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June 2021 Performance Review

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.

May 2021 Performance Review

Large cap growth and tech names are no longer driving the big gains and are even dragging on the market cap weighted indexes as smaller and cheaper stocks catch up, which benefits our current portfolios.

April 2021 Performance Review

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.

March 2021 Performance Review

The stock market moved back up on increasing optimism that the upcoming roaring post-COVID economy is going to lift all boats, and plenty of yachts, too. This wasn't good for bonds, which have been struggling for months now (except for inflation-protected bonds), as the consensus is that inflation is going to take off with interest rates. 

February 2021 Performance Review & Trade Alert

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.

January 2021 Performance Review

In a month in which individual stocks entered what can only be described as a crazed bubble fueled by chat room manipulators, it was a calm month for bonds and stocks as a whole.

December 2020 Performance Review

What a year. The market doesn't typically (as in basically never) drop as far as it did early this year only to gain back the losses and end the year with gains.

 

November 2020 Performance Review

It was a good month all around for basically everything, with over a 10% rise in the S&P 500—and that was on the low end of global stocks. The news of multiple COVID vaccines saving us from perpetual shutdowns is likely a big part of the excitement.

October 2020 Performance Review

With Biden on the edge of a win, you can chalk up another success for stocks predicting the outcome of elections. While not scientific, it's probably a better indicator than any number of expert predictions or even polling, in some cases.

September 2020 Performance Review

Until recently, markets had been acting as if the worst was well behind us, and it was just a question of how fast the recovery was going to be