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February 2006 performance review

March 17, 2006

Interest rates were down in February, helping bond fund returns. Longer term bonds gained 0.77% for the month, while Vanguard Total Bond Index (which owns all types of investment grade U.S. bonds) rose 0.37%.

Stocks were flat-to-down except for some strength in the mega-cap stocks of the Dow (which was up 1.48%). The S&P500 index (heavily weighted by larger caps) gained just 0.27%, while the tech and growth loaded NASDAQ fell 2.28%. Smaller cap stocks, as measured by the Russell 2000 Index, dipped 0.28%.

Our Conservative portfolio rose 0.15% for the month. Weak spots included American Century International Bond (BEGBX), which was down 1.13% on U.S. dollar strength. We just added a small stake in this fund to our Growth portfolio, given the weakness over the last year.

SSgA International Growth (SINGX) dropped a sharp 2.66%. International stocks in general were a bit weak – notably Japanese stocks - but this fund took a bigger hit than most. 

Harbor Bond (HABDX) gained an index-beating 0.43% for the month, likely reflecting portfolio manager Bill Gross’s stance that longer term rates are not going to rise much more and may fall as the economy weakens. Unfortunately this will hurt the fund in March if recent increases in interest rates continue.

Now that short term interest rates are up, short term bond funds are starting to return something measurable for our portfolios. Vanguard Short Term Investment Grade was up 0.22% for the month. When short rates stop climbing this fund should deliver almost 5% a year.

Vanguard Dividend Growth (VFIGX) gained a solid 1.18% for the month – our last month holding this fund in this portfolio. Our total return on this fund is 44.67% since we added it at the end of July, 2002.

Healthcare stocks outpaced the broader market , and our HealthCare Select SPDR (XLV) holding climbed just under 1%.

Our Aggressive Growth portfolio dipped just -0.13% for the month.

Interest rates were down in February, helping bond fund returns. Longer term bonds gained 0.77% for the month, while Vanguard Total Bond Index (which owns all types of investment grade U.S. bonds) rose 0.37%.

Stocks were flat-to-down, except for some strength in mega cap stocks like those in the Dow (which was up 1.48%). The S&P500 index (heavily weighted by larger caps) was up just 0.27%, while the tech and growth loaded Nasdaq fell 2.28%. Smaller cap stocks, as measured by the Russell 2000 Index, dipped 0.28%.

The worst performer in our Aggressive Growth portfolio was T. Rowe Price Japan (PRJPX), down a sharp -4.39% on a pullback in hot Japanese stocks. The fund is still up 34.45% over the last 12 months. As we’ve noted in recent commentaries we've lowered our outlook on Japan funds. The Japanese market is a bit overdone, but since everything else is too we’re sticking with our now smallish stake.

The only other dog was SSgA Emerging Markets (SSEMX), which fell -1.22%. We dumped this red hot fund at the end of February. Considering it is up 207% since we added it at the end of February 2003, you can’t complain too much about its final month's performance. We’ve been in the fund business long enough to know you book 200%+ returns made in just a few years because they tend to become just 100% return (or worse) if you leave ‘em alone.

Bridgeway Blue-Chip 35 (BRLIX) was flat for the month, a disappointment given the strength in mega cap stocks. Healthcare stocks outpaced the broader market; we saw HealthCare Select SPDR (XLV) climb just under 1%.

Now that short term interest rates are up, short term bond funds are starting to deliver measurable returns for our portfolios. Vanguard Short Term Investment Grade was up 0.22% for the month. When short term rates stop climbing, this fund should deliver almost 5% a year.

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