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:

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

For Aggressive Risk Investors

For Conservative Investors

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.

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.