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July 2002 performance review

August 15, 2002

While we were very big on bonds 2 years ago when we first started designing allocation portfolios, we are less enthusiastic today. Bonds have had strong returns in the last two years as interest rates have come down across the board. We feel we are at the bottom of an interest rate cycle. While you probably can't go wrong being in any low-fee bond fund, we have focused on foreign bonds as a way to avoid the mediocre returns we are predicting in ultra-safe, longer-term US government bonds over the next year or two. Our foreign bond choice is the excellent, institutional-grade BlackRock International Bond fund. Make sure you buy the no-load class here, ticker symbol CIFIX.

Our US bond choice is the top-notch Harbor Bond fund, which has an extremely low fee and is run by the finest bond investor out there, Bill Gross. Gross' services are available to you through a sub-advisory arrangement with the Harbor Bond fund. Most of the billions under Gross's management are for high-minimum institutional accounts.

Our choice for growth stocks in this model portfolio is the strange Bridgeway Ultra Small Company Tax Advantaged fund. Run by white-hot growth fund manager John Montgomery, this fund has a much lower fee than most small-cap funds. The reason is that it is actually an index fund (sort of) based on a very obscure small-cap index. While we usually do not pick index funds, since we have been able to choose out-performing, actively managed funds more times than not, this fund is an exception. We feel it is a good, cheap way to invest in the very smallest stocks in the market, and a good counter to the large-cap focus most people have. Call it the anti-S&P500 index. These micro-cap stocks are very volatile and risky - a full 10% of them will likely be bankrupt in the next few years, but enough shine for the long-term performance to be good. Some of this volatility is lowered by the fund owning hundreds of these stocks, but only so much can be reduced this way. The other reason we chose this fund is that most of the micro-cap stock funds we like are closed to new investment.