Copyright 2013 Tom Madell, PhD, Publisher
Jan. 2013. Updated Jan. 4, 2013


-Model Portfolios for January 2013
-Stock and Bond Funds Recommended During 2012 Did Extremely Well


Model Portfolios for January 2013

By Tom Madell

Now that 2012 has come and gone, we can confidently pass judgment on how long-term investors in both stock and bond funds have fared. And, likely, for most, there has been a myriad of opportunities to be successful, as I will point out below. 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. (The extent to which investors in well-chosen funds have profited over 2012 may be seen in my Jan. 2013 Newsletter at my web site.) 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) 


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)


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)


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)


35% (35%)

 PIMCO Real Return Instit (PRRIX) or 
 Harbor Real Return (HARRX)


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)


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.

Stock and Bond Funds Recommended During 2012 Did Extremely Well

The following table shows exactly how well the funds I recommended at the start of 2012 did over the just completed year.

Morningstar Data for's Model Stock and Bond Portfolios
Ordered by Percent of Recommended Allocation
Recommended Stock Funds   Recommended Bond Funds
Fund (Symbol) (Percent of Portfolio) Tot.
Fund (Symbol) (Percent of Portfolio) Tot.
Fidelity Low Priced Stock (FLPSX) (20%) 18.5% PIMCO Total Return Instit (PTTRX) (32.5%) 10.4%
Nicholas Equity Income I (NSEIX) (20) 13.6 Harbor Bond Fund (HABDX) (32.5) 9.3
Tweedy Brown Global Value (TBGVX) (20) 18.4 Vang. Total Bond Mkt. (VBMFX) (32.5) 4.1
Vanguard Internat. Growth (VWIGX) (20) 20.0 PIMCO Real Return (PRRIX) (15) 9.3
Vanguard 500 Index (VFINX) (17.5) 15.8 Harbor Real Return (HARRX) (15) 8.4
Yacktman (YACKX) (17.5) 11.5 Vang. Intermed. Term Tax-Ex. (VWITX) (15) (No Fed. tax) 5.7
Fidelity Contra (FCNTX) (15) 16.3 Vang GNMA (VFIIX) (12.5) 2.4
Vanguard Growth Index (VIGRX) (15) 16.9 Vang. Interm. Tm. Treas. (VFITX) (12.5) 2.7
Vanguard Windsor II (VWNFX) (12.5) 16.7 Vang. Long-Term Inv. Gr. (VWESX) (10) 11.7
Vanguard REIT Index (VGSIX) (10) 17.5 Vang High Yield Index (VWEHX) (10) 14.4
Amer. Cnt. Real Est. (REACX) (10) 17.8 PIMCO Foreign Bond (USD-Hedged) Adm (PFRAX) (5) 10.9
Vanguard Equity Inc (VEIPX) (5) 13.5 T Rowe Price Intl. Bond (RPIBX) (5) 6.1
Notes: Data thru year end.
Multiple funds were recommended for a given fund category, thus percentages allocated add up to more than 100%.

Out of our 12 stock funds, 8 beat the S&P 500 Index while one, VFINX as would be expected, was virtually tied with it.

And out of our 12 bond funds, 9 beat the AGG ETF, which is considered the benchmark for bond funds, while one (as expected - VBMFX) was virtually tied with it. In most cases, the outperformance was quite large. Our suggestion to avoid all short-term bond funds was on target with these types of funds performing the worst of all other categories along with intermediate govt. bonds.

At that time, we additionally suggested BUY signals for aggressive investors in three categories. The following shows the average total returns for funds in these categories through year end:

Financials 24.2%

Japan 11.4

Global Real Estate 30.6

Our Other More Recent Recommendations

In our Apr. 2012 newsletter, we again recommended a position in the Vanguard Financials ETF (VFH) as we had done as far back as Oct. 2010. This sector has been one of the top performing groups in 2012. On the bond side, we recommended Loomis Sayles Retail (LSBRX) and continued to recommend throughout the year. It wound up returning 14.8% for the entire year.

In our June newsletter, our focus was on consumer cyclical and real estate funds. These sector funds, too, have done well since our recommendations, especially our recommendation for Vanguard Consumer Discretionary ETF (VCR).


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Note: Steve Shefler, a frequent contributor to this site, will not be providing an article this month.