You know you are getting older when you remember George Orwell's "1984" and Arthur C. Clarke's, "2001 A Space Odyssey" both being set in some far distant future! Anyway, 2005 is now behind us, and we are well on our way into the current decade. Here are some highlights and thoughts on the past year, as well as some observations and discussion about what might lie ahead.

First, here is how the major U.S. market indexes ended 2005:

Here are how some selected stock markets from around the world fared in 2005 (my choices, no scientific reason):

The low returns in 2005 for the major U.S. market indexes came as a surprise to some, especially given that both economic growth and corporate profit growth generally outpaced the forecasts for the year. There were sectors of the U.S. market that did quite well - such as midcap stocks (S&P 400 Midcap Index up 12.55%). Due to increased energy and commodity prices and inflation concerns oil and gas products were up 65.05%, mining (nonferrous & nonmetals) up 43.87%, and gold and silver up 25.81% (Source: Morningstar).

The International markets did well overall in comparison to the U.S. markets. Here's how some of the major indexes performed:

Emerging markets were a standout in 2005, and given the rapidly developing and changing global economy, these markets may well provide some very strong returns in the future. Looking over the returns from all parts of the market (large-, mid-, and small-cap, growth, value, U.S., international, developed and emerging markets) the role that diversification plays has increased. Prior to the internet and globalization companies had a good amount of breathing room to make mistakes and/or rest on their laurels. This margin has narrowed considerably given global competition and the exponential availability of information and ideas. Companies can implode rather quickly, even with absence of fraud! The day of buying a few good large, safe companies and hold them forever is not a wise strategy in my opinion. (Consider AT&T, Lucent, MCI-Worldcom, Enron). Neither is just limiting yourself to just the U.S. A portfolio should be well diversified and divided among stocks (all sizes, U.S. and international), bonds, real assets, and cash equivalents) with the allocation based on your particular situation. My role is to help you with these decisions, and I appreciate your trust in me.

As always, who knows what any one year may hold. Looking long-term, I have tremendous confidence in the U.S. workers to adapt. We read daily of layoffs and traditional jobs disappearing, however what we need to be reminded of is the tremendous creativity and survival skills of our workforce.

Fareed Zakaria addresses Americans being constantly told that students in other countries are testing so much higher than American students (Newsweek 1/9/06). Mr. Zakaria writes: "But one thing puzzles me about these oft-made comparisons. I talked to Tharman Shanmugaratnam to understand it better. He's the minister of education of Singapore, the country that is No. 1 in the global science and math rankings for schoolchildren. I asked the minister how to explain the fact that even though Singapore's students do so brilliantly on these tests, when you look at these same students 10 or 20 years later, few of them are worldbeaters any more. Singapore has few truly top-ranked scientist, entrepreneurs, inventors, business executives or academics. American kids, by contrast, test much worse in the fourth and eighth grades but seem to do better later in life and in the real world. Why? Mr. Shanmugaratnam's reply We both have meritocracies. Yours is a talent meritocracy, ours is an exam meritocracy. There are some parts of the intellect that we are not able to test well like creativity, curiosity, a sense of adventure, ambition. Most of all America has a culture of learning that challenges conventional wisdom even if it means challenging authority. He also points out that American universities are unrivalled globally. I will add that there are now approximately 4 adult students for every 1 typical college age undergraduate student. Guilford College, where I teach, now has an adult education population greater than the traditional college student population. This commitment to education is important - both for us in the global marketplace and for the problems that lie ahead.

We have a full plate of challenges on our plate on the financial side. Social Security needs reform. Medicare and Medicaid are in even worse shape. We have started a prescription drug program when we can't pay for the Medicare program we already have. We are financing a war (that some academics now estimate a long-term cost of over $1 trillion) off-budget. Our dollar is at risk if we do not get our financial house in order. Inflation is a concern, particularly in health care, education, and energy costs. The Social Security benefit increase for 2006 was 4.1 percent. You lose half of your buying power in just over 17 years at that rate. With longer life expectancies this is significant. More firms are freezing and eliminating their pension plans (joined now by IBM) as more responsibility is being shifted to the individual to save. We will need all the creativity we can muster in the coming years. This will require openness, transparency, and honesty traits we need to keep as a nation.

I wish you all the best in 2006.

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