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the world markets with the MSCI World ex USA index increasing 4.70 percent for the quarter. The world has certainly become a frightening place, and as investors scour the globe for investment opportunities, the U.S. seems to be the country of choice, so our markets continue to lead the way. When will that change? That is the million dollar question and one that we do not even pretend to know the answer to. Diff erent sectors and asset classes move at diff erent times and some move in opposite directions of each other. Having a diversifi ed portfolio reduces risk and assures participation in an advancing market. We rely on empirical data that indicates the stock market goes up more than 70 percent of the time, so it advances at more than a two-to-one rate of when it declines. We all have friends who insist on buying individual stocks and having a concentrated portfolio, but that is a diffi cult and risky way to build wealth. Let us take you back to the beginning of 2012 to plead our case for diversifi cation.

include dividends, was 10.03 percent for the fi rst quarter of 2013. Although the 16 percent return of last year eff ectively dragged the average return down (for the 18 times that the S&P 500 index posted positive returns for the fi rst three months of the year) to a paltry 19.97 percent average return, the record of never posting a negative return in those years remains intact. And of course we are joking about being disappointed with a 16 percent return and 19.97 percent average. We also want to remind you that past performance is no guarantee of future performance, but it always feels better when we feel the odds are with us.

The fast start this year is actually being fueled by small cap stocks with the Russell 2000 posting a 12.03 percent increase, followed by the Dow Jones with an 11.25 percent increase, and then the NASDAQ with an 8.21 percent increase for the quarter. Not surprisingly, with Europe still struggling and emerging markets fl oundering a bit, the U.S. markets outperformed

May 2013

Annual stock market returns are very much like sprinters in a race—getting off to a good start means everything, and oftentimes it portends good things to come. The stock markets jumped out of the gates in 2013 posting solid returns for January. They carried that momentum into February and closed out the quarter with double digit returns in most major domestic indexes. In this issue of Market View we will take a look at fi rst quarter performances, analyze what the fast start could mean for the markets, and also discuss why REDW Stanley still believes in diversifi cation.

In the fi rst quarter issue of 2012’s Market View, titled, “Climbing a Wall of Worry?” some of you might remember that we were optimistic about the year ahead and referenced research to support our position. The following is an excerpt from that issue:

While it turned out to be a relatively good year with a 16 percent return on the S&P 500, we were very disappointed that we didn’t reach the average of 20.2 percent. The good news is, it appears that we will have another chance this year to surpass that 20.2 percent average return. That’s right, the S&P 500 percentage change, which doesn’t

WE ARE OFF AND RUNNING!

According to Yardeni Research therewere 17 times in the last 66 years that each of the fi rst three months of the year have posted positive S&P 500 returns like we have this year. The average total yearly return for those 17 years was 20.2 percent, with NONE of those years posting anegative return.

Copyright 2012 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only.

The information contained does not constitute legal fi nancial, accounting, or other professional advice.

By Jude V. Gleason, CFP®, AIF®, MBA Chief Investment Offi cer

and the problem is not limited to individuals. Not one of the 10 seasoned professionals participating in Barron’s annual Roundtable stock-picking panel in early January 2012 mentioned homebuilding stocks or any housing-related fi rms.

The recent surge in housing shares also serves as a reminder that stock prices are forward-looking and tend to rise or fall well in advance of clear changes in company fundamentals. Investors who insist on waiting for evidence of healthy profi ts before investing are often frustrated to fi nd that a fi rm’s stock price has appreciated dramatically by the time the fi rm begins to report cheery fi nancial results. Shares of Hovnanian Enterprises, for example, rose 580 percent between October 7, 2011, and December 31, 2012, even though the fi rm continued to report losses. Similarly, it is not unusual for a fi rm’s stock price to decline long before signs of trouble become obvious.

Many observers in recent years predicted that a recovery in the housing industry would be agonizingly slow, and they were right. Many investors in recent years have avoided housing stocks as a consequence, and they’ve been wrong; housing stocks have outperformed the broad U.S. stock market by a healthy margin from the market low in March 2009 to the present day.

BOTTOM LINE: Markets have 101 ways to remind us of Nobel laureate Merton Miller’s observation— diversifi cation is the investor’s best friend.

In closing, we would like to say that there is nothing wrong with investing in individual stocks as long as it is still done in the context of a well-diversifi ed portfolio, but oftentimes that is not the case. We would also like to remind our

readers that, when in doubt, fall back on the fundamentals; and while we did not look at specifi c fundamentals in this issue of Market View, most indicators are still slightly undervalued or fairly valued. This is good news because we are of the belief that when the pendulum begins to swing back toward the mean, it doesn’t stop right at the mean but continues well past it. Translation: even if we are at fair value, we believe there is still plenty of room for the market to increase.

It’s New Year’s Day 2012. In addition to overdosing on televised college football, you’re spending part of the holiday working on the family fi nances. Armed with a laptop and various online fi nancial tools, you’re on the hunt for appealing stock market opportunities. To prune the list of candidates to a manageable size, you decide to focus on fi rms that are leaders in their respective industries and exhibit above-average scores on various measures of fi nancial strength. As you work your way through the alphabet, you come to the “P” stocks, and another candidate appears. It’s a prominent player in a major industry (good), but operates in a notoriously cyclical industry (not so good), is currently losing money (defi nitely not good), pays no dividend, and has a junk-bond credit rating of BB-minus. Next! You push the “delete” key and move on. Congratulations. You just passed up the best-performing stock in the entire S&P 500 Index for 2012. Shares of PulteGroup, a Michigan-based homebuilder with a 60-year history, jumped 187.8 percent last year amid strong performance for the entire industry. For the year ending December 31, 2012, all 13 homebuilding fi rms listed on the New York Stock Exchange outperformed the S&P 500 Index by a wide margin, with total returns ranging from 34.1 percent for NVR to 382.8 percent for Hovnanian Enterprises. The Standard & Poor’s SuperComposite Homebuilding Sub-Index rose 84.1 percent in 2012 compared to 13.4 percent for the S&P 500 Index (the return was 16 percent with dividends included). The point? For those seeking to outperform the market through stock selection, underweighting the market’s biggest winners can be just as painful as overweighting the biggest losers. Investors are often caught fl at-footed by stocks that do much better or much worse than the broad market,

2

Diversification and the Average Investor

Equity Mkt. Neutral

Commodities

(Top) Indexes and weights of the traditional portfolio are as follows: U.S. Stocks: 55% S&P 500; U.S. Bonds: 30% Barclays Capital Aggregate; International Stocks: 15% MSCI EAFE. Portfolio with 25%

Traditional Portfolio More Diversified PortfolioMaximizing the Power of Diversification (1994 – 2012)

8%8%

8%

22%13%4%

26%

Commodities

REIT

S&P 500

Russell 2000

MSCI EAFE

55%

15%

30% S&P 500

MSCI EAFE

Barclays Agg.

in alternatives is as follows: U.S. Stocks: 22.2% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral: 8.3%, DJ/UBS Commodities: 8.3% NAREIT Equity REIT Index Return22%

9%13% MSCI EAFE

MSCI EM

Barclays Agg.

15%y gg NAREIT Equity REIT Index. Return

and standard deviation calculated using Morningstar Direct.Charts are shown for illustrative purposes only. Past performance is not indicative of future returns. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data are as of 3/31/13

Return: 7.43%Standard Deviation: 10.80%

Return: 7.72%Standard Deviation: 9.87%

20-year Annualized Returns by Asset Class (1993 – 2012)3/31/13.(Bottom) Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI Average asset allocation

11.2%

8.4% 8.2% 8.1%

10%

12%

CPI. Average asset allocationinvestor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period se

tCla

ss

8.1%

6.5% 6.3%

2.7% 2.5% 2.3%4%

6%

8%

63

ending 12/31/12 to match Dalbar’smost recent analysis. A

s

0%

2%

REITs Gold S&P 500 Oil EAFE Bonds Homes Inflation Average Investor

Copyright 2012 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only.

The information contained does not constitute legal fi nancial, accounting, or other professional advice.

Asset Class Returns

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q13 Cum. Ann.MSCIEME REITs MSCI

EME REITs MSCIEME

Ba rc la ys Agg

MSCIEME REITs REITs REITs Russe ll

2 0 0 0MSCIEME

MSCIEME

5 6 .3 % 3 1.6 % 3 4 .5 % 3 5 .1% 3 9 .8 % 5 .2 % 7 9 .0 % 2 7 .9 % 8 .3 % 19 .7 % 12 .4 % 3 7 6 .0 % 16 .9 %

10-yrs '03 - '12

Russe ll 2 0 0 0

MSCIEME

DJ UBSCmdty

MSCIEME

DJ UBSCmdty

Ca sh MSCI EAFE

Russe ll 2 0 0 0

Ba rc la ys Agg

MSCIEME

S&P5 0 0

REITs REITs

4 7 .3 % 2 6 .0 % 2 1.4 % 3 2 .6 % 16 .2 % 1.8 % 3 2 .5 % 2 6 .9 % 7 .8 % 18 .6 % 10 .6 % 2 0 4 .6 % 11.8 %MSCI EAFE

MSCI EAFE

MSCI EAFE

MSCI EAFE

MSCI EAFE

Ma rke t Ne utra l REITs MSCI

EMEMa rke t Ne utra l

MSCI EAFE REITs Russe ll

2 0 0 0Russe ll

2 0 0 03 9 .2 % 2 0 .7 % 14 .0 % 2 6 .9 % 11.6 % 1.1% 2 8 .0 % 19 .2 % 4 .5 % 17 .9 % 8 .1% 15 2 .8 % 9 .7 %

Russe ll Russe ll Ma rke t Asse t Russe ll DJ UBS S&P Russe ll MSCI MSCI MSCIREITs Russe ll 2 0 0 0 REITs Russe ll

2 0 0 0Ma rke t Ne utra l

Asse t Alloc .

Russe ll 2 0 0 0

DJ UBSCmdty

S&P5 0 0

Russe ll 2 0 0 0

MSCI EAFE

MSCI EAFE

MSCI EAFE

3 7 .1% 18 .3 % 12 .2 % 18 .4 % 9 .3 % - 2 4 .0 % 2 7 .2 % 16 .8 % 2 .1% 16 .3 % 5 .3 % 13 0 .3 % 8 .7 %S&P5 0 0

Asse t Alloc .

Asse t Alloc .

S&P5 0 0

Asse t Alloc .

Russe ll 2 0 0 0

S&P5 0 0

S&P5 0 0

Ca sh S&P5 0 0

Asse t Alloc .

Asse t Alloc .

Asse t Alloc .

2 8 .7 % 12 .5 % 8 .3 % 15 .8 % 7 .4 % - 3 3 .8 % 2 6 .5 % 15 .1% 0 .1% 16 .0 % 5 .0 % 117 .7 % 8 .1%Asse t Alloc .

S&P5 0 0

Ma rke t Ne utra l

Asse t Alloc .

Ba rc la ys Agg

DJ UBSCmdty

Asse t Alloc .

Asse t Alloc .

Asse t Alloc .

Asse t Alloc .

Ma rke t Ne utra l

S&P5 0 0

S&P5 0 0Alloc . 5 0 0 Ne utra l Alloc . Agg Cmdty Alloc . Alloc . Alloc . Alloc . Ne utra l 5 0 0 5 0 0

2 5 .1% 10 .9 % 6 .1% 15 .2 % 7 .0 % - 3 5 .6 % 2 2 .2 % 12 .5 % - 0 .6 % 11.3 % 0 .7 % 9 8 .6 % 7 .1%DJ UBSCmdty

DJ UBSCmdty

S&P5 0 0

Ma rke t Ne utra l

S&P5 0 0

S&P5 0 0

DJ UBSCmdty

MSCI EAFE

Russe ll 2 0 0 0

Ba rc la ys Agg Ca sh Ba rc la ys

AggBa rc la ys

Agg2 3 .9 % 9 .1% 4 .9 % 11.2 % 5 .5 % - 3 7 .0 % 18 .9 % 8 .2 % - 4 .2 % 4 .2 % 0 .0 % 6 5 .7 % 5 .2 %Ma rke t Ne utra l

Ma rke t Ne utra l

Russe ll 2 0 0 0 Ca sh Ca sh REITs Ba rc la ys

AggBa rc la ys

AggMSCI EAFE

Ma rke t Ne utra l

Ba rc la ys Agg

Ma rke t Ne utra l

Ma rke t Ne utra l

7 .1% 6 .5 % 4 .6 % 4 .8 % 4 .8 % - 3 7 .7 % 5 .9 % 6 .5 % - 11.7 % 0 .9 % - 0 .1% 6 1.5 % 4 .9 %7 .1% 6 .5 % 4 .6 % 4 .8 % 4 .8 % 3 7 .7 % 5 .9 % 6 .5 % 11.7 % 0 .9 % 0 .1% 6 1.5 % 4 .9 %Ba rc la ys

AggBa rc la ys

AggCa sh Ba rc la ys

AggRusse ll

2 0 0 0MSCI EAFE

Ma rke t Ne utra l

Ca sh DJ UBSCmdty

Ca sh DJ UBSCmdty

DJ UBSCmdty

DJ UBSCmdty

4 .1% 4 .3 % 3 .0 % 4 .3 % - 1.6 % - 4 3 .1% 4 .1% 0 .1% - 13 .3 % 0 .1% - 1.1% 4 9 .3 % 4 .1%

Ca sh Ca sh Ba rc la ys Agg

DJ UBSCmdty REITs MSCI

EME Ca sh Ma rke t Ne utra l

MSCIEME

DJ UBSCmdty

MSCIEME Ca sh Ca sh

1.0 % 1.2 % 2 .4 % 2 .1% - 15 .7 % - 5 3 .2 % 0 .1% - 0 .8 % - 18 .2 % - 1.1% - 1.6 % 18 .2 % 1.7 %setC

lass

Source: Russell MSCI Dow Jones Standard & Poor’s Credit Suisse Barclays Capital NAREIT FactSet J P Morgan Asset Management

56

As Source: Russell, MSCI, Dow Jones, Standard & Poor s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management.

The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 3/31/13, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 2/28/13. “10-yrs” returns represent period of 1/1/03 – 12/31/12 showing both cumulative (Cum.) and annualized (Ann.) over the period. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures.Data are as of 3/31/13.

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