We are becoming more and more convinced that the next three to five years will be volatile for investors (and also opportune). The world is in a period of economic transition. We are moving from a time of ever increasing leverage and credit availability back to a low leverage world. A more positive angle on this is to say that we are now setting the stage for the next bull market. Massive debts have been built up, many of which will not be repaid. Actually, we are still in the process of adding to overall debts, perhaps placing us nearer to the beginning of the transition period than the end. This transition will not be easy. A good portion of the deleveraging will not be debt getting paid back; instead much of this deleveraging will be in the form of defaults by borrowers (including governments – who sometimes mask default as high inflation) and write-offs for lenders. What does this mean as investors? Two things: We should expect volatility. Great opportunities will arise. We don’t know exactly when, or exactly why there will be disruptions to the stock and bond markets, but we do believe that the future is likely to be full of disruption. This is due to the fact that death and birth are painful for economies just like they are for people. Uncertainty is the not the market’s friend. Foremost among the reasons for uncertainty is sovereign debt repayment. It is becoming clearer by the day that countries/governments in Europe, and perhaps other parts of the world, will not be able to pay their debts. This could be bad, or it could be terrible. Incredible new technologies, companies, and fortunes will be made in this time as the old goes away and the new comes in. An outright default by a European country will probably mean the collapse of many European banks – which are only “solvent” now due to accounting rules that allow them to avoid marking to market the sovereign debt they hold. US banks will also be affected by this, but how much is unknown due to the exposure of US banks being held largely in derivatives – such as credit default swaps (where a US bank has essentially taken on the debt default risk in exchange for payments now). The good news is that ends are also beginnings. Incredible new technologies, companies, and fortunes will be made in this time as the old goes away and the new comes in. As questions about the economy get answered, and as leverage is decreased (through debt repayment or default) confidence will build and the stage will be set for another secular bull market – 20 years or so of generally rising stock prices. In this transition time, the drivers of the next bull market will come into being. The sense of opportunity in green energy, software, and healthy living is bursting. This is just the beginning, there will be many other areas of growth and dynamism. Medicine and biotechnology are likely candidates for game-changing discoveries. If you can mitigate and tolerate the volatility, now is the time to invest to ensure participation in the prosperity that will come. Riding out storms is essential to long-term investing success. Economic transitions have a cyclical nature that is not new, nor is it restricted to economics. Akin to seasonal change, economic upheaval and doubt eventually evolve into stability and prosperity which leads to excess and greed, bringing back upheaval. We are in a big transition right now from upheaval to renewed prosperity. With hindsight, perhaps we will see that we are already on the upside of this transition in terms of stock prices. Where do we go from here? As investors during this time of transition we believe it is essential to stay diversified and open to opportunities. Our portfolio management is geared toward the dual goals of mitigating volatility without giving up the upside of investing. We see our Active Hedge strategy, private investments, and insurance options as being important, unique additions to the stocks, bonds and commodities that we build into portfolios. Our goal is to maintain an even-keel as advisors while this transition runs its course. We believe this can be accomplished by acknowledging that there will be volatility and mixing stabilizing factors (such as diversification and life insurance) with pursuit of returns from the new leaders of our economy.