INVESTING

There are several reason why we use index funds to implement our asset class strategies:

_"active" money managers consistently fail to beat unmanaged indexes

_there is no way to know in advance which managers will beat their relevant indexes

_active managers and actively-managed mutual funds are subject to significant
style drift

_the expense ratios for active funds are much higher than those of index funds

_index funds are more tax-efficient than actively-managed funds

Of course, selecting the right index funds and the most appropriate mix of the funds is critical since these decisions are likely to determine more of the long term results of a portfolio than individual stock selection or market timing.

There are three primary factors influencing portfolio returns:

_the percentage invested in stocks overall,

_the percentage invested in large company versus small company stocks, and

_the percentage invested in "growth" versus "value" stocks.

Most investors know that although stocks are riskier than short-term bonds and money market funds, this risk is rewarded by higher returns over time. Small companies are also riskier than large companies and, as expected, they have generated higher average returns. "Value" stocks--those that sell at lower prices relative to their earnings and book values--are perceived by "the market" to be riskier than growth stocks and their returns have also been higher over longer time periods.

Cypress Asset Management diversifies portfolios among these asset classes with the goal of realizing higher average returns than the market alone. We believe investors should also consider at least a 70/30 mix of U.S. and foreign stocks. Since these asset classes do not always move in tandem, our goal is also to smooth out the normal ups and downs of the investment portfolio and provide greater downside protection.

We utilize the institutional index funds of Dimensional Fund Advisors (DFA) as well as index funds of The Vanguard Group and other fund families to implement our strategies. Funds are selected based on the indexes they track, performance relative to the index, and the expense ratios of the funds.

Cypress Asset Management follows a strict buy-and-hold discipline, periodically rebalancing asset classes to target allocations (taxable accounts are rebalanced upon instructions from the client). This insures that portfolio risk/return characteristics remain within acceptable limits at all times while avoiding the risks and high costs of market timing. See CAM'S investment approach.

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