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Model Portfolios for January 2013

Now that 2012 has come and gone, we can confidently pass judgment on how long-term investors in both stock and bond funds/ETFs have fared. And, likely, for most, there has been a myriad of opportunities to be successful - the S&P 500 Index returned 16%, while quality bond funds generally returned between 2 and 15%. But more importantly, I will focus on how I recommend investors might set up a Model Portfolio for the year ahead.

In short, it has been almost nothing short of a terrific year for long-term investors. Of course, there were, as always, short-term considerations that might have suggested not staying invested to the maximum of one's "ideal" asset allocation, which for many people could be as easy as constructing, and continuing to maintain, a simple 60/40% split between stocks and bonds.

No matter how many times it's been said before, however, many people still ignore the dictum of "don't try to time the markets" (and, I would add, try to outguess how it may react to specific events). Otherwise, every time something might arise such as the now infamous "fiscal cliff," some market followers will choose to adhere to conventional thinking and use the event as an excuse to either pull back from existing investments or merely sit on the sidelines, afraid to invest.

Of course, scary events can indeed impact the markets, reinforcing the belief that market timing can be successful. But such fear-induced drops are usually short-lived, with not much accomplished for the pulled-back or pulled-out investor. Realistically, unless you are willing to become a trader focusing on these relatively short-term down (or up) movements, the investor who attempts to sidestep potential potholes will more than likely be missing out when the blip disappears, as it so often does.

Such up and down movements of stocks and bonds can often mask the bigger picture. For example, try to suppose you had never heard of the term "fiscal cliff" along with its potential for a big downdraft for the stock market. If the fearful premise had proven correct, surely you would now be able to recognize its existence in the following five year graph of the S&P 500 Index:

5-Year S&P Performance

There have been a few drops big enough to stand out over the past five years but the effect of the fiscal cliff over the period is not one of them. In fact, the S&P 500 instead rose over 5% between Nov. 15th and year end, a period of high drama for the fiscal cliff negotiations.

Of course, some may argue that when events such as the fiscal cliff seem to be dominant, they are not trying to time the market, just to be prudent in the face of the real possibility of losses. But, in truth, whenever one tries to jump out, jump in, avoid the market, or embrace it based on events that are likely be a factor for perhaps only 6 months or less, they may risk missing the bigger picture which frequently dominates an investment cycle, lasting from anywhere between 1 and 5 years, or even more.

So clearly, long-term investors should feel good about where they are at the start of 2013 in spite of having just traveled down what might have appeared from a shorter-term perspective as a treacherous course. It all seems to suggest that investors should mainly focus on picking quality funds from undervalued categories, rather than being influenced by the vagaries of public opinion, fears stirred up by politicians and even some economists, as well as overly simplified predictions of where stocks and/or bonds may be headed.

With this in mind, let's turn to what my research now suggests are good choices looking forward.

Allocations to Stocks, Bonds, and Cash

My overall allocations to stocks, bonds, and cash remain unchanged from last quarter. However, there are some significant changes in my recommended allocations to specific funds to reflect changing prospects for specific stock and bond categories which we feel offer the best prospects going forward.

For Moderate Risk Investors

Asset Current (Last Qtr.)
Stocks 67.5% (67.5%)
Bonds 27.5 (27.5)
Cash 5 (5)

For Aggressive Risk Investors

Asset Current (Last Qtr.)
Stocks 85% (85%)
Bonds 10 (10)
Cash 5 (5)

For Conservative Investors

Asset Current (Last Qtr.)
Stocks 47.5% (47.5%)
Bonds 45 (45)
Cash 7.5 (7.5)

Model Stock Fund Portfolio

The most significant change from our 4th quarter Model Portfolios is a somewhat lesser emphasis on funds/ETFs with either a Growth or a Small/Mid-Cap orientation, and, an increase in our International allocation. While there is no fundamental reason to expect the two former categories to do less well than before, we simply think the remaining categories in the portfolio are currently showing better prospects, especially our International choices, than the two with lowered allocations.

Our Specific Stock
Fund Recommendations
Fund Category Recommended Weighting
Now (vs Last Qtr.)
Fidelity Low-Priced Stock (FLPSX) Mid-Cap/Small-Cap 12.5% (15%)
Tweedy Brown Global Value (TBGVX) (see Note 1)
Vanguard Internat. Growth (VWIGX) (see Note 2)
Putman Europe Equity Y (PEUYX) (see Note 3)
International 27.5 (22.5)
Vanguard 500 Index (VFINX) or VOO
Yacktman (YACKX)
Large Blend 17.5 (17.5)
Vanguard Growth Index (VIGRX) or ETF
Fidelity Contra (FCNTX)
Large Growth 12.5 (15%)
Vanguard Windsor II (VWNFX) Large Value 15 (15)
Vanguard Financials ETF (VFH) (A)
Vanguard REIT ETF (VNQ) or Fund (VGSIX) (M)
Vanguard Consumer Discretionary ETF (VCR) (A)
Sector 15 (15)
Notes: 1. TBGVX is currently one of our favorite managed funds (see Dec. 2011 for details)
2. VWIGX provides a moderate allocation to Emerging markets and to Asia, areas we expect to do well in 2013.
3. The European region is highly undervalued; PEUYX has done better than Vanguard Europe and has been more tax-efficient.

Model Bond Fund Portfolio

We continue to expect subdued returns for "traditional" bond funds and therefore recommend continuing to invest in funds that have a better chance of doing well than funds which customarily invest in treasuries, mortgage, or short-term bonds.

Our Specific Bond
Fund Recommendations
Fund Category Recommended Weighting Now
Now (vs Last Qtr.)
PIMCO Total Return Instit (PTTRX) or
Harbor Bond Fund (HABDX)
Vang. Total Bond Mkt. (VBMFX) (C) (see Note 1)
Diversified 35% (35%)
PIMCO Real Return Instit (PRRIX) or
Harbor Real Return (HARRX)
Inflation 12.5 (15)
Vang. Intermed. Term Tax-Ex. (VWITX) (see Note 2) Intermed. Term Muni 15 (12.5)
Vang. Long-Term Inv. Gr. (VWESX)
Loomis Sayles Retail (LSBRX) (A)
Long-Term Corporate
and/or Multisector
15 (12.5)
T. Rowe Price High-Yield (PRHYX) High Yield 15 (15)
PIMCO Foreign Bond (Hedged) Adm (PFRAX)
T Rowe Price Emerging Markets Bond (PREMX) (A)
World 7.5 (5)
Note 1: (C) indicates Conservative Risk; (A) indicates Aggressive Risk; we believe it will likely hardly pay to be conservative in this extremely low rate environment. Therefore, we are also eliminating our prior 5% recommendation for Vanguard GNMA Fund in the Intermediate Govt. bond category.
Note 2: Instead, if available, select a muni fund that has your own state's bonds for double-tax exemption.


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