Emphasis on “relatively.” While the S&P 500 sank 5.4% in June and 11.9% in the quarter, my model slipped only 3.0% and 8.4%, respectively. That was a disappointment, but the model is still up 18.5% in the last year, which is its first.

Looking ahead, I am not shopping for bargains–yet. The Obama administration, whose bewildering incompetence is responsible for this mess, has barely gotten started. It seems likely voters will toss out the Democrats en masse this October, but enough of them will remain (including Barack Obama himself) to do enormous mischief. It will get worse before it gets better.

That said, my model is designed for the long term. And in the long term, Obama will be politically dead.

Here’s how the model finished June:

Gimme shelter ... from Washington

I say that Obama’s incompetence is bewildering because, let’s face it, the guy is smart as a whip. Unfortunately, he doesn’t know beans about business; he doesn’t have a single businessman in his cabinet or among his closest advisers.

So his trillion-dollar economic rescue plan has been a complete failure. When his “cash for clunkers” program was unveiled, auto sales were at a wretched 7.3 million annualized rate. They shot up when subsidized, but have since collapsed to a 7.0 million rate.

Similarly, new-home sales had shriveled to 400 thousand annually. Obama’s subsidy to first-time buyers pumped them up to 450 thousand, but when the subsidies expired sales collapsed to even more depressed levels.

So U.S. stocks, reflecting the outlook for the U.S. economy, are doing miserably. Big-company equities, as represented in this portfolio, sank nearly 6% in June and riskier small and mid-size stocks were down almost 7%. Both of the portfolio’s foreign-stock holdings, representing companies that are beyond Washington’s reach, were slightly ahead during the month. Gold, which is the ultimate “no” vote on economic policy, was the portfolio’s best performer.

This is going to get worse. (See ‘Market’s sound and fury is signifying something … bad.’) So while U.S. stocks are becoming cheaper, they will get cheaper yet. This portfolio’s bondholdings are higher than they would be in a better market, and the gold mutual fund is a stopgap against Washington’s profligacy.

(God is not an investment; it pays no dividend and indeed bears substantial expenses for storage and security. It is a trade. I put it on recently as a hedge against U.S. political risk; namely, amazing incompetence from the White House to Congress. I’ll take it off when that risk retreats to something better than a Venezuela-level threat. Let history record that Al Franken, who wore a gorilla suit in “Trading Places,” is part of a fillibuster-proof Democratic majority in the U.S. Senate, but it won’t be fillibuster-proof after this October’s election.)

So now, when Washington is so radical, is a time for us investors to be conservative. That means keeping plenty of powder dry in bonds, and building a defensive bullwark of commodities (energy and gold) to protect us against inflation.  

Once Obama is a lame duck–which could become clear as early as this October–the outlook for U.S. stocks will improve. Until then, I’m keeping my head down.

So everybody with a lick of sense is running for cover. U.S. corporations, for example, are holding record sums of cash because they fear it will be confiscated if they try to use it to make a profit. That means they’re not hiring–which is the only path to recovery.

And small investors–quite logically–are deserting stocks because, after all, Barack Obama knows as much about economics as Hugo Chavez. But this, too, shall pass: Obama’s doppelganger, Jimmy Carter, only served one term. For long-term investors, the current malaise is just a pothole.

My model portfolio of exchange-traded funds finished the second quarter down 7.3%, with nearly half of that (3.0%) coming in June. Thanks to sheltering well more than half the assets from Washington, that was much less than the U.S. stock market’s plunge of 11.9% in the quarter and 5.4% in the month.

What’s next?

Not much. The portfolio is very well positioned for our current difficulties. Here’s how it finished June:

Trimming sails, but making no sudden moves

Domestic stocks took a whipping in June (see above) but foreign issues did much better. Bonds held up very well–they love bad news, because it means no pressure on interest rates to go higher–and gold sparkled.

U.S. stocks entered an official correction in June, with the S&P 500 falling more than 15% from its cyclical peak in May. That is not a sharp enough decline to be characterized as a new bear market (20% is the threshhold for that), but it is becoming increasingly obvious that a new bear market is indeed upon us.

In the week ended July 2, the dreaded “death cross” signal was recorded by the Dow Jones industrial average–the 50-day moving average closed below the 200-day moving average, meaning the market’s weakness was deepening. The chief technical analyst for Standard & Poor’s, Mark Arbeter, issued a report to the firm’s clients saying he expects weakness until September or October.

Market internals are gloomy. While prices rallied in the week ended July 9, each day’s volume was slighter than the earlier day’s, signifying a lack of bullish sentiment. In a bear market, professionals sell into rallies; in a bull market, they buy on dips.

In the model, meanwhile, nearly $800 poured in in June from dividends on some of the equity and all of the fixed-income ETFs. It was used to buy an additional 10 shares of Vanguard Short-Term Bond, a nearly risk-free portfolio that nevertheless managed to deliver a monthly return of 1.0%.

I expect to be shifting some bondholdings into stocks later this year, but not yet. The sharp knives are still falling at Broad and Wall; I’ll not try to catch them.

And before you join the “death of equities” chorus, note that this portfolio, which I have publicly maintained for nearly seven years, finished this disheartening period ahead 24.3% in the last year and an annualized average of 4.0% since inception.

Investing is a good idea even in the worst markets since the Great Depression. It is a great idea over longer periods than that.

What happened? My mutual fund managers–and I consider each one of them the best in his or her business–did worse than the indices they were chosen to represent. ETFs are index funds; they are not vulnerable to the kind of mistakes active managers can (and obviously do) make.

Few individual investors even know what manager risk is. But they should. Over the very long term, and I mean 10 years, at least, active management consistently beats indexing, despite its higher costs. But in the short term is can depart radically from the investment category it is supposed to represent, and that can be painful.

Here’s how my model portfolio of best-in-class mutual funds available in 401(k) plans finished May.

Active managers fumble

Look at my cornerstone domestic equity holding, Dodge & Cox Stock. It went down about 10% more than the broad market itself. Tocqueville Gold went down, while gold itself went up. Templeton Global Bond had a melt-down, suffering an equity-like plunge of 4.6% in a single month.

But examining the funds, I find nothing wrong with them. Indeed, I chose them in the first place because their managers make good long-term decisions. Short-term shortfalls just mean they’re out in front of  everybody else. That’s what I want from them.

Dodge & Cox’s largest holdings are a cross-section of what the market hates right now; Hewlett-Packard, Schlumberger, Novartis, GlaxoSmithKlein and Pfizer. That means they’re cheap. Dodge & Cox excels at buying cheap stocks and holding them until their worth is broadly perceived.

My gold fund has a significant stake in the precious metal itself, but most of the assets are invested in gold mining stocks. This gives leverage to profits on the upside, but in a downturn stocks is stocks, and all of them get tarred with the same brush.

The Templeton bond fund, like that entire fund family, is extremely contrarian, and this year has invested very heavily in emerging markets, at the expense of mainstream stuff like German government bonds. Morningstar’s Kevin McDevitt, writing about it back in February, noted, “The greatest short-term risk to the fund is if investors return to Treasurys during the next panic.” The next panic has now arrived, investors are flocking to U.S. Treasurys, and this fund suffers.

Meanwhile notice that my small and mid-capitalization managers lost much less than the market in May, meaning they are getting on base while their peers are striking out. That’s exactly what active managers should be expected to do most of the time.

The research I’ve seen indicates that the best active managers will outperform in seven of every 10 years. Conversely, they tend to underperform for three consecutive years within this decade. Three years is about as much patience as most investors have, meaning they tend to sell the best funds at exactly the wrong moment.

As May shows, active management doesn’t always beat indexing. Indeed, indexing wins about 80% of the time. The other 20% is where to search for active managers, and you have to understand these people almost certainly will fail 30% of the time.

So choose well and be patient. Managers are going to let you down sometimes. They can’t help it. But stay with the odds. Over decades, you’ll be well rewarded.

Also in May, the stock market corrected violently, finishing down 10.5% from its peak on April 23, owing mainly to dread spreading from the looming bankruptcy of Greece, the European Union’s weakest sister. I bought gold at the end of April specifically because I foresaw a correction, but I sure didn’t think it would come so quickly.

Overall the model ETF portfolio performed excellently in May as most, but by no means all, of my strategic decisions performed as expected. So what do we do next?

Here’s how the model portfolio finished this vicious, violent month.

Notice that all of the domestice equity ETFs performed better than the broad market. That’s especially noteworthy because small and mid-capitalization stocks are riskier than large caps, and could have been expected to do much worse.

Why they didn’t? All three are tilted toward the value style of investing (as is the entire portfolio), and value–theoretically a riskier style than its alternative, growth–has the advantage during most of the economic cycle. Growth, which favors steadiness over streakiness, does best in a bear market, but value outperforms the rest of the time.

Also helping resist the downturn in this portfolio were thorough diversification into bonds and alternative asset classes, such as commercial real estate and gold. Only $6 of every $10 are invested in equities.

Alternative asset classes are those with little or no correlation to stocks and bonds. This portfolio invests in three of them, energy, real estate and gold. In May energy took a whalloping, on fears Europe’s woes will stall a worldwide recovery. Real estate did better than stocks, and gold added value while nearly everything else was declining.

Bonds did well if they were ultra safe, as in American mortgages and governments, and poorly if they were riskier, as in corporates and foreign bonds.

As I noted last month, “Sell in May and go away,” is one of the market’s most venerable chestnuts. Stocks traditionally deliver their weakest returns over the summer. That’s because the top talent is on vacation and decisions are left to trading desks that are stocked by clerks so green they can’t get time off till the grown-ups come back in the fall.

But I’m an investor, not a trader, and this portfolio is designed to do well over decades, not months, so I never sell out. You shouldn’t, either. The greatest bull market of modern times began in August, 1982.

Rather I’m holding to a conservative stance, making no changes now. My worst strategic decision–to allocate assets overseats, including bonds as well as stocks–will be rewarded when the euro stops crumbling and the dollar resumes its nearly decade-long decline.

I don’t know when that will happen, but I’m confident it will. So now is a better time to be buying foreign assets than selling them; they are on sale.

But U.S. stocks are getting riskier and riskier. In just the last month volatility, as measured by the VIX, or “fear” index, has surged 35%. Bonds are dicey, since interest rates are more likely to rise than fall. Foreign markets are in a shambles. What remains?

Gold. And thanks to the strength of the U.S. dollar, we Americans can buy it at a discount. Its price in dollar terms is up only 8.8% in the last six months. That’s half the 16.6% rise in terms of the British pound, and a fraction of the 20.1% surge in euros.

We can afford to buy it because we have cash on hand. I’ve been worried about the increasingly fragile rally in U.S. stocks for several months. So my model portfolios are so well diversified they have outperformed the S&P 500 index.

Here is how the model ETF portfolio finished the month of April.

Small caps, energy and property lead the way

The model outpaced the U.S. stock market’s 1.5% return in April thanks to its overweight position in small-cap stocks and in alternative asset classes, namely energy and commercial real estate. So I’m taking 4% of assets and putting them into yet another alternative class, precious metals.

SPDR Gold Shares is a pure play in bullion. Each share represents one-tenth of an ounce of gold, less the ETF’s expenses. Those fees are not immaterial–currently the shares are worth only 98% of 1/10th the price of gold. But that’s unavoidable; gold pays no dividend but is so valuable it must be locked in a vault, so its carrying costs are a tangible pain.

My model 401(k) portfolio owns mutual funds, not ETFs, and there is no mutual fund that corresponds to GLD. Gold mutual funds tend to invest in the stocks of gold mining companies. One of the best of these is Toqueville Gold, and I’m allocating 4% of this portfolio’s assets in that fund.

What's new here is Tocqueville Gold

Speaking generally, gold stocks provide more bang for the buck than the metal itself. A 10% change in the price of the metal could produce a 100% change in the profits of a mining company. So in the last year the ETF is up 32.2%, whereas Tocqueville Gold has surged 92.1%.

Warning: Chances are your 401(k) does not offer a gold fund. The industry is very paternalistic, rightly terrified that it could be hauled in front of Congress if any of its investment options turned sour. This is why you need to have an IRA in addition to your company plan, or even a taxable investment account, to own the stuff Mommy Government tsk tsks.

Why gold? For inflation protection. The United States is in the catbird seat right now, because Europe is going broke and Japan already is. Our dollars are recognized worldwide as the only reliable store of value among currencies. But our dollars are only a currency, backed by nothing except Uncle Sam’s smiling face, and we have flooded the world with them to avert financial disaster in the late near-depression.

Inflation is always and everywhere a monetary phenomenon. The Federal Reserve has shown amazing dexterity in managing the financial crisis, and is already sopping up some excess dollars through its management of a mortgage-bond portfolio. But it can’t sop up dollars so easily in China and India, not to mention Athens, Rome and Madrid.

The gold price is rising strictly because of investment demand; fundamentals in that marketplace are actually weak. A rising number of investors regard inflation as inevitable. Let’s own some protection against it.

As you look over these model portfolios, one question you might ask yourself is why the ETF model continues to own SPDR Barclays Capital International Treasury Bond (BWX).

This fund is down 2.7% this year, entirely because of fallout from the Greek debacle. The euro is an exercise in elitist political fantasy that has been pole-axed by reality. The Greeks are not like the Germans, thrifty and honest on their taxes; no other Europeans are. Monetary union will not survive the horror The Economist has dubbed Acropolis Now. Greeks will renege on their current fiscal promises in three years or so; the austerity they demand will be too cruel. Italy is also likely to go bankrupt within a few years, and maybe Portugal. Even Spain, where unemployment is already 20%, faces a horrible fiscal future.

But …

Markets do not look ahead three years. They have trouble looking ahead six months. And six months from now Europe’s financial woes will seem less immediately pressing than they do right now. At the moment they appear to be “solved.”

So I expect a rebound in European bonds in coming months, and I will look forward to selling this fund into that rally.

As for everything else: There’s a market axiom that preaches, “Sell in May and go away.” Markets are more likely to go down in the summer than up. This year I think that’s particularly true. We are due a correction in stocks, and it could become ugly.

But I am already light on stocks in these portfolios. If we get a correction, I’ll become a buyer. But meanwhile I’m content to sit back and relax. I always have a mint julip when I watch the Kentucky Derby, and this year I forgot to, despite having a robust crop of mint sprawling around in my garden. I think I’ll make up for that oversight this afternoon.

After only nine months, the portfolio has racked up total gains of 29.4%. Not bad, especially compared with a companion model of exchange-traded funds, which in more than six years has advanced only 39.9%.

Forget about market timing: The best time to invest is always right now.

And the best thing to invest in is often whatever is performing worst at the moment. In March, that was true of commercial real estate, which has the second-worst three-year returns among mutual funds (behind only Japanese equities), but by far the best returns in the month.Here’s how the model 401(k) portfolio finished March.

A snap-back from earlier weakness

Equities were solidly ahead in the month, celebrating their one-year anniversary as participants in a bull market. Bonds were weak–animal spirits made their paltry yields particularly unappealing–and commodities barely advanced amid worldwide economic anxiety.

But check out T. Rowe Price Real Estate, which rocketed ahead 10.4% in the month, which was virtually all of its 10.6% gain in the first quarter. That still left it, however, about one-third below its value three years ago.

This fund has very little to do with housing, by the way: It invests in commercial real estate, which right now happens to include a lot of apartment companies, but usually does not. More normally, residential real estate is a distinct minority of holdings. But that group is so hot currently that this actively managed fund has bulked up on the group.

This helps explain its 118% surge over the last year. The best index fund in this sector, iShares Cohen & Steers Realty Majors, which is owned by the model ETF portfolio, is up less than 95%. Indexing advocates say active management is doomed to trail the average because of its relatively high expenses, but that claim is nonsense; 20% or more of active managers regularly beat the average, and identifying them in advance is not hard; I picked this T. Rowe Price fund, eh?

So while most investment analysts, including me, recommend against explicit market timing, we also recommend stocking up on bargains when they appear in the marketplace, and commercial real estate has been in this bucket for a year now. You can never know what markets will do tomorrow but you can easily learn what they have done in the last one, three and five years. Beaten-down merchandise is almost always the best stuff available; as I’ve said ad nauseum, in investing you get what you don’t pay for.

In that spirit, if this portfolio had a lot of cash (which it does not) I would be drawn to commodities, notably energy, like the Vanguard fund, or even gold, which has been racking up double-digit gains over the last year because of fears of inflation resulting from extravagent spending to combat the recent recession.

Otherwise I’m content to leave the portfolio untouched for at least one more month. Stocks could very well pull back 10% or more in coming months before rallying briskly in the fourth quarter; that would fit traditional market patterns after a year-long run-up.

If so, I’ll buy more stocks. If it doesn’t happen, I’m glad I own as many equities as I do.

This portfolio is designed for a retirement-oriented investor, so it’s relatively conservative. It is similar in design to my own retirement portfolio, and I own some of the funds held here, including T. Rowe Price Mid Cap Value, T. Rowe Price Emerging Markets Stock and T. Rowe Price Real Estate.

So while my model portfolio of exchange-traded funds dribbled up a measly 4.1% in the first quarter–thanks to a surprisingly robust March–I am not inclined to make any sweeping changes. The second quarter could be worse.

Here’s how the ETF model finished the month of March.

Not quite market-beating returns

As you can see, the model’s 4.8% return in March was enough–barely–to overcome a really bad January and make it positive for the last three months.

But the model trailed the market, and that’s no surprise. Slightly less than 60% of the portfolio’s assets are invested in stocks; bonds account for nearly 30%, with the balance in alternative assets (commodities and commercial real estate).

I can’t justify bulking up on risky assets. In fact, I cut back months ago on the riskiest equity segment, emerging markets, and I’m glad I did: The average diversified emerging markets mutual fund eked out only a 2.8% advance in the period. My holding, Claymore/BNY Mellon BRIC, advanced only 0.6% in the first quarter.

But actually nearly all the securities in the model were consistently out of sync with markets in the first period. That’s because the model is strongly tilted toward foreign securities, and they did miserably in the quarter.

The reason: A rallying U.S. dollar. It’s rallying partly because federal monetary authorities continue to act very adroitly to fuel economic recovery without firing up inflation, and partly because the wheels are coming off the euro, the dollar’s most credible alternative as a global reserve currency.

The euro has been a blessing to Europe’s poor relations like Spain, Italy and Greece when economic growth was vigorous, but it threatens to strangle them in the current weakness. Greece is literally a debtor nation; it needs to devalue its currency to make itself more competitive (as the United States has done for most of the last decade), but it cannot. The euro is a supranational deutsche mark; devaluation is forbidden.

So all my foreign investments were duds in the first quarter. iShares MSCI EAFE Value was up 0.6%. (The domestic Vanguard Value spurted 6.3%.) SPDR Barclays Capital International Treasury Bond was actually down 1.2%. (The domestic Vanguard Total Bond Market was ahead 1.4%.)

Longer-term, however, I continue to be married to the theme of a weak U.S. dollar, so I stubbornly refuse to shake up the model. The Federal Reserve has created a maelstrom of excess dollars to combat the recent crises, and inflation is the certain consequence of that. That’s what the price of gold is telling us. It’s up nearly 20% in the last year, to around $1,125 an ounce. (It’s up only 13.8% in terms of Japanese yen, and less than 10% in Swiss francs.)

So I’m going to leave the model unchanged for now. In coming months I expect U.S. equities to correct on the order of 10%, giving a boost to bonds as investors flee to their relative safety.

When that happens I plan to pare down bondholdings and boost the allocation to equities. I expect them to finish this year well ahead of their current level.

As I have noted before, this model portfolio broadly mirrors my personal investments, and I own some of these ETFs, specifically iShares MSCI EAFE Value, Claymore/BNY Mellon BRIC, iShares Cohen & Steers Realty Majors and Vanguard Total Bond Market.

The correction I anticipate is from the recent bull market high, reached in the middle of January. As of Jan. 31, the S&P 500 was down 3.7% from there, so I mean a further decline of at least 6.3%. I am hardly alone in making this forecast.

But this adds emphasis to Mark’s original question: When should I buy back in? Here’s my answer.

First of all, I would suggest that if you’re asking the question, you’re approaching investing the wrong way. Implicit in the question is that you have sold out. That’s a market-timing decision, whose flip side is, When do I buy back in? But market timers know the answer to that question even before they sell. If you don’t know the answer, you’re not an experienced market timer, so why are you selling out?

Investing is not a form of savings. When you save, you can be 100% sure of what will happen to your money. Investing is different. The odds are out of your hands from moment to moment. Only over a long period does time itself bring the odds into a form that can be successfully estimated. So if you need money within a relatively short time period–say, three to five years–it should be held in the form of savings, such as bank accounts or Treasury bills.

It follows that an investor’s minimum time horizon is five years, and his maximum is something longer than this–say 20 years, at least. (If you’re 65, you’ve still got 20 years left, according to actuarial tables.)

It also follows that the recent performance of financial securities, while interesting to an investor, is not terribly significant, and is likely to be a contrary indicator. That is, stocks have been in a funk for more than a decade, and bonds have been fabulous, but I think you’d be a fool to invest heavily in bonds right now, since interest rates are bound to go up significantly over the next five years, and bond prices go the opposite way.

Stocks, meanwhile, are up more than 50% from their nadir last March, but unless Washington really mucks things up they’ve got much higher to go; at least another 30% over the next three years, if history is any guide.

So whether or not you (or I) expect a correction immediately ahead, stocks are a buy today and bonds are not. In actuality, even bonds are a buy–in moderation, to damp down volatility in the portfolio of someone of middle age, and in quantity if you need to rely on the income in old age. Relative to themselves, however, bonds are expensive and stocks are not. They’re not cheap, as they were a year ago, but they’re not dear.

So if you’re waiting for a signal to come back to stocks, you have it: In the average stock market bull cycle, stocks make half their gains in the first year and the other half in the next several. In the average bear cycle, they lose a quarter to a third of their value. (Last time they lost half, but that’s rare.) So net, net, you lose less than you gain if you simply stay the course, ignoring current conditions.

The model portfolios I run, of exchange-traded funds and a 401(k) portfolio of mutual funds, change very little for years at a time, and are tweaked only to try to wring a few extra dollars out of performance. The real money, which is also the easy money, is made by sitting pat with a well-diversified portfolio of stocks, bonds and alternatives like energy. All the time.

Traditionally, a weak January presages a negative year for domestic equities, although last year was an exception. I don’t attempt to time the market so signals like this don’t interest me much. I do think, however, that weakness will continue until we get a little more clarity on conditions in Washington. As Thomas Friedman noted in today’s New York Times, the United States under Barack Obama suffers the kind of political instability usually associated with countries like Venezuela.

So I’m making no changes to the models, except to tidy up excess cash in the ETF portfolio. I expect a full-fledged correction–i.e., a decline of more than 10%–in global equities, and if it comes I’ll take profits in bonds and add to my stock holdings. Fundamentally the future is much stronger than the recent past, not least because Congressional Democrats are being emasculated.

Bonds did very well in January, and both of my models benefited from large fixed-income positions. Let’s look first at the model 401(k) portfolio.

Bonds zagged when stocks zigged

Foreign securities, especially those in emerging markets, took the biggest hit in January. Developed markets overseas, for bonds as well as stocks, were hurt by weaker currencies. The U.S. Dollar Index, a trade-weighted measure, rose 1.4% during the month, continuing a rally that began in November. Since its nadir, the index has advanced 5.3%.

Developing markets were the victims of risk aversion, which also showed itself domestically, with small capitalization stocks doing much worse than their big-cap brethren. You’ll recall that I saw that coming, and cut back my emerging-markets stake late last year.

Let’s turn now to the ETF model portfolio.

Securities' selection aided returns

This model, like that for 401(k) investors, performed better than the market primarily because the individual securities it owns are better than run-of-the-mill index funds. Note that despite the 3.7% decline in big-cap domestic stocks held by the S&P 500, my big-cap funds did better. That’s because they’re tilted toward beaten-down value stocks, which tend to outperform when the economy is perking up. It definitely is; GDP jumped 5.7% in last year’s fourth quarter.

Contrariwise, both models were held back in January because of their heavy weighting in foreign securities, including bonds. That overweighting is a strategic decision, based on what I think is likely long-term weakness in the U.S. dollar. Today’s deficits, including the trade deficit, are a millstone around the dollar’s neck. So the current strength of the dollar is an anomaly, I think, that will not last.

Meanwhile domestic bonds are doing great. So I tidied up the excess cash in the ETF model, produced by a flood of dividends received in December, by purchasing an additional 17 shares of Vanguard Short Term Bond.

Obama has run into almost exactly the same wall that Bill Clinton hit early in his first term. Clinton, ever the pragmatist, immediately pivoted toward the center, and had the most successful administration any Democrat has enjoyed since FDR.

Obama, however, seems to be an ideologue, in the unfortunate mold of Jimmy Carter. Even worse, he reacted to losing Massachusetts by spouting populist nonsense, which has ominous overtones for everything economic from taxes to tariffs to environmental regulation. There are just as many populist yahoos in Congress on the right as the left. They could unite to overcome gridlock, and gridlock is the economy’s only friend in Washington.

So investors are cautious, as well they should be. Politicians since Augustus have turned to the circus to take the mob’s mind off their failings, and no good has ever come of it.

December was a splendid month for the portfolio, which advanced 2.6%, despite a poorly timed move into foreign bonds. It was paid for with a halving of the portfolio’s investment in emerging markets stocks, and while they lagged domestic small caps, they still did better than the bonds with which they were replaced.

So is it time already to dump those foreign bonds?

Absolutely not. They are linked to the portfolio’s strategic vision of a weaker U.S. dollar, and correspondingly stronger markets overseas. The exact opposite occurred in December, but I think the long-term outlook for foreign securities remains very strong.

A 25% return in six months ain't bad

The portfolio’s biggest advance in December came from T. Rowe Price Real Estate, which spurted 7.5%. This fund, which invests in giant commercial-property trusts like Simon Property Group and AvalonBay Communities, is recovering from a bear market in real estate that began earlier and dove deeper than that in stocks during 2007 and 2008.

Most investors overlook real estate securities because they assume they behave like stocks in general. Actually, they are a separate asset class and everyone should own them. They diversify stock/bond risk, and have built-in inflation protection, as well.

Novice investors, in particular, would have avoided this fund in 2009, because it did so poorly in the prior two, falling 18.8% in 2007 and a ghastly 39.1% in 2008. In reality, because investments tend over time to return to their historical level of returns, the best time to buy them is when they are beaten down. This fund shot up 31.7% last year and the model 401(k) portfolio, which was launched at the end of June, captured most of that gain.

Indeed, I’m very happy with the entire portfolio. It has 22.7% in fixed-income securities, which is a bit on the low side but that’s appropriate, because interest rates are going to rise this year and that pushes down the prices of bonds. It is correspondingly heavy on equities but that seems timely, as well, because the global economy is recovering nicely and corporate profits, which drive stock prices, will follow.

By design, this portfolio puts more emphasis on small- than large-company stocks, because over time they produce higher returns. It is also heavily weighted with foreign stocks, both to capture growth overseas and to diversify away from the U.S. dollar, which sank 35% in the last decade and will probably continue to decline until budget deficits, notably the trade deficit, are brought down.

Right now, however, foreign securities are being penalized by a surprisingly strong dollar. It rallied in December as the Federal Reserve took significant steps to hold down future inflation.

A retirement portfolio is the longest term of any; even at age 65 you’ve still got an investment horizon of 20 years. Therefore, it is the most apt to be changed very little from month to month and even from year to year. I don’t plan on making any changes to this one until events conspire to create new opportunities.

For example, if stocks were to correct sharply, and I expect a pull-back of more than 10% at some point in the first quarter, I would draw down the fixed-income holdings and add to the equity funds, notably in emerging markets.

Almost without exception, the smartest investments are the cheapest ones. Everything goes on sale. Don Yacktman, manager of the outstanding eponymous mutual funds, likes to note that if lettuce is marked down 50% at the market, shoppers will buy more of it. Investors, on the other hand, “turn it over and look for the brown spots,” assuming there must be something wrong with it.