The brief weakness in stocks in September didn't last. Any fears of inflation, stagflation, global supply shortages, and the like melted away as the S&P 500, with dividends, returned 7%, leading to a 5.13% three-month return and a whopping 24% year-to-date.

This 7% pop was higher than the monthly return of 95%+ of fund categories (stock and bond). It was also enough to get us to Dow 36,000, only 22 years after the then-famous bubble book of the same name was published in 1999. For the record, it took about 15 years for investors to break even on NASDAQ stocks purchased in early 2000 and about a decade for S&P 500 investors to be safely above the levels of the bubble top (the brief move above 2000 levels in the S&P 500 didn't hold through the 2007-09 crash).

Our Conservative portfolio gained 3.19%, and our Aggressive portfolio gained 3.16%. Benchmark Vanguard funds for October 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 7.00%; Vanguard Total Bond Index (VBMFX), down 0.03%; Vanguard Developed Mkts Index (VTMGX), up 3.15%; Vanguard Emerging Mkts Index (VEIEX), up 1.11%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.33%.

Our low allocation to US growth stocks was covered by strong returns in energy, utilities, and bonds, leading us to roughly match the Vanguard global balanced fund, which is a bit riskier (more stocks and downside) than our portfolios. It was another late 1990s market, where everything sort of underperforms large-cap growth stocks in the US.

Our hottest fund was Vanguard Energy (VDE), up 11.21%, as inflation fears and consumer demand drive oil ever higher. It is almost unbelievable to consider that a little over a year ago we had zero-dollar oil futures and everyone writing oil off as yesterday's investment destined to go the way of the buggy whip, and ultimately the internal combustion engine.

Now there are gas lines in the UK and Russia is sitting in the natural resource catbird seat. While the good times could last, this area needs to get cut back from portfolios, if for nothing else, as protection from the next economic slowdown, which will break the oil markets again. Vanguard Utilities (VPU) was up 6.01% as interest rates drifted back down, boosting the value of this high dividend income area. Everything else we owned underperformed the S&P 500, though only Brazil stood out as a big loser (not including shorting), with Franklin FTSE Brazil (FLBR) down a big 9.17% as emerging markets in general are falling out of favor, kicked off by China's ongoing troubles.

This fear of foreign emerging market risk pushed iShares JP Morgan Em. Bond (LEMB) down 1.18% during an otherwise good month for bonds that saw our Vanguard Extended Duration Treasury (EDV) holding climb 3.52% and Vanguard Long-Term Bond Index ETF (BLV) up 1.72%.

Other hot areas in October were precious metals funds, which jumped almost 10% in an otherwise terrible year where they are still down for the year - surprising to those who believe that gold is the ultimate protection against inflation.

It must be aggravating to gold bugs to finally (after waiting for so many years!) get inflation to jump significantly only to watch in horror as gold- and silver-related investments slide. To add insult to injury, the new anti-dollar investment all the youngsters can't stop blathering about - cryptocurrencies - are up big. We've read stories about the supposedly uncomfortable holiday season as families with, let's say, differing COVID policies get together, but what of breaking bread while sitting on a pile of 'precious' metal coins bought from some TV ad about Armageddon only to hear some younger family members talking about their digital currency riches?

Understandably, with interest rates below inflation, the incentive to do something is high. Low, sub-3% rates will likely be here forever, other than some brief pops, for two main reasons: too much money to invest in too few safe assets, and globally indebted governments like ours literally can't afford the payments on the debt if the rates rise to 'normal' levels.

The Fed is going to orchestrate a system to keep the economy and government functioning and that is likely going to require managing how much cash and bond investors can lose relative to inflation. Don't hate the Fed, though - they are merely picking up after our government, which won't or can't close the gap between spending and tax revenues. It is almost preposterous that the Fed may have to raise rates soon, probably crushing stocks and real estate, all to fight inflation that the government can clamp down on by raising taxes and/or cutting spending. Sadly, the fiscal response would only help our debt situation while the Fed's fix of raising rates will only worsen it by raising the government's borrowing costs.

But while low rates can and should rationalize higher asset prices, they won't prevent downside risk as panic takes over or guarantee higher returns going forward.

The main difference between now and the early 2000s Dow 36,000 book era isn't stock valuations, which are almost equally absurd as they were in 2000 (and in many cases more so). It is the lack of a safe 5% choice.

Imagine stocks double from here in the coming few years, and we get a dividend yield of below 1% across the market (currently only 1.3%, roughly where we were in 2000) and P/E ratios go to 44 from around 22 now. Or double again and get to basically Japan 1989 valuation levels. At some point, you won't beat even the negative inflation adjusted returns of safer bonds or cash over time. The same is true of real estate - there is a point, say when the rental yield doesn't even cover property taxes and maintenance, that upside is more or less limited. There is a reason Warren Buffett currently is sitting on a record $150 billion in cash..

The Japan stock market is still about 25% under the highs of over 30 years ago. When you get into bubble territory, the only way to not lose money in the longer run is if the underlying fundamentals - earnings with stocks, rents with real estate - grow and catch up to your overvaluation. Unlike Japan, we've remained a positive GDP growth country (but only in the sub-3% range annualized since the 2000 bubble) and tech earnings have caught up to the old NASDAQ price level, eventually.

The question is, can we grow the fundamentals fast enough again when we are already running massive budget deficits with little room to add more, under-tax and overspend as if in a recession, are hitting inflation levels the Fed will eventually crush, and are probably going to face rising taxes in the future? We've got other population issues that will be an increasing drag, as they have been in Europe and Japan.

For those looking too hard for investments to get away from zero, please check out "Series I Savings Bonds" directly from the U.S. Treasury's 1990s retro website. They are sold with zero yield with an inflation adjustment, so if inflation is 5% you get a 5% return in the form of the bond's value going up - a gain that can be deferred for 30 years.

These directly sold non-market-traded bonds can be superior to the inflation-adjusted bonds we already own in our portfolios and client accounts (and are now selling), which already adjusted up in value as investors' fear of future inflation grows (leaving room for a drop if we get falling inflation fears). Direct I bonds don't sell at a premium (other than a no-coupon besides an inflation adjustment - itself a sign of high demand). You will still need inflation to be higher than, say, 2% to beat regular non-inflation bonds, so while they may have no downside they can underperform other low-return investments. What you don't risk is "losing" 5% to 10% if inflation comes down fast, as can be the case in TIPS if you buy now and sell when investors aren't as fearful about future inflation.

The direct-bought bonds are limited to $10k per person per year or larger investors would be snapping them all up. It is a gift in this market. Yes, they can be sold when there are better deals in other safe assets (which may be never) or stocks (likely). The current interest rate is 7.12%, but it will drop when the government gets around to stamping out inflation, or if inflation just proves to be transitory as we are told. All those gold investors who are down for the year during our highest inflation year in decades shouldn't be jealous of cryptocurrencies, but zero-risk, zero-fee, or zero-commission inflation-adjusting bonds that guarantee to pay you the rate of inflation. They don't advertise them on TV, of course.

It is also worth noting that stock markets tend to go down soon after a rise in inflation, not so much because rising prices destroy economies at relatively low levels of inflation, but because the actions taken to fight inflation sink asset prices. This is why the transitory theory better prove right - if inflation goes away "naturally," with no major Fed action, we are far more likely to avoid another market slide.

The S&P 500 beat 95% of fund categories last month, once again leaving portfolios in the dust as mega cap growth and tech stocks continued to dominate, much like they did in bubbly 1999. With no real standouts other than perhaps utilities, we barely beat bonds last month.

Our Conservative portfolio gained 0.37% , and our Aggressive portfolio gained 0.45%. Benchmark Vanguard funds for August 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 3.04%; Vanguard Total Bond Index (VBMFX), down 0.20%; Vanguard Developed Mkts Index (VTMGX), up 1.38%; Vanguard Emerging Mkts Index (VEIEX), up 2.67%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.31%.
The only fund to beat the S&P 500 in our portfolios was Vanguard Utilities (VPU), up 3.7%. This was probably the result of relatively low valuations attracting investors, as well as yields being harder to come by, attracting interest.

Emerging markets have been rocky, with many markets negative in recent weeks and months. This is likely the fear of rising inflation in many of these markets as well as the overall reminder of political risk that appeared seemingly out of the blue in China. Franklin FTSE South Korea (FLKR) was down 2.33% with Franklin FTSE Brazil (FLBR) down 2.8%. Bonds were weak, and only our reduced stake in iShares JP Morgan Em. Bond (LEMB) was up, with a 0.53% return. Interestingly, inflation-adjusted bonds were flat, and precious metals funds were the worst-performing fund category during this era of the highest inflation in over a decade.

At the top of the market in 2000, before the collapse of US tech and growth stocks, tech stocks represented about 33% of the S&P 500. After the 2000—2002 crash—which also took the S&P 500 down by about half, and tech stocks down a whopping 80%—technology was down to just 14% of the index.

Today the tech sector is 27%. While this level seems lower than the past tech bubble, the index creators now count Google, Facebook, and Netflix as communications companies, like Verizon, and Tesla is a consumer discretionary name, like Ford. These high-flying growth stocks are priced as tech stocks, and their value is derived largely from software technology. All in, what could be considered technology shares are pushing half the value of the stock market.

The only reason this is not a completely absurd bubble about to crash 80% (as opposed to an overvalued sector that could fall 25—50%) is that these companies make much of the money in the economy. In 2000 it was a bubble about future earnings, sort of like how Tesla is today. The sector earned 15% of the earnings of the S&P, but was more than 30% of the market value— basically the P/Es were double. Today the tech sector trades at only about 1/3 premium value over the rest of the index. Considering the reliability of the earnings growth, this isn't even out of whack.

In general, being in the most successful and popular area in the market when the economy slides is a bad idea. Financials in 2006 were over 22% of the market—the then #1 position in the S&P 500—as the world was becoming one of finance engineering rather than manufacturing or even tech. After the crash and lackluster years, this sector is now just 11% of the market.

How will the end come for tech leaders? A case could be made that, in the future, most profitable companies will be essentially tech names driven largely by software, and there will be no more epic crashes as in 2000. More likely there will be some hiccups along the way. One path to slowdown is just running out of places to use software to earn high margin profits. More likely the concentration of power will be their undoing, if not from their own competition with each other, then from government intervention as we are now seeing in China.

The top five tech names in the US alone are now around 23% of the S&P 500's market value. Most of them deal in high-margin spaces with few competitors where the buyer has little choice. The price is more about maximizing profit than market share or competition.

The Government has largely ignored tech power because it mostly seems to impact other businesses, not consumers. But input costs don't magically go away. The consumer—or voter, rather—doesn't see the full bill, sort of like Value Added Tax or VAT in Europe. The consumers often just see exciting free or cheap services, or their own behaviors are being sold to the highest bidder.

Tech billionaires also seem to live relatively modestly, at least next to the so-called robber barons of over a century ago, which led to the era of busting monopolies and higher taxation. Sure they have jets and yachts, but you can't really compare the lifestyles of the rich and famous from the turn of the century globally to today. This may have shielded the socialist tendencies of global governments and the public.

These days of relatively low regulation and tax may be coming to a close. They seem to be in China, which also has a high-flying tech sector, unlike most of the world. Europe has little to lose and more to gain as this is barely their own industry getting cracked down on, sort of why adding tariffs to China was popular. Rising regulations and taxes could scare investors out of tech. There even seems to be growing bipartisan support here.

This could take years to play out, but the upside to downside risk from these levels seems skewed to the negative.

The great reversal of investment laggards from the past few years beating tech and growth stocks has come to a grinding halt in recent weeks. Larger-cap U.S. stocks and tech stocks were the top performers last month after lagging for much of the year. Value stocks were at the bottom of the heap. While the S&P 500 was up 2.33%, this disguised the big split. Large-cap growth and tech funds were up around 5—7%, while value funds were down slightly. Our focus on yesterday's losers and some shorts on tech dragged at our returns last month, though some hot areas, like energy and Brazil, kept us in the game with the drag of value stocks.

Our Conservative portfolio gained 0.67% , and our Aggressive portfolio gained 0.85%. Benchmark Vanguard funds for June 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.33%; Vanguard Total Bond Index (VBMFX), up 0.77%; Vanguard Developed Mkts Index (VTMGX), down 1.11%; Vanguard Emerging Mkts Index (VEIEX), up 1.19%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.73%.

Specific hot areas in our portfolios last month included Franklin FTSE Brazil (FLBR), up 6.29%, perhaps Brazil may be appealing to contrarians (those who want to buy out-of-favor investments) looking to get in after years of rough returns and a still very much out of control Covid situation. Vanguard Energy (VDE) was up 5.19% and is one of the hottest funds of the year, as investors realize that not only were last year's hit to energy and predictions of a dying oil industry a little overblown, but the current inflationary rebound, fueled by twin monetary and fiscal stimuli in a not recessionary economy, as ill-fated as that may be, is a perfect environment for this down and out industry. That said, we're going to need to refocus to other areas, perhaps more utilities, to have additional downside protection.

Everything else we owned underperformed the S&P500, as did about 85% of mutual fund categories, notably Vanguard Value Index (VTV), which is down 1.25%, showing that the growth versus value fight had a clear winner last month, though, for 2021, value is still ahead. Inflation fears seem to be abating as gold-related funds were the worst performers last month (the only fund category to drop double-digits) and interest rates drifted further down, into the negatives adjusted for inflation.

This boosted our recently repurchased and very interest-rate sensitive Vanguard Extended Duration Treasury (EDV), which climbed 5.48%, followed by a 3.86% jump in Vanguard Long-Term Bond Index ETF (BLV). Interestingly, higher credit risk iShares JP Morgan Em. Bond (LEMB), which we had cut back on a bit recently after a big run-up, slid 1.13% as inflation fears are very much affecting emerging markets and weighing on currencies, since we are essentially exporting inflation as we create money here and buy stuff.

This inflation phenomenon is dangerous for many markets abroad, as they are still dealing with serious Covid issues and can't necessarily raise rates or tighten monetary policy to fight the inflation we are dumping on them without risks to their own economies. This situation could be a drag on foreign markets.

Such relative swings, particularly between growth and value, do raise the question, why bother? Just own the S&P 500 and you will get some average of the value and growth. First, note that, back in the overpriced value markets from 2006 on, we were heavy in larger-cap growth funds. Our problem back then, at least after the initial rebound in the market off the 2009 low, was generally having too little in stocks, but a focus away from small-cap, value, commodities, and foreign markets was a winner that we, unfortunately, didn't stick with long enough. These relative performance wins tend to go on way too long and you can't walk away too soon. The pendulum swings too far.

But now is not too soon; larger-cap tech and growth are near the end of an outperformance cycle. Even if we don't get ongoing outperformance of value and foreign stocks relative to U.S. growth and tech, the best case for growth is that it moves with everything else—and everything is basically overvalued and goes up or down mostly in reaction to rates, recessions, and wavering risk appetite.

One reason the indexing phenomena may finally be nearing a breaking point is that the whole concept works best as a free ride off all the active stock-picking going on, only without the fees and transaction costs. This has been a smart move for basically 50 years. The problem now is that as more and more buying as a percentage of the market is indexing (or passive), the rest of the "actives" are becoming relatively more important. Unfortunately, that is a world fast being overrun by morons less experienced investors trading more on narratives than numbers. So powerful are all the pocket day traders that expert, or sometimes just a little crooked, investors who short stocks are having to cut back on their questionable yet important work of repricing overhyped or even scam stocks.

If this keeps up, we're going to have a market of Robinhooders reading chat boards and index investors following along for the ride. This doesn't mean you have to avoid all indexes, just the ones with more popular momentum and so-called meme stocks.

The danger for the funds is less in the meme bubble of idiocy than in the question, how much does the real economy and market tank when the speculative mania collapses? The last two crashes were essentially the result of a collapse in speculation, tech stocks in 2000, real estate in 2007. You didn't have to be over-allocated to these areas to feel the pain. When two trillion in cryptocurrencies collapses 90% and so does perhaps another five trillion in blatant market overvaluation, on top of perhaps another one to five trillion in outright future bankruptcies, it's likely that at some point, you are going to feel that, even if you don't have a Robinhood account.

It was the best of times, it was the best of times. The only thing that seems capable of burning investors now is just that: too many good times. The S&P 500 was back in the top 10% of the entire universe of over 100 fund categories, and in the top 15% for the year. Our portfolio saw more of our funds underperforming the index as well.

Our Conservative portfolio gained 2.27% and our Aggressive portfolio gained 1.98%. Benchmark Vanguard fund performances for April 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 5.33%; Vanguard Total Bond Index (VBMFX), up 0.95%; Vanguard Developed Mkts Index (VTMGX), up 3.17%; Vanguard Emerging Mkts Index (VEIEX), up 1.86%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.17%.

The S&P's continuing outperformance seems like proof of why the S&P 500 is the best investment, relative to other funds. You will get no beef here about the long-term benefit of low fees and passive management. However, this sort of outperformance is more akin to the experience of the late 1990s, when investors piled into the U.S. growth winners during the years of outperformance. Ultimately this led to a stock market crash, with the S&P 500 underperforming most global fund categories for the next several years.

The end of U.S. large-cap growth and tech dominance may already be here. In that respect, it is just like early 2000. There is no saying what will be the cause of the decline, or just the rotation to other types of stocks (or increasingly — gulp — crypto-collectibles).

Many inflation-oriented fund categories that could benefit from rising inflation had a good month; precious metals, real estate, commodities, and energy partnerships were all near the top of the list. Nothing was down except for Japan funds, India, and surprisingly, energy stock funds such as we now own. However, they are still in the top 3% of fund categories for the year, with returns of over 20%.

Our only real standout was Franklin FTSE Brazil (FLBR), with a 6.46% return. The only loser was Franklin FTSE China (FLCH), down 0.18%. Bond rates drifted down, pushing most bonds up even with the threat of an overheating economy. Our recently re-added Vanguard Extended Duration Treasury (EDV) was up 2.87%, followed by iShares JP Morgan Em. Bond (LEMB), up 1.89%, pushed by a higher risk appetite.

There is certainly fear of missing out on the next leg of the boom as we come out of the Covid lockdown. But optimism can quickly turn. Psychologically, it could just be a fear of losing gains in hot areas, or it could be the temptation of higher-returning speculations beating old winners — trade in the Tesla stock for crypto.

More a fundamental factor than an emotion one to the triggering of a market slide would be the Fed increasing interest rates, to counter the solid boost to an already accelerating economy of another significant stimulus program, if passed. A few years back the Fed did the opposite. The Federal government wasn't doing much deficit spending to boost a still sluggish post-2009 economy, so the Fed did all the heavy lifting — low rates and money creation through so-called quantitative easing or QE. It did the same thing last year, with the extra boost of massive government spending.

Does it make sense to continue to run massive deficits this far into a recovery? An enormous infrastructure plan could be mothballed for the next recession, so they have a ready-to-go (shovel-ready…) jobs and stimulus program, rather than a panic stimulus during a crisis resulting in questionable grants and checks in the mail. If we start an infrastructure stimulus program now, will we have less money to burn when we need it? Will we create more demand for labor and materials in a booming post-Covid economy, and cause increased traffic and energy waste? Why didn't we attend to the infrastructure late in the Covid economic slowdown after the initial hard shutdowns? We already see shortages and price booms in many materials key to growth, and could worsen the problem. Perhaps an on-deck plan doesn't take the nuances of a current crisis, be it real estate or pandemic, but infrastructure seems somewhat perennial.

The current Treasury Secretary and former Chair of the Federal Reserve just slipped, and said aloud that the Fed might have to raise rates to cool the economy in the face of more government spending. The market didn't seem to like it, even though she quickly toned down the message.

The other looming threat to the party is higher taxes. While this future drag is far off, investors' behavior may already be changing in anticipation of significant tax changes. Muni bond yields are at historic lows relative to treasuries, as investors expect even better after-tax returns as rates go up. If favorable capital gains taxes will increase to ordinary income tax levels, which themselves are going up, will investors try to book gains while rates are low? Or will they have to wait, as such changes can be retroactive to the beginning of the year? Perhaps the dumping hour will be late this year, before any actual tax changes are passed with the presumption they are coming in 2022. With such low rates, are large investors using margin loans to avoid booking gains, and will that party end if rates go up? Or will interest rates stay low, with high capital gains rates leading to more extended holding periods — like forever, as investors with significant gains wait for lower rates, years down the road? Perhaps we will get a bigger stock boom, as nobody with capital gains wants to sell and pay 50% taxes on the gains, State and Federal.

The more predictable part is that corporate tax rates will likely climb, which can only lower corporations' after-tax profits, making their current valuations even higher.

February was another good month, for us and for global markets. Many fund categories which have lagged in recent years continue to beat the market. This has benefited our portfolios as we've been moving into these areas in recent years (and paying the price for it, lagging the increasingly tech-dominated market). With a balanced portfolio, we have managed to be in the performance range of the S&P500 while beating the Vanguard Star Fund (VGSTX) by a small margin.

Our Conservative portfolio gained 2.09% and our Aggressive portfolio gained 2.90%. Benchmark Vanguard funds' performances for February 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.76%; Vanguard Total Bond Index (VBMFX), down 1.51%; Vanguard Developed Mkts Index (VTMGX), up 2.52%; Vanguard Emerging Mkts Index (VEIEX), up 1.65%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.87%.

Last month the top fund categories were energy, small cap value, natural resources, value in general, and many foreign markets. These hot returns boosted our overall performance, even with relatively low stock allocations compared to what we have in a bargain market. Vanguard Energy (VDE) was up 22.45% as everyone is suddenly sure that inflation and a booming economy are around the corner. Vanguard Small-Cap Value (VBR) was up 8.79%, mostly because value is coming back and small cap has lagged. It wasn't all roses, as Franklin FTSE Brazil (FLBR) was down 6.37% after some hot months. Vanguard Utilities (VPU) was down 5.54% as rates rose significantly.

The temptation is to sit back and let the dollars roll in. We should be somewhat insulated from the next slide in stocks, which will probably be in whatever sector was hottest over the last few years (sort of like 2000 and 2007). This could happen, but in all likelihood most stocks will drop when this market deflates eventually. There are many signs that the stock market is due for a slide, and not only from high valuations. High prices aren't a perfect indicator; in a boom, a large part of the gains happen in its last phase, and nobody wants to leave the party early. As noted before, low interest rates can support very high valuations because the alternative is bleak and debt financing can boost all assets.

More of a concern, by our methodology, is the number of ill-conceived new funds launching and the number of funds scoring high returns of two or three times the already high returns of the S&P 500 off the bottom. These hot funds are now bringing in tons of money. The financial press, never learning from the errors of the past and always focused on what people want to read about, not what they should read about, is featuring these new fund geniuses as having the hot hands for today's markets. This of course is how 1999 was before the crash in hot stocks: dozens of funds up 100%+ in a year, new funds with trendy strategies, and investors that could not get enough.

We're not quite at that level of pure speculative stock market froth, but there are enough signs (besides triple-digit fund returns over one year) to be wary. One hot new ETF family has brought in tens of billions on future wonder stories that include many companies with zero earnings and a crypto coin fascination. There will be a new ETF that invests in stocks popular in online chat rooms. There is the continuing absurdity of GameStop speculation. Tesla bought $1.5 billion in Bitcoin and then touted the move, juicing Bitcoin and earning a quick near-billion. A dead-end software company that has largely missed out on the last decade in software growth and an old bubble favorite from 2000, Microstrategy, decided to put all its cash in Bitcoin, then do two large convertible bond offerings paying almost nothing in interest to raise cash to buy more Bitcoin — in effect, converting to a de facto Bitcoin fund. This is the 2021 equivalent of 1999's 'add dot-com to your name and watch your stock go up' business strategy. Nobody seems to wonder what will happen to the company if Bitcoin tanks.

If it is not now the equivalent of March 2000, it is certainly mid to late 1999 and it is time to cut back before the music stops. We can't do much, for tax reasons, as our buys from the short-lived crash last year will soon become long-term gains.

One opportunity we wanted to take is to cut back on inflation-protected bonds, which have done very well from the crash lows of 2020, when inflation looked like a far-off land. Pricing was finally good in this area last year, so we jumped in and exited from almost all other bond funds — except for emerging market debt, which we added for some upside. As it turned out, risky bonds and inflation-adjusted bonds did well, so this worked out on both fronts.

Interest rates are now back up fairly significantly, considering how low they were recently, hurting regular bond funds. Inflation-adjusted bonds have done well, as they do when fears of inflation are rising. Unfortunately this cuts into future returns, because inflation now has to be above 2.25% for inflation-adjusted bonds to beat regular government bonds. Could happen, but the potential was much better when inflation expectations were around 0.6% last year. Plus, inflation-adjusted bonds won't do well if we get another stock crash, unless it is a crash based on rising inflation fears, which is possible in the shorter run. Typically, regular government bonds do the best.

The bull case for stocks from these levels is that we're on the cusp of an economic boom, fueled by those desperate to get out of the house and spend all the freely distributed trillions in government money. This may very well be, but stocks are already pricing this in and could just as easily fall.

Trade Alert

We placed a few small trades at the end of February in our model portfolios.

Conservative Portfolio

We added a 5% stake in VanEck Vectors Pharma. (PPH) as its relative safety and low valuations should keep this fund afloat in even moderately down markets.

We added a 10% position in an oldy but goody, Vanguard Extended Duration Treasury (EDV), to take advantage of the recent bump up in rates, hoping for some downside protection in the next crash. This is a very risky fund in the short run if rates keep going up. Long-term, much higher rates don't seem possible as there is just too much debt that needs low rates. The only real question is the rate of inflation. Lowish rates of under 3% on 10-year government bonds should be here to stay, with plenty of short-term volatility.

We sold our 26% stake in Schwab US TIPS (SCHP) because prices had gone too high, leaving little room for gains without truly massive sustained inflation of maybe 3—6% a year. Possible, but considering how easy it would be for the Fed to stop inflation these days, unlikely. There is a risk of the government running 3—4% inflation as the best way out of this debt mess, but even then TIPs funds won't do that well in the long run from here.

We added (FXE) at 10%, just to have something with some direct upside if the US dollar continues to fall. If foreign bonds paid much and didn't also face rising rate issues, we would not use this fund and would instead go with a foreign bond fund. There is also risk here that the rest of the world doesn't get the vaccine out as fast as we do, and that our economy is off to the races first.

We also added Vanguard Long-Term Bond Index ETF (BLV) to benefit from higher rates, though again there is a risk of losses as rates head upwards on fears of a booming economy and inflation.

We sold iShares JP Morgan Em. Bond (LEMB) even though we really want foreign bond exposure. This fund has too much credit risk for a downturn and we wanted to book our gains since purchase, which were substantial compared to safer bonds which have been very weak lately. Ultimately, if rates keep climbing, all these risky bonds will start tanking as the spread between safe and risky yields is getting too close already. In other words, who would own this fund at a 4.2% yield if 10-year US bonds start paying 3% (currently 1.5%)? Bottom line: all bonds have downside from here if rates keep going up because the spread between high-risk and low-risk debt can't get much smaller, and typically will get much wider if the economy or markets slip again. That goes double for convertible bonds linked to high-flying tech stocks.

We also did a limited amount of rebalance trades, which included selling some Vanguard Energy (VDE) after a hot run, as well as Franklin FTSE South Korea (FLKR), another outperformer, and Franklin FTSE Germany (FLGR) and Homestead Value Fund (HOVLX). You can use your discretion on rebalancing to our official percentage allocations and in non-IRA accounts. You may want to wait until you have long-term capital gains on these winners, to sell without offsetting capital losses.

Aggressive Portfolio

We boosted VanEck Vectors Pharma. (PPH) from 6% to 9%, for similar reasons for adding it to the Conservative Portfolio.

We switched to a new 2% stake in (QID), which is an inverse 2x, and sold ProShares Short QQQ (PSQ), an inverse 1x, to generate losses to offset sales and to increase our short position in the Nasdaq, which has dwindled as the market has risen. Avoiding tech and growth stocks here is the best overall strategy, but we will continue to short this high-flying area of the market to help protect the rest of the portfolio. Unlike in 2000, you can't simply buy 5% government bonds and sit out a possible train wreck. Hopefully, this 4% effective short position in the Nasdaq will offset losses in the stock market. There is a possibility that our picks remain mostly flat and only tech slides. If the economy goes back into shutdown mode and tech booms anew and oil stocks tank, we're going to wish we didn't make this adjustment.

We took a new 10% stake in Vanguard Extended Duration Treasury (EDV) for the same reasons that we added it to the Conservative Portfolio.

We cut Schwab US TIPS (SCHP) from 9% to zero, for the same reasons as in our Conservative Portfolio.

We cut iShares JP Morgan Em. Bond (LEMB) from 8% to 4% for similar reasons as in the Conservative Portfolio. But we kept some of this stake because it is a riskier portfolio and can handle what could be a rough ride. Plus, we have shorts in the portfolio which may take the edge off, so to say, and wanted to limit short-term gains.

There were a few rebalance trades where we didn't change the official allocation but got the holdings back in line with our target allocations. This was limited, due to taxes. Vanguard Small-Cap Value (VBR) saw a small sell and ProShares Decline of Retail (EMTY) saw a buy. Frankly, we'd probably cut back on Vanguard Small-Cap Value (VBR) more aggressively if not for the tax implications and our desire to drag out the momentum gains that may continue.

We really thought these trades could be put off until a year after our buying during the COVID crash. Unfortunately there is just too much speculation going on these days not to make some changes. We'll probably make more in a few months' time, after our buys become long-term capital gains (which are taxed at lower rates than income). In an IRA or other tax-deferred account, this is not relevant. In general, our hunch that stocks are due for a pullback is not a good reason to realize gains at a significantly higher tax rate, so close to the one-year mark.