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2012 is going to be another choppy year. On one hand, investors are encouraged by the best holiday shopping season since the Great Recession, a potential turnaround in the housing market, increased gains in job markets, improved consumer confidence and rising corporate profits. On the other hand, investors are concerned about European problems, a potential collapse of the banking system, slowing growth in emerging markets, a potential war in Iran and natural disasters.

Given the uncertainties surrounding the global economy and roller coaster ride ahead, how do investors position themselves in 2012? Following are 2 sample portfolios: one is a fixed income portfolio constructed using 4 popular iShares ETFs; the other is Dow Jones 30 companies (NYSEARCA:DIA) with a 13% potential annual return.

A 6% Yield Fixed Income Portfolio

If you put money equally into the following 4 sample ETFs, the 12-month yield for this portfolio would be 6%:

Fund Name (Ticker)

Category

Yield

iShares iBoxx $ High Yield Corporate Bd (NYSEARCA:HYG)

High Yield Bond

7.69%

iShares S&P U.S. Preferred Stock Index (NYSEARCA:PFF)

Preferred

7.20%

iShares JPMorgan Emerg Mkts Bond (NYSEARCA:EMB)

Emerg Mkets Bond

4.90%

iShares iBoxx $ Invest Grade Corp Bond (NYSEARCA:LQD)

Long-Term Bond

4.44%

Total

n/a

6.06%

Dow 13,820, a 13% Return

Below are one year forward earnings of Dow Jones Industrial Average companies:

Name (Symbol)

Forward P/E (1yr)

Forward Earning

3M Company (NYSE:MMM)

13.0

$6.3

Alcoa Inc. (NYSE:AA)

9.8

$0.9

American Express (NYSE:AXP)

11.3

$4.2

AT&T Inc. (NYSE:T)

12.3

$2.5

Bank of America (NYSE:BAC)

5.8

$1.0

Boeing (NYSE:BA)

14.8

$4.9

Caterpillar, Inc. (NYSE:CAT)

10.0

$9.0

Chevron (NYSE:CVX)

8.2

$13.0

Cisco Systems, Inc. (NASDAQ:CSCO)

9.4

$1.9

Coca-Cola (NYSE:KO)

16.9

$4.1

E.I. du Pont (NYSE:DD)

10.8

$4.3

Exxon Mobil (NYSE:XOM)

10.2

$8.4

General Electric (NYSE:GE)

11.4

$1.6

Hewlett-Packard (NYSE:HPQ)

5.8

$4.5

Home Depot (NYSE:HD)

15.4

$2.7

Intel Corporation (NASDAQ:INTC)

10.2

$2.4

IBM (NYSE:IBM)

12.4

$14.8

Johnson & Johnson (NYSE:JNJ)

12.5

$5.2

JP Morgan Chase & Co. (NYSE:JPM)

6.8

$4.9

Kraft Foods Inc. (KFT)

14.8

$2.5

McDonald's Corporation (NYSE:MCD)

17.5

$5.7

Merck (NYSE:MRK)

9.8

$3.8

Microsoft Corporation (NASDAQ:MSFT)

8.6

$3.0

Pfizer, Inc. (NYSE:PFE)

9.4

$2.3

Procter & Gamble (NYSE:PG)

14.6

$4.6

The Travelers Companies (NYSE:TRV)

10.2

$5.8

United Technologies (NYSE:UTX)

13.1

$5.6

Verizon (NYSE:VZ)

15.7

$2.6

Wal-Mart (NYSE:WMT)

12.2

$4.9

Walt Disney (NYSE:DIS)

11.3

$3.3

Total

11.5

$140.7

The value of the Dow is the sum of the component prices divided by a divisor, which is 0.1323. If we use P/E of 13, then the Dow will be 13,820 ($140.7 * 13 / 0.1323). Based on today’s Dow value, it would be a 13.3% return in 2012.

Conclusion

We no longer have the attention span to deal with any 21st century crisis. We live in an economy that is immensely complex and we are completely at the mercy of the small group of people who understand it – who incidentally often happen to be the same people who built these wildly complex economic systems, according to Matt Taibbi, the author of “Griftopia” and a contributing editor for Rolling Stone.

Even though it is almost impossible to predict the unpredictable and what really happens in 2012 could be far different than any projections, both “smart money” and “lucky money” still need a roadmap: at least we can be brave enough to hold onto our positions or buy more when stock prices tank, because their prices are cheap based on fundamentals.

When the yield on 10-year Treasuries is 1.87%, investors have little incentive to stay in cash. Many Dow companies have a strong record of dividend growth. Firms that grow their dividends tend to be confident about their future prospects. With a 2.6% dividend yield and a potential 13% capital gain, SPDR Dow Jones Industrial Average (DIA) might be a better option than a 6% fixed income portfolio.

Note: Data is from Yahoo Finance and is valid as of December 31, 2011.

Source: SPDR DJIA ETF Offers Better Risk/Return Profile Than A 'Safe' 6% Yield Fixed Income Portfolio