On Christmas Eve in this very rocky December, the stock market, as measured by the S&P 500, was down 20% from its October peak. Technically, this wasn't officially a bear market as the price slide from the peak closing value in the S&P 500 to the bottom in late December was just shy of 20%. Officially, the market needs to be down 20% from a market close to market close. Unofficially, this is a silly concept, and any 20% drop from a high in the market should qualify as something bigger than a "correction" (itself an overly positive term), which is a 10% drop. Whatever you want to call it, we haven't had many of these drops since the 2009 bottom, which is one reason investors are skittish—the good times have to end eventually, right?

Any way you slice it, December was the sort of month where the benefit of not taking on too much risk and avoiding popular strategies worked, basically the opposite tack from the previous months.

Our Conservative portfolio declined 0.35% in December. Our Aggressive portfolio fell 1.66%. Benchmark Vanguard funds for December 2018 were as follows: Vanguard 500 Index Fund (VFINX) down 9.04%; Vanguard Total Bond Market Index Fund (VBMFX) up 1.80%; Vanguard Developed Markets Index Fund (VTMGX) down 5.37%; Vanguard Emerging Markets Stock Index (VEIEX) down 2.97%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 4.73%.

December was among our best performances relative to the S&P 500 since these model portfolios started in early 2002. It's way too early to brag, and we were lagging during the last months of this bull market such that our returns relative to the stock market are still so-so. Still, if you like sleep-at-night downside risk, it was a good near-bear market for us.

For 2018 as a whole, our performance was underwhelming but acceptable. Our Aggressive portfolio was down 5.24% compared to the negative 4.52% showing for the Vanguard 500 fund in 2018 (with dividends). Our Conservative portfolio dipped just 2.81%. The Vanguard Star fund, our globally balanced benchmark, was down 5.34% for the year. What was most interesting about 2018 was how lousy "diversified" portfolios did, even ones that are balanced with bonds and stocks. Vanguard Star Vanguard Star Fund (VGSTX) is 60% stocks and 40% bonds, and it fell more than the S&P 500 and our portfolios.

2018 was the worst year for a globally balanced portfolio since 2008. This was largely because bonds were down significantly in 2018, especially longer-term and higher-credit-risk bonds, and foreign markets were down sharply. Just looking at market gyrations up and down, we're taking less risk than the market and less even than most balanced funds. According to one hedge fund tracker, the average hedge fund fell over 4% in 2018 as the highest-paid experts in minimizing downside had trouble doing just that.

The few positive return areas in December (if not the year) included longer-term and investment-grade bond funds like those we own in the portfolios. All bond funds except short-term bond funds with limited interest rates and credit exposure (including our holdings) were actually down for the year. Still, the rebound in bond funds in December was a key reason our portfolios didn't fall much during this rough month.

Higher-yield, higher-credit-risk bonds performed poorly for the year and month as these areas tend to have near-stock-market downside during market corrections and less upside than stocks during rebounds. Selling our position in Artisan High Income Fund (ARTFX), a higher-credit-risk bond fund, in June proved timely as this fund, which was up solidly in 2016 and 2017 and early 2018, slid 5.27% in the last three months of 2018 year.

The only fund sector in positive territory in 2018 was utilities. Our own Vanguard Utilities (VPU) holding was down 4.12% in December but still delivered a positive 4.37% for the year. After technology, utilities have shown the highest returns over the last five years in sector mutual funds, sort of amazing in this growth-oriented market. Considering the lower down side, the risk/reward has been very good.

Unfortunately, our inverse MLP (Master Limited Partnerships) fund was shut down for lack of investor interest in 2018 right before shorting energy-related investments started working very well. This could have helped our Conservative portfolio score even better numbers in 2018. MLPs fell as much as 20% in the last three months of 2018 and were down double-digits for the year. Our oil short PowerShares DB Crude Oil Dble Short (DTO) was up 18.59% after a 45%+ gain the previous month, yet only delivered a 13.77% return for the year. The smart move would have been doubling up on this holding when the short MLP fund was closed.

Shorting in general obviously worked well in December, except for shorting gold. Proshares Ultrashort Russel2000 (TWM) was up 26.35% for the month for a 19.19% year, while Proshares Ultrashort NASDAQ Biotech (BIS) gained 24.40% but was only up 5.18% for the year.

Conceptually, our call to favor large cap and short small cap in recent years was right in the sense that large cap funds were up 6.6% on average per year over the last five years, while small cap funds were only up 3.2%. The gap was even bigger between large cap growth and small cap value—the latter up just 1.86% per year over the last five years. But, as we noted, there were no ETFs with which to do that other than shorting small cap value ETFs directly. Our short positions in inverse ETFs dwindled during the booming market (because they are flawed products) such that the offsetting gains where limited here.

So, is this a dip to buy or the start of a 50% slide?

When the market broke down in 2007 and 2008, we saw similar relative performance benefits in our portfolios compared to falling benchmarks. We also increased the risk level on the way down in that bear market by increasing our stock allocation. This worked when the eventual recovery hit. We have no way of knowing if this market slide will continue or rebound quickly (as it did after the 2011 slide and appears to be happening in January so far). Either way, a 20% decline is an opportunity for any portfolio that isn't on a fixed-risk level (say, 60% stocks, 40% bonds permanently) to start increasing risk. If the market goes down 50%, we aim to be as aggressive as we were in early 2009, meaning our downside risk can start increasing on the way down in order to boost our upside.

Ouch. The good times ended in October and rather suddenly at that. There are many straws out there, and it's impossible to know which one broke the market's back but break it did.

The best explanation, which is one part voodoo and one part real economics, was that the market has been up for so long that investors were looking for signs that the music was going to stop. The sign was rising interest rates leading to fears that the global economy and real estate market couldn't handle higher rates. This in turn led to worry that tech stocks have risen so far so fast that the downside is exceeding the upside.

In October, our Conservative portfolio declined 3.52%. Our Aggressive portfolio declined 3.11%. Benchmark Vanguard funds for October 2018 were as follows: Vanguard 500 Index Fund (VFINX) down 6.85%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.73%; Vanguard Developed Markets Index Fund (VTMGX) down 8.49%; Vanguard Emerging Markets Stock Index (VEIEX) down 7.58%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 5.71%.

Even with our interest-rate-sensitive portfolios with significant foreign exposure (a performance drag), we fell significantly less than the S&P 500. More notable is that the global total portfolio benchmark that we also aim to beat over time, the Vanguard STAR fund, was down 5.71%, almost as much as the S&P 500 and quite a bit for a diversified global portfolio that is only 60% stocks. We're trying to deliver a better risk/reward tradeoff than this balanced fund (not an easy task given this is a great low-fee total portfolio fund, but we aim high) but have been lagging it recently on the way up. As you can see, such upside performance often comes at a price—Vanguard STAR was taking quite a bit more downside risk than we were.

One reason balanced portfolios fell in October is that all categories fell. That has become the new problem with building portfolios: there is nowhere to hide when the drops come but low-return cash. Diversification doesn't really work anymore.

The best-performing fund categories in October were precious metals, utilities, and Latin America. Not coincidently, precious metals funds and Latin American funds have some of our highest category ratings on MAXfunds: 91 and 97, respectively. We're still short gold because we don't believe it has any long-term investment merit, and our limited stake in Latin American stocks in our iShares MSCI BRIC Index (BKF) fund was offset by losses in the RIC part—Russia, China, India—of BRIC (though the fund fell less than emerging markets in general).

Other areas of relative strength include value stocks in general, an area we are focusing more on after the big run in growth and tech this past decade or so. But our only traditional stock fund that posted a gain was Vanguard Utilities (VPU), up 1.17%—even Vanguard Value (VTV) was down 4.35%.

Homestead Value (HOVLX) dropped 9.03% despite being a value fund because it's somewhat of a tech value fund now. The fund's holdings are probably more economically sensitive than many other value funds, and the fears of rates hurting the economy hit this fund hard.

All our bond funds where down, but long-term bonds fell the hardest with Vanguard Extended Duration Treasury (EDV) down the most at 4.61%. Long-term rates shouldn't go up much from here (at least not quickly without risking much more downside to stocks). You'd rather be in long-term bonds with the moderate loss you will take than the stock alternatives if rates climb quickly.

The shining stars of October were our three short funds, all up high double digits: PowerShares DB Crude Oil Dble Short (DTO) up 18.6%, Proshares Ultrashort Russel2000 (TWM) up 24.56% and Proshares Ultrashort NASDAQ Biotech (BIS) up 33.42%. These funds, which can slowly go to nothing over time as markets long term go up, can be useful in a crash scenario. We should have rebalanced into a short tech fund because our short stake was so small after dwindling in value in the portfolio from losses in the bull market as to have minimal upside performance impact. That said, we did beat the balanced portfolios out there and these funds are a good part of the reason our "riskier' aggressive portfolio actually fell by less than our short-fund-free conservative portfolio.

U.S. stocks were hot again in August while foreign stocks were very much not. At this stage it looks like the U.S. is winning the trade war, but some of this global stock divergence could be due to frightened international investors moving funds into the U.S. from suddenly scary looking emerging market stocks and bonds. There are now at least three economies in some form of economic chaos — Venezuela, Argentina, and Turkey.

Our Conservative portfolio fell 0.15% in August. Our Aggressive portfolio declined 0.77%. Benchmark Vanguard funds for August 2018 were as follows: Vanguard 500 Index Fund (VFINX) up 3.25%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.52%; Vanguard Developed Markets Index Fund (VTMGX) down 1.91%; Vanguard Emerging Markets Stock Index (VEIEX) down 3.55%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.17%.

The small gains for our value/income focused U.S. stock funds (and even smaller gains from U.S. bond funds) were more than swallowed up by losses in anything foreign last month, stock or bond. The Vanguard STAR fund we aim to beat over time not only has more in stocks (60%) and less interest rate exposure but also has more of the stock allocation in U.S. stocks (40% U.S. / 20% non-U.S. Our net stock exposure in our Aggressive portfolio in real money now is about 28% US to 22% foreign In Conservative we are just under 20% US / 16% foreign).

Notably weak recently have been Italian stocks; sending our iShares MSCI Italy Capped (EWI) position down 9.27% for the month. Investors want to avoid being invested in the next crisis economy abroad. Politically questionable and leveraged Italy sitting on a rocky economic foundation seems a likely trouble spot.

The hottest areas in the U.S. were growth stocks, notably smaller cap growth stocks, up 7.65% for the month and capping a 32%+ twelve-month streak. The five-year leader remains larger-cap growth, the category where all the tech giants live.

The coldest August performers were foreign stocks with Latin American stocks sliding just shy of 10% — double the next worst performer China. This was not good for our iShares MSCI BRIC Index (BKF) position last month. Latin America is really the only stock fund category down over the last five years.

In sectors, technology was again the top gainer up 6.11% for the month and the one-year leader at 28%. Some famous managers that underperformed much of the last decade by being too heavy in foreign and value stocks are finding new focus in tech and healthcare This is likely a mistake. Such performance chasing will be a drag over the next ten years.

This recently intensifying performance gap in foreign vs domestic stocks really started around the last bear market in 2007. Some of the gap can be chalked up to currency changes as the dollar's long slide in the early 2000s reversed course over the last decade or so, but a lot more of it has to do with investors putting too much money abroad in the early to mid-2000s. They bid up international stock prices too high relative to U.S. stocks and we're still working it off. The gap is also widened by the sheer domination in technology companies in the United States and the relatively strong U.S. economy.

That said, China has big powerful tech companies and even more economic growth and the main China ETF (FXI) price is still down over 40% from the bubble peaks of 2007 (though with dividends an investor is only down about 25% over a decade later). The fund asset level is down around half from the near $10 billion peak and the fund is sitting on a couple of billion in realized losses because the average investor lost money in China and most other hot then not funds. Come back and look at U.S. biotech ETFs in ten year's you will see a similar pattern.

Looking just at ETF cash flows this year (where most of the hot money goes now) investors moved money out of U.S. stocks during the brief slide early this year and into foreign stocks — which turned out to be exactly the wrong move as U.S. stocks rebounded and foreign stocks dropped.

Even without a bear market the performance pendulum should swing back to foreign stocks as it did after the late 1990s performance run by U.S. growth stocks.

Looking back over the last 9+ years of this historic bull market with no drops over 20% (the definition of a bear market) along the way, our main performance problem was not sticking with our U.S. growth focus and a high stock allocation well after the last crash — these trends tend to last longer than you expect. There was too much money still going abroad over the last few years for foreign to be the bargain of the early 2000 era.

Ideally, we'd get another full-blown emerging market crash. This ultimately could lead to the sort of pricing where you can get back into the high-single low-double digit stock returns for taking on higher risk. Today there is plenty of downside risk in the U.S. market and just mid-single digit upside.

June was a respectable month for U.S. stocks (though you wouldn't know it from our portfolios…) but a down month for bonds and foreign stocks. Emerging market stocks were the big loser among foreign stocks — down 4.44% — primarily on trade war fears .

Our Conservative portfolio declined 0.52% in June. Our Aggressive portfolio fell 0.84%. Benchmark Vanguard funds for June 2018 were a­s follows: Vanguard 500 Index Fund (VFINX) up 1.22%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.33%; Vanguard Developed Markets Index Fund (VTMGX) down 0.83%; Vanguard Emerging Markets Stock Index (VEIEX) down 4.44%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.12%.

U.S. growth stocks were hot while value-oriented stocks lagged again. In an odd turn interest rate sensitive funds with higher yields were top sectors even though value stocks in general lagged.

Real estate funds jumped 4.6% (though still down for the year) while utilities and communication funds were up 3.15% and 2.85% respectively. Other than our short on gold (which had a good month) only our holdings in these three areas beat the S&P 500 last month, with Vanguard Telecom Services ETF (VOX) and Vanguard Utilities (VPU) scoring 2.83% and 1.53% returns respectively.

These gains could be because recent weakness in these sectors created bargains, but could also be because interest rates stopped rising (by and large) with a strange 3% ceiling forming across the treasury yield curve at most maturities. This is relevant to our positions in telecom funds which we are in the process of changing to global telecom funds because U.S telecom indices are evolving to include tech stocks like Facebook and Google.

At the end of June we made some trades in the Conservative portfolio largely because one of our holdings, ETRACS 1xMonthly Short Alerian MLP (MLPS), was liquidated for lack of investor interest.

The trade brought two new holdings to the Conservative portfolio: iShares Global Telecom ETF (IXP) and Dodge & Cox Global Bond Fund (DODLX).

iShares Global Telecom ETF (IXP) is a new global telecom fund, an index fund based on a global telecom index. The yield is attractive if interest rates don't rise significantly and will offer extra benefits over a domestic telecom fund should our dollar fall.

Dodge & Cox Global Bond Fund (DODLX) was added because it's becoming a good time to consider low fee active management in general as indexing takes over the investing landscape. In addition, our previous no-transaction fee ETF in this area is no longer NTF at TD Ameritrade (the brokerage platform we use for our real money model portfolios and client accounts). This is a global fund so there is significant US exposure. We went with a larger allocation here (30%) but are getting some currency oomph from global telecom stocks as well.

The very low fee choice that is NTF iShares Core International Aggregate Bond ET (IAGG) for us at TD Ameritrade is hedged to the dollar which defeats the main purpose of owning non-US dollar denominated bonds which is diversification and protection from a slide in the U.S. dollar. Otherwise, unless you go with a higher risk emerging markets bond fund you wind up with 1% yielding government bonds. We can do better than that in yields from our own debtor nation which is paying near 3% as our deficit widens (while other major economies are seeing shrinking debt to GDP levels in this strong global economy).

With this trade we removed 4 holdings (not including the fund company liquidation and cash settlement in ETRACS 1xMonthly Short Alerian MLP (MLPS) which would make it 5):

It was time to cut back on junk bonds, which have been doing well, and our pick in this area, Artisan High Income Fund (ARTFX), was in the top 10% of this category for much of the fund's existence (including this year). At $3 billion in assets the top percentile returns and 5-star rating are no longer likely given the high 1% fees.

Artisan Global Equity Fund Investor Class (ARTHX) has been a solid performer and is still smallish but is too expensive at 1.40%

SPDR Barclays Intl. Treasury (BWX) is no longer transaction-fee free at TD (where we keep our real-money portfolios), and it's too expensive for a non-NTF fund. Recent weakness could get you a tax loss. In general active management with low fees should do slightly better than indexing in coming years.

We're trying to get away from higher credit risk yield though may come back to this on weakness. The iShares Mortgage Real Estate ETF (REM) mortgage REIT ETF, which owns mortgages purchased with borrowed money, has been a decent performer for us with a roughly 41% return (with dividends reinvested) since January 7th 2016.

We also rebalanced some holdings to slightly different allocations just to make the trade more cost efficient: Vanguard Mortgage-Backed Securities (VMBS) from 14% to 12%, Vanguard Long-Term Bond Index ETF (BLV) from 20% to 19% and Homestead Value (HOVLX) from 6% to 7%. These ETFs (but not HOVLX) also stopped being NTF for us at TD so small trades don't make sense at this time and we may eventually move out of some of these for this reason.

Alternates to consider here:

For iShares Global Telecom ETF (IXP): Because domestic telecom indexes are getting tech stock updates, this category is about to get noticeably higher risk and lower yield. You might try Fidelity Select Telecommunications Portfolio Fidelity Select Telecommunications Portfolio (FSTCX) and you can stick with Vanguard Telecom Services ETF (VOX) if need be but don't also own tech funds. The ETFs in this area are heading in the direction of T. Rowe Price Comm & Tech Investor (PRMTX) which already went tech years ago and has big stakes in Amazon (AMZN) so you won't be worse off than in Vanguard Telecom Services ETF (VOX) after the changes. In general we’re not in telecom to increase tech exposure – rather to avoid it - which you already get plenty of in regular stock indexes and just about everything these days.

For DODLX you can continue to use SPDR Barclays Intl. Treasury (BWX) or the cheaper iShares International Treasury Bond ETF (IGOV). Those who want more risk and higher yield could consider iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) which is NTF at TD Ameritrade. In active management, if you can avoid the sales load one of the classes of Strategic Global Bond Fund (MAWIX) can work. AB FlexFee International Bond Advisor (FFIYX) is cheap and new and small and the flex fee is interesting (at 0.20% for now until the fund performs well against a benchmark) but the dollar hedging is unappealing right now PIMCO Foreign Bond (Unhedged) (PFUIX) if you can avoid the sales commission or load and get a cheaper class no more than 0.75% a year.

April was not a particularly good month for stocks or bonds but once again the modest monthly change disguised the intramonth and often intraday volatility that is becoming more common in the stock market. Foreign non-emerging market stocks performed well. Riskier debt moved up slightly but longer-term, investment grade bonds and foreign bonds slid as the dollar reversed a steady decline. Our government debt now pays substantially higher interest rates than other major economies, and it's likely attracting inflows of cash which could push our currency back up in value.

Our slant towards longer-term bonds didn't help in April compared to benchmarks. Our Conservative portfolio declined 0.88%. Our Aggressive portfolio fell 0.56%. Benchmark Vanguard funds for April 2018 were as follows: Vanguard 500 Index Fund (VFINX) up 0.37%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.83%; Vanguard Developed Markets Index Fund (VTMGX) up 1.55%; Vanguard Emerging Markets Stock Index (VEIEX) down 2.03%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.07%.

Much of the volatility in stocks appears to be related to ten-year government bonds getting to around the 3% level. The worry is that rates will blow through that threshold and shoot up to 4% and beyond with rising inflation fears. The already strong economy is now getting fanned by increased spending and tax cuts. Effectively we've got a small stimulus package kicking in when unemployment is already below 4%. Nobody really knows what will happen to the economy if borrowing costs rise significantly but if interest rates rise in anticipation of higher inflation it could cause problems — particularly for the government than needs to rollover trillions in debt at higher interest rates.

This interest rate focus may be taking away from an issue which is more about growth stocks: are these earnings growth rates and rocketing stock prices sustainable? Or are we near the end of another boom cycle in tech with signs of over-indulgence everywhere?

A more value and yield-oriented portfolio could beat a more growth and risk-oriented portfolio in coming years, which would be a near-reversal of the last decade or so. We may still see gains in growth, but the risk-vs-return is becoming unfavorable in the types of stocks that rely more on earnings growth to rationalize higher prices.

We're getting close to year-2000 levels (when value was where you wanted to be, not growth) and farther away from 2008 (when growth, particularly U.S. growth stocks, was where your portfolio should have tilted). Growth index funds have now beat value index funds by just over 2% a year over the last decade — a sizable difference.

The most surprising action in April was the performance of yield oriented stocks like those in utility and telecom funds. These did well even as the stock market was barely up and while interest rates moved higher. Vanguard Utilities (VPU) climbed 2.47% and Vanguard Telecom Services ETF (VOX) rose 1.36%. This may because these areas have been so weak that they are attracting value investors. In general value stocks are getting attractively priced relative to growth stocks after about a decade of growth beating value by upwards of 2% a year.

Oil continued to move higher even as the U.S. dollar rose, which is typically bad for oil prices. Our oil short fund PowerShares DB Crude Oil Dble Short (DTO) fell 10.65% in April, and this time ETRACS 1xMonthly Short Alerian MLP (MLPS) fell 7.51%, reversing some of the recent gains. While this likely won't happen if the economy remains strong, oil is now priced for a near 50% hit if we get a global slowdown.