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The title alludes to an oft-cited aphorism of Sir John Templeton: "bull markets are born in pessimism, grow on skepticism, mature on optimism and die of euphoria." The elegant epigrams of bright and wealthy men resonate through culture and Templeton's gem is timely. The fiscal policies of the world's major central banks and economic fundamentals like low workforce participation and growing debt impart skepticism; geopolitical, environmental, energy and 'health' initiatives like the "affordable care act" [sic] make a case for pessimism leavened by the fact that "the worst is not so long as we can say, 'this is the worst,'" (King Lear 4.1.25-6).

With the markets opening 2013 on a pulse of euphoria sparked by the New Year's eve-and-day compromise of Congress on a 'fiscal cliff' package time is ripe to consider asset allocation that ignores short term noise and is alert to skewed bond markets and overseas' opportunities.

First, it is likely the euphoria will be short-lived. For while some fiscal uncertainty has been removed, major tax increases already have gone into effect and the debt will continue growing. Expect choppy markets with repeated buying opportunities: there likely will be many dips if not chasms. There is heightening attrition in Syria, a client of Iran. A deeply divided Congress and increasingly imperial Executive Branch make policy stalemates and sudden lurches routine.

It would be delightful if we could have a year or decade of daily triple-digit gains in the Dow, but policy interventions in the markets are as unlikely to produce steadiness as they are to increase employment. This may be a good year: on Fox Business, Moody's John Lonski just estimated the indices may rise about 10%, but like most analysts, his crystal ball is imperfect.

A few months ago Bob Prechter emphasized a point about economic uncertainty by suggesting you cash out and "put it all under the mattress." He foresees a "major secular bear market" to last about four years (!) and rising credit risk in all bond classes. This may be overstated but it's clear that traditional asset diversification won't fly in this brave new world.

Some suggest an allocation quartered between precious metals, cash, equities and fixed income. Many people, however, can't afford having 25% of their savings in a money market that daily bleeds value. But given that euphoric moments like January 2nd will be punctuated by frequent corrections if not a March bear, few people can afford to have less than 10% cash as a cushion and for buying. In any case, the prolonged period of suppressed interest rates argues that one should underweight fixed income holdings whatever the ordinary level might be for you. It also is prudent to review how much of your bond allocation you could hold clear through falling share prices caused by rising interest rates and how much you could sell while prices are elevated and yields low. This play is not why most of us hold bonds, but the unusual current conditions make it a compelling strategy for some portion of one's fixed incomes that might be better in a different asset class. People have been loading up on bonds when underweighting is prudent.

Unless you are expert at juggling coupons or have full faith and credit in the Fed's pledges about low rates holding through 2015, consider shifting Treasuries and municipal bonds to investment grade and high yield corporate bonds of short to intermediate duration. Vanguard's high yield corporate fund (VWEHX or VWEAX for Admiral shares, expense ratio .13) is known as 'good junk'; its short duration (averaging about 4.2) and relatively low risk make it a good option. During the past decade it returned almost 9%/year. Last year its 14.47% almost matched the S&P- without the volatility. In fact, since rising from the deep bottom of early March 2009, it has been one of the steadiest issues around: Its five-year average annual return is 8.68, which encompassed extreme market swings and this return aligned closely with its average of 8.94% in the 34 years since inception in December 1978. Its current yield of about 4.6- depending on which share class you own- won't turn heads but it is real. Another option is Barclay's high yield ETF (NYSEARCA:JNK). Its yield is about .85 higher with a .40 expense ratio. You may find JNK's high share price a bit harder to track but some people like to trade the swings. A short-term corporate ETF makes a good cash fund, things being as they are.

Two general points: if yields continue to decline, one should be ready to shift more to cash, equities and precious metals. In the difficult year for metals just past, Gabelli Gold (MUTF:GOLDX) held up about the best among funds while Tocqueville Gold (MUTF:TGLDX) and American Century (MUTF:BGEIX) have strong ten-year records.

The junior gold miners (NYSEARCA:GDXJ) may have bottomed in the past two months. Silver Wheaton (NYSE:SLW), the silver streaming company that helps finance miners by paying up front $4 - 6/oz for a share of the ore produced, has been a success story since its transformation from junior miner Wheaton River Minerals about 8 years ago. Those who believe Rob McEwen knows what he's doing in exploration, development and production could add some McEwen Mining (NYSE:MUX), especially if it drifts below $3.50.share.

I believe that hard-asset backed bullion funds like Sprott Silver (NYSEARCA:PSLV) or gold (NYSEARCA:PHYS) are better long-term choices than popular paper contract ETF's ([[GLD]] or SLV, etc) and would mix bullion with mining shares about 50-50. As to portfolio allocation in precious metals, not less than 5% and not more than 20%, unless you have so much wealth you can indulge a fancy. And, who knows, "the times are out of joint…"

Emerging market funds that include bonds have done well and should be a substantial part of a balanced portfolio. Matthews Asian Growth & Income Fund (MACSX) has been a good choice for a decade. In 2012, it showed nearly 27% gains and averaged 14.27% for the decade ranking high in its peer group. Matthews Asia Small Companies Fund (MSMLX) had a strong year as did the more diversified Vanguard All World except US small cap ETF (NYSEARCA:VSS). Emerging market bonds and world real estate are important parts of the mix. If you can't evaluate companies, find a good fund or umbrella ETF like Vanguard All World ex U.S. Real Estate (NASDAQ:VNQI).

This writer believes it is important to watch charts to learn the historic ranges of funds and companies. It is also important to follow the news less than commentary on the news. Trading needs to be part of wealth protection in volatile times. Long-term charts and demographics suggest it still is good to acquire Guggenheim's China Small Cap (NYSEARCA:HAO) below 26 and add to it on dips. A position in the Nordic ETF (NYSEARCA:GXF) should ride through the gales and be a long-term hold.

A fund that's been around since a year before the abrogation of Bretton Woods, Vanguard's Wellesley Income Fund (VWINX) has been a rock in all kinds of markets and administrations. Since 1970, it average annual return is about 10.2%. During the past decade it managed 7.19% and with its weighting of about 60% high grade medium-term corporate bonds, 38% large-cap value American equities and a bit of cash for trading it is a good anchor for many portfolio types.

A fund that complements it well is Vanguard Extended Markets Index (VEXAX), mainly tracking the Wilshire 4500 'market completion' index. It is low cost and grew 18.48% in 2012. For nearly three decades, it has averaged about 10.4%/year, 10.73% during the rough past decade.

Keep an eye on commodities like timber (NYSEARCA:CUT) and grains (NYSEARCA:JJG). Perhaps the best idea when the euphoria subsides is to acquire productive farmland from which you can lease fishing, hunting and timber rights as well as grow food and also serve as a home, seems ideal. If you can afford the minimum investment, Ceres Partners LLC with offices in South Bend, Indiana acquires and rents farms and leases mineral, fishing, water and hunting rights. It has had great success in its six years of acquisitions and management.

The good and bad news is that skepticism is warranted. According to Sir John Templeton, this means that we are not yet at the mid-point of the secular bull market that began the second half of March 2009. If you're young, learn Spanish and/or Chinese and do some traveling.

Disclosure: I am long GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own VEXAX, VWINX, GDXJ, PSLV, SLW, JNK, MUX

Source: Skepticism, Euphoria And Asset Allocation