The emails are arriving from clients, the media and people newly interested in our services and the questions are all the same. They are all in search of one answer: what in the world is going on? Is this the worst time in history or the best time in history to be a buyer? The range of questions go from extreme to extreme - do we cash out entirely or do we put it all to work right here, right now? Either could be right and one will be proven to be correct, though the right strategy could change based on when you look at the perceived results!

Our most honest opinion is the best strategy is the one we are currently deploying, and that is one of "wading." This is true both of individual positions and overall allocations. We would always suggest you wade into a pool of cloudy water, and the equity markets are rarely clear even in the best of times. We believe you wade into the market at this point if you are entirely in cash. We also believe you should wade out of the market if you have all your resources in equities. How can both answers be right? They can't and we have to accept that. The job is to make the best decisions you can with the current facts at hand.

Portfolio Discussion

Individuals all have specific needs and portfolios should have the same premise - a specific purpose. One large issue we find is the professional financial industry, as well as self asset allocating individuals, examine the past occurrences of the market to "frame" particular beliefs and expectations. The very same people then tend to use that "frame" to draw out what they anticipate should and will occur into the future. Everything goes along as planned until the picture in the frame changes more dramatically than the artist had anticipated! Suddenly the decision making process is called into question and judged based on the immediate issues at hand. That can be both good and bad - it is all in your perspective.

The canvas now has a new view and uncertainty enters the equation. It is more than just emotion. Some things have clearly changed. Do you throw away the canvas and start from scratch? Do you try to paint over the imperfections that exist to get back to the original plan? Do you take what you have and begin to create a new and different picture? We are personally witnessing a world with massive divisions and "artists" moving in all three directions. Our preference is the latter, of course, but they are each worthy of discussion whether good or bad.

Throwing out the canvas and starting fresh is our version of a complete change, selling everything and going to cash or taking all your cash and buying all you can. Clearly there are more people leaning toward the first thought as individuals, but there are some on the other side as well specifically large money centers. (The appearance is of the larger assets moving in, not out, for the record.)

Taking all of your current holdings and going to cash will certainly let you sleep better tonight, or most think it will! In reality, we have watched people not be able to sleep with the market volatility and then go to cash, to only watch them lose sleep in fear that it goes up without them! Aren't emotions simply grand?

We are commonly asked what to do right here and the answer for the right action in most professional circles is based entirely on your stated objective or need. We argue differently. What you choose to do must include that you are willing to stick to that strategy unless the facts absolutely change. The decision you make right now will only prove to be right or wrong if you are willing to stick to the plan. If you are incapable of that, then I most certainly promise your choice today will have little importance to your long‐term future.

Please notice I said stick to a strategy, not to a stock or mutual fund. The decision making process needs to be iron clad and protected from emotions. The individual holdings must be held in the highest scrutiny. We have reached a place where we have discussed changing consumer patterns for as long as most of you have known us. The strategy must be rigid yet offer the ability to be flexible in implementation.

History dictates, and I concur through both my personal and professional opinion, that the market will both rise and fall from the current level over time. There will be clear opportunities identifiable only after the occurrence have passed naturally where we can look back and say with certainty if this was a great time to buy or to sell. Further, when you evaluate the results of the decision, it will clearly be based on the day you decide to measure the result - the ending point if you will.

For instance, March of 2003 was a truly amazing time to buy equities, though very few did because the landscape was fraught with uncertainty and confusion. Exxon opened at $36 a share and the boats were on the way to Iraq. We would soon hear the words, "shock and awe." Things appeared to be cheap but they also looked cheap in October 2002 and we watched the market destroy our confidence as it went up to merely fall again. We as investors were despondent to a large degree. The S&P 500 went up 24 percent in three short months. Was this a good time to buy?

If your measuring stick was applied one year later, three years later, or even five years later, the clear and obvious answer is absolutely! On the other hand, if you look at the market today where it resides firmly lower than it did in 2003, was it a great time to buy? The obvious answer is no.

This is not intended to be written as a confusing parable but a simple point and fact that things, including our interpretations of results, change as time changes. Sometimes that change is for the better and other times it is for the worse. We observed people who fired their money managers for missing the rise in 2003 and simultaneously fire managers for missing the downfall of 2008, and yet hold on to the belief that there should be little movement (transactions and allocation changes) within a portfolio. Rather ironic, but true nonetheless.

Clearly, the only way to prosper from 2003 through October 2007 was to be in the market and be willing to alter your allocations. Clearly, the only way to survive the swift changes in 2008 was not only being willing to make adjustments to the changing climate but also changes to the percentages held in various asset classes including cash and commodities.

Academics will argue the ability for anyone to get 2003 correct, the time period between the rocket up, the eventual crash of 2008 and the actual crash was remote, if possible at all. Indeed, the icons of my industry proved this out as their reputations and results went from the penthouse to the poor‐house in one short year. The academic argument then is for absolute, uncertain, rigid diversification without any willingness to adopt or adapt to new economic changes and conditions. Is this the right argument?

One endowment style portfolio we follow that mandates such an unwavering set of diversification principles, the Seven‐Twelve Portfolio by Professor Craig Israelsen, had results making its worst year going back to 1970 as being a loss of 5.5 percent. This plan of diversification helped through the recessions in the early 70s, the crash of ‘87 and the tech wreck of 2000. Impressive to say the least, and also had notable upside years as well. We have worked diligently to create a similar model in our practice to prepare for the eventual market contraction based on demographic changes.

Then 2008 hit. The seemingly flawless portfolio mustered up a loss of 28 percent. Obviously managers are in shock, the investors concerned, and academics almost speechless. My question to them is not one of what happened but rather what will happen. 2008 was horrific if held independently in time. If the only measure you, me and they care about is what happens as of December 31, 2008, then this is clearly a failure and most of my industry is treating it as such. Money managers across the globe are holding meetings in private and public to figure out what went wrong. Large mutual funds are scuttling options and firing managers. They are also making changes to prevent it from happening again in the future. One question I have, is to prevent what? A market meltdown, getting caught in a market meltdown, or are they simply changing because it appears what we have today is broken?

My largest concern is that we are trying to make changes to asset allocation similar to helping protect northern Indiana from a hurricane. Could 2009 repeat what happened in 2008? ABSOLUTELY! We read about that occurrence in 1930 and 1931 with losses of 28 percent followed by another loss of 57 percent, and shocking the investment world, not to mention the investors both professional and private. So I ask, would the 1930s have been a good time to invest? Clearly, not any time soon in the early 30s, and even much later that decade, but if we looked today the obvious answer is ABSOLUTELY! The same would be true for crash of 1987 and the recession of 1991.

For the record, we in no way believe that people should have static portfolios, nor do we suggest you should hold tight and trust the eventual market outcome. We simply want to bring to your attention that results seem to be based on self‐imposed ending points and as media centers find ways to "update" you on the current situation, the ending points seem to come faster and more often - neither of which is good.

Assuming you are getting my gist, then the discussion needs to be more than the yard stick measurement of point‐to‐point returns and should include more discussion over application of the strategy as it is used to determine which course of action to take in the future. Should I throw out the canvas, paint over the mistakes and continue on the present course? Or take the canvas I have to adjust the art to fit what we know to be true and what we expect in the future?

The three key points of the last 1,000 words is this: Should you make you a change based on the data points from October of 2007 through today? What adjustments should be made and how do you absolutely convince yourself that you will not drastically change again in the future over another data point good or bad? In other words, are you saying the world has absolutely changed and you are willing to make a drastic change this one time but never again, or at the very least not for the foreseeable future? Lastly, if the data point measurements are incorrect, how do you measure how well the plan is working? Tough questions indeed.

Selling out entirely at this point and going to cash will remove the opportunity for more principal losses, but removes the ability for income appreciation versus inflation. The action would guarantee that what was "lost" in the markets will not be able to return. If this is the course of action you choose - in my most humble opinion - you need to either promise yourself you will not get back into the market at any point and time, or have clearly and ironclad written details of what re‐entry point you will take to move back into the market. I can recite dates that would have paralyzed you financially for re‐entry (or exit) at the wrong time. Sadly, I can provide names of people who did exactly that and their fate haunts me to this day. My years of experience seem to say the action that causes one to change is based on market prices (data point of measurement), much more than economic issues, which are never absolutely certain. In other words, you cannot allow yourself to get out on "low prices" on the notion that they could very well go lower, if you will allow yourself to buy back into the market merely because prices are higher without actual real change in the investment climate.

Jumping in or out of the pool at any given time allows for very shocking experiences! Hot water, cold breezes, hidden rocks and trees, alligators, misquotes and the scorching heat of the sun on an August day in the desert. The same jump could provide refreshing cool waters, the warmth of God's sunshine, even the visit of a butterfly. Are you willing to risk the bad circumstances in exchange for the hope of the good one? Our recommendation again is to wade - wade into the pool and wade out. Move from the market when your strategy dictates and move into the market when it dictates.

The second choice was to try to cover up the mistake and continue on the same path as before and I genuinely think that is more realistic than the first option, but not the best choice. There are clear distortions in the pricing of assets at this moment. That is clear as we watch prices move in multiple percentages on any given day and in multiple directions. The credit crisis last year also changed some long held rules or practices in the banking world which created changes in the economic landscape. The "frame" of how we view the past has to be adjusted to make room for some of the changes of the current landscape, which includes but is certainly not limited to the three legs of economic change (think of a stool if you will) globalization, demographic shifts and technological innovation. Simply moving forward with no adjustments is most likely a mistake, but the adjustments should be made based on changing conditions not market pricing in our opinion.

The other choice is to modify the original art work to fit the "frame" we have today. The first decision has to be the intended result and which are most important to you: Principal, Income, Growth or market neutral with some income opportunities which we refer to as an endowment allocation. Is it that simple? On paper, yes. In reality, no.

We watched fixed income portfolios last year fall as much as 30 percent ‐ equal to and sometimes exceeding the loss in the equity market - and for the most part the income produced did not change. How can this be? The secrets of asset pricing can be haunting. If you chose principal protection then you were clearly distraught over what happened last year, just as you were if the goal was growth. On the other hand, if income was the objective, little appears to have changed. Which one are you? Can you have both? We don't think so in this economic condition driven by changes occurring in the three legged economic stool mentioned before.

Our suggestion is to choose an endowment model if you have the desire for some income now or in the future, but not a specific requirement today. This model means you cannot compare your returns to that of the broad equity market. We would suggest the growth portfolios if you believe your need for income is years off or you are searching for opportunities. If you require income, then the portfolio needs to be aimed in that direction and the day‐to‐day value of the portfolio ‐ even the year‐to‐year value ‐ must take a back seat. Each is right for different reasons and for different portfolios. Notice I said different portfolios, not different people. We feel strongly that we are entering a period of time where one family may have very different needs within multiple portfolios.

The Economy

When my girlfriend and eventual wife (over 20 years ago) and I were on the way for her to meet my parents for the first time, I couldn't have experienced more emotions. The fears of "what if they don't like her" to the pure joy of sitting next to her were racing through my heart and head. I even remember the music that was on - Alabama if you care - and suddenly I hit black ice. My little red pickup swerved out of control into oncoming traffic. I still believe God righted the truck and put me in the ditch with mere inches between me and the oncoming vehicle. By inches we avoided a near certain fatality. The memory still makes the hairs on the back of my neck stand up 21 years later almost to the day. The event was so scary that Barb and I never mention the event to one another - not then, not now.

My contention is that many of you, if not all of you, have a similar experience to share, and even those of you who haven't, can reach a decided visual. Without there even being a wreck, we all understand the severity of the potential outcome. None of us waves off the encounter without thanking Jesus for our safety, because we knew what could have happened if those few inches of safety ad been removed.

The point of this very true event is that we go through life with things where we don't truly understand how close we were to dramatically different outcomes. The events that unfolded from September 15 of last year through October 15 were indeed enough to cause a collision with economic fatalities with extreme global ramifications. For Iceland, the wreck clearly occurred. For those of us with assets, we feel like we were in a wreck that required hospitalization perhaps but not a mortician! Friends, rest assured, your economic fate and mine was spared by a few inches in my opinion.

Some will clearly say this is a dramatic over statement and things weren't that bad. Others will say the wreck could still happen. Most of us are like me and Barb in the incident above - the occurrence was so incredible that a few miles down the road we discussed examining the tread on the tires or what the street department should have done differently. The majority of the world watched the 30‐day time period unfold in 2008 and has now moved to their version of the "street department" and their errors, as we haul people before Congress and the regulators. Just as Barb and I are blessed to be alive, so is our current economic system even if it is badly bruised.

This is not to say that questions shouldn't be asked and lessons learned, but to point out that we as individuals have a tendency to assume no risk was taken once the outcome occurred. You surely recognize the risk to life in the near accident above, but you don't necessarily understand the risk of being in all cash if the market had gone up as much as it went down last year. We don't naturally understand the risk of economic outcomes different than what happened to play out. This understanding of "rear view risk" may seem meaningless, but it is crucial to the concept of asset allocation.

The thought was that if I were all in cash, I would still have my cash - true enough. But if the market had rallied as much as it went down, then you would have had the same money but not necessarily the same spending power. Loss to inflation is not like a car wreck that we can visualize and sadly, most of us don't understand the "wreck" that it can cause in a retirement strategy.

2008 offered other unconceivable issues as well. Last year the top performing sectors in the S&P 500 for the first six months were precisely the worst performing sectors of the second half. The rear view risk here underscores the rational for diversification within equities, regardless of the economic appearance AND without the inclusion of market pricing as a tool to determine value of an asset (stock or bond) in a portfolio decisions. The need for asset diversification is and was clear.

Interestingly enough, we compared long-term U.S. Treasury bonds to the tech wreck stocks of the roaring 2000s in the fourth quarter of last year. Our unwillingness to participate in that market environment caused us to miss our benchmark measurement by a large portion and looking at the year­end results as the selected data point made us appear to be wrong - dead wrong. As of this writing, the long term U.S. Treasury, as priced by TLT, is off more than 15 percent year‐to‐date. The once-bestowed safest investment on the planet fell by 15 percent in less than one quarter. Wow! Off more than the equity markets this year.

We have no way as mere mortals to play out all the implications of rear view risk and honestly, that is not our job from an economic standpoint. We buy that type of work from the world of academics who write papers and create models that "suggest" what the risk measurement was, but even those are distorted in my opinion. We filter information and apply it to our strategy and we must be cognizant of distortions.

That is the second or third time I have used the word distorted in this paper. It is a powerful word. The intended definition is that things we are seeing are not entirely accurate. Think about your side door mirrors where the label clearly reads, "objects may be closer than they appear." These distortions include market prices, as well as economic indicators, and we get no warning labels!

One such instance of this is the money supply. You have undoubtedly heard we are printing money faster than superman can catch a speeding bullet. Indeed, we are. But, and this is a very important but, the "scales" we use to measure the money supply was created around 1918, as are the same scales used today. Those scales say the money supply is out of control and we are about to crash and burn the US dollar! The challenge, or distortion, comes in the wake to the 30‐day time period discussed earlier as the Federal Reserve executed many first‐time changes. As a result, we are using the same scales, but we are weighing different things. It would be similar to getting weighed, stepping off and getting a bag of rocks to throw on your shoulders and then getting weighed again and comparing the results. We would be reacting to bad data and that is exactly what we are doing in the economic world right now.

This is one of what I believe to be many distortions occurring right now. You have a "framework" for decision making that comes from years of past experience, beliefs and attitudes that you use to judge where we are right now. That is natural, understandable, and somewhat obvious. The academic and professional asset management world is doing the same thing. They spend years in school studying and developing a "framework" of economic issues - "if this, then this" type situations. When things that never change suddenly change, wrong conclusions can be drawn. My concern - among many - is how many other economic data points we depend on are currently being distorted?

If we give a well-trained economist a scenario with two components of economic change, we should get a reasonable answer - I know you are laughing but work with me here - as to the outcome. They use their "framework" to reach that conclusion. The challenge is that things are so extreme right now, that the U.S. isn't only watching two things change but 20, and the same is occurring around the world - many places of which are in far worse shape than we are. No one alive - including yours truly - can tell you what will happen with all of these things in action. To make matters worse, the "framework" that we use to measure the potential changes has been distorted by game changing governmental maneuvers.

We are accustomed to economists getting it wrong and joke frequently about this, but suddenly this is far from a laughing matter. The expectations for the economy, the market and the world economy are across the board from the largest surge in commodity prices in history to a global depression surpassing that of the "Great Depression" in the 1930s. How can so many be so far apart - some see no distortions, some see some distortions, and there maybe somebody who has seen them all but we won't know who that was for years to come. There will be economists absolutely right and deadly wrong as measured by asset prices in the future, as that is the only measuring stick most of us have to use. What we will never know is if the outcome and glory or doom they receive will be based on perceived results or actual computations that played out as they expected.

The market has humbled everyone who held anything but cash lately - yes, gold is off near 10 percent this year as well. If you bought anything in 2008 it was generally wrong, unless you were willing to take profits almost immediately. If you failed to keep anything that you previously held and didn't sell it, you were wrong! Cash won the battle for 2008 and of course the long U.S. bond, if you sold it in December!

We believe that there are distortions causing a serious deviation from proper pricing and we are starting to find those who agree with us and using big money to cast their vote. Last year every sector within the S&P 500 fell in price and we had more than 60 percent of all the companies in the S&P 500 making new 52‐week lows at the then November lows. The current low now has less than 20 percent of the companies in the same boat. Companies that seem to have the strength are seeing their prices hold up and the others, as well as the market indices, continue to fall. We deeply believe there are companies worthy of buying based on the facts we have today and others that simply have to be sold.

Our intention, which has been backed by our action, has been rather straightforward all year long and will remain that way in our current investment model. We are moving from baskets of stocks to individual companies that we feel have market support, economic strength and demographic rational following what we said we would do back in the late 1990s as we discussed the "S‐curve" and the economic cycle of innovation. Individual companies are bought and held until there are material facts that change that holding. The change can occur within the company, the political process including protectionism and globalization, and it can be based on market trends changing within that particular holding. Each asset is now judged on its own independent merit. This must be the future course of equity holdings for the next few years and perhaps even longer.

Within areas where mutual funds or separate accounts are required, the amount of equity funds used must be minimized to as few as managers as possible. We work diligently to find managers who seem to be following the same course of action discussed above. Obviously this is more difficult but it is also why we have the team in place that we have working and watching.

On the other hand, fixed income investments must move from individual holdings when possible to baskets. Never before has liquidity in fixed‐income been so dramatically relevant. We are watching enormous price confusion and asset shifting form municipals, treasuries, high yield and even good corporate paper. We must make certain that we can adjust as politics and economic conditions adjust. This is critical to each and every one of the asset models we have discussed.

In summary, we have been slowly wading out of the equity market and wading into the fixed income market. The wade has been to individual companies and baskets of bonds. The wade will progress until the tides change and suggests a different action. We would clearly not encourage anyone to jump in at this point any more than we would encourage you to jump out. That is not a mandate to stay the course but rather an understating of our fluid allocation process. As you can see by the changes mentioned above, we are anything but sitting still. What we are unwilling to do is to move simply to move, or sit still simply to say we gutted it out.

These markets will prove for years to come that the ability to react will be more important than the ability to predict. This will not change until the economic distortions are removed and asset prices settle. In the meantime, expect change! Change in the policy of governments - not just ours. Change in asset prices quickly and swiftly. Change in where and how consumers choose to spend their money, regardless of the apparent economy we find ourselves.

Our team feels very blessed to be in this industry and to offer our guidance in these challenging times. We apologize for the time it may have taken to absorb the information in this letter, but we cannot apologize for the length. We are in a period of time where communication is paramount and second only to the ability to move as dictated.

Have a great spring!

--Big Joe and the FEG Allocation Team

Joseph “Big Joe” Clark is a Certified Financial Planner and the Managing Partner of the Financial Enhancement Group, LLC. He is a Registered Principal offering Securities through World Equity Group, Inc, member FINRA/SIPC. Registered Investment Advisor Services offered through World Equity Group, Inc.  Big Joe can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it , or (765)-640-1524.