Where do we go from here?

Ken Karr, CFP MBA Adam Drake, CFA

HIGHLAND INVESTMENT ADVISORS, LLC

Market Worries Global Recession Financial System Dysfunction Corporate & Consumer Credit Contraction Diminished Confidence Uncertain Global Response

Political, Fiscal, and Monetary

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Where Are We Now? Markets still work - for every seller

there is a buyer. Highest expected returns occur

when perceived risks are the greatest.

Paranoia running rampant. Valuations are depressed… but this

is good news for investors.

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Fear still elevated, but moderating

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The Chicago Board Options Exchange (CBOE) Volatility Index, a popular measure of the volatility of S&P 500, is often referred to as the fear index.

Index hit all-time high in late October, but has since moderated slightly.

Volatility… a paradigm revisited

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Are Valuations Low or Just “Fair”?

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0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0x

5x

10x

15x

20x

25x

30x

35x

S&P 500 (bars, left)

P/E Ratio (line, right)

LONG Term, Valuations Look Attractive

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10 Year Trailing P/E Ratio Since 1881

0

5

10

15

20

25

30

35

40

45

50

1881

1885

1889

1893

1897

1901

1905

1909

1913

1917

1921

1925

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

Credit Market Dysfunction

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2009

Q1

2008

Q1

2007

Q1

2006

Q1

2005

Q1

2004

Q1

2003

Q1

2002

Q1

2001

Q1

2000

Q1

1999

Q1

1998

Q1

1997

Q1

1996

Q1

1995

Q1

1994

Q1

1993

Q1

1992

Q1

1991

Q1

1990

Q1

1989

Q1

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%Spreads (right)

10 Year Treasury

AAA Corporate Bonds

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Economy Has Stalled

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

GDP Growth (left)

Unemployment (right)

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The Market’s Response To Crisis

-17%

18%

-2%

18%

-1%

-4%

7%

10%

7%6%

-2%

12%11%

12%

10%

7% 7%

12%

October 1987:Stock Market Crash

August 1989:US Savings

and Loan Crisis

September 1998:Asian ContagionRussian Crisis

Long-Term Capital Management Collapse

March 2000:Dot-Com Crash

September 2001:

Terrorist AttackAfter One Year

After Three Years

After Five Years

Annualized Return:October 1973:

OPEC Oil Embargo

Performance of a Normal Balanced Strategy: 60% Stocks, 40% Bonds

HIGHLAND INVESTMENT ADVISORS, LLC

1925 1930 1935 1940 1945 1950 1960 1965 1970 1975 1980 1985 1990 2000 2005

Average Duration:Bull Market: 32 MonthsBear Market: 11 Months

Months = Duration of Bull/Bear Mkt. % = Total Return for the Bull/Bear Mkt.

44 months193%

34 mos.-83%

2 months92%

6 months100%

3 months26%

4 months12%

23 months133%

6 mos.-30%

2 mos.-19%

6 mos.-21%

4 mos.-10%

9 months61%

5 months22%

4 mos.-16%

31 mos.-30%

49 months210%

6 months-22%

116 months491%

13 mos.-50%

5 mos.12%

7 months-10%

5 months-15%

48 mos.105%

6 mos.-22%

9 mos.55%

15 mos.35%

20 mos.-17%

61 months282%

3 mos.-30%

30 mos.71%

2 mos.-15%

92 months355%

24 mos.63%

14 months-40%

61 months108%

8 mos.-16% 19 mos.

-29% 21 months-43%

3 mos.-11%

5 mos.-15%

25 months-45%

43 months90%

26 mos.52%

30 mos.76%

33 mos.86%

14 mos.-14%

S1370.5

Bull And Bear MarketsS&P 500 Index (USD) Monthly Returns: January 1926-December 2008

S&P 500$2,048

Long-Term Returns vs. Short-Term Volatility

S1388.2

April 1999 Daily ReturnsTotal Month of April Return: 3.9%

During this month, the S&P 500 had 10 days of negative returns out of 21 trading days.

1999 Monthly ReturnsTotal Annual Return: 21%

During this year, the S&P 500 had 5 out of 12 months with negative returns.

• Even during periods of positive stock returns, investors may experience substantial volatility.

• Short-term volatility is a typical characteristic of stock market investing.

• Long-term returns are the sum of short-term volatility.

J F M A M J J A S O N D

1 15 30

-2.24%

-0.49%

-3.11% -2.36% -3.12% -2.74%

21.04%

“You already paid for the risk,

you might as well stick around

for the return.”

David Booth, CEO

Dimensional Fund Advisors

HIGHLAND INVESTMENT ADVISORS, LLC

Highland Investment Advisors Portfolio Management Solutions Diversification is the antidote to risk Structure is the strategy Risk and return are related Low costs mean you keep more of what you

make Ignore market noise!

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