Investors face some hard choices into the end of the first quarter

Published Sat, Mar 20 20218:13 AM EDT

A year ago, the most painful move was the most profitable. It hurt in March 2020 to exercise time-tested prudence by using history's steepest selloff, in a fog of pandemic uncertainty, to add exposure to stocks. With the S & P 500 rushing to an unprecedented 34% drop in five weeks as bond prices surged, the market was serving up an urgent yet hard-to-accept invitation to shift money from bonds into stocks. This column the week the S & P 500 bottomed noted it was a rare moment, one of only a few times the traditional balanced stock-bond portfolio had dropped 20% from a high. And history showed at the time that adding equities in such moments had always proved a good bet, averaging better than a 20% return for the standard 60% stocks/40% bonds portfolio. Since then, this 60/40 mix, as reflected in the Vanguard Balanced Index Fund , has delivered a total return of more than 40%, about quadruple its long-term annual average. This is not a victory lap. This rebalancing idea a year ago was a fairly timid call compared to some investors who just bought heavily into stocks, even grabbing the most beaten-down ones, in a bet on an ultimate recovery that has paid off exceedingly well. But taking what the market gave you and realigning long-term exposures seemed hard enough at that moment. So now what? The S & P 500 is sitting on its best 12-month return since the 1930s. Bonds are having one of their worst stretches ever, as they are repriced for an economic acceleration, heavy Treasury supply and a Federal Reserve intent on boosting inflation. The Bloomberg Barclays Aggregate Bond Index's total return year to date is negative 3.7%, which annualizes to a 16% loss. This index's worst year in total return since its inception in 1976 was less than a 3% drop in 1994 (though, crucially, that started with much higher yields to pad losses in bond prices). Is the wisdom of rebalancing away from extreme recent strength toward the weaker asset class as solid as it was a year ago? Perhaps, but it's a bit less clear. History says huge one-year gains in the S & P 500 tend not to be registered at the very peak of the market, though before too long there has typically been some payback. I asked technical strategist Frank Cappelleri of Instinet to look at when the best 12-month S & P rate-of-change tallies were registered. After the current run, the highest returns were March 2010 (like now, a year after