SAN FRANCISCO (MarketWatch) — Many stock investors thought 2011 would be upbeat, but they got beat up instead. The year for stocks was a year of shocks, while bonds remained unbroken.

2011 REVIEW & OUTLOOK

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U.S. stocks have an edge in 2012 , says Liz Ann Sonders, Charles Schwab's chief strategist.

No quick fix for euro crisis in 2012 
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• Japan stands strong despite disaster year 
• China set for new generation of leaders 
• Asia 2011: A look back in pictures

Understandably, people are more wary than usual about where to invest this year. As you review your portfolio, think about how 2012 might be different from 2011 and ways it could bring more of the same. It pays to keep in mind one of esteemed former Wall Street analyst Bob Farrell’s cardinal rules of investing: “When all the experts and forecasts agree — something else is going to happen.” Read more: 10 investing rules tailor-made for tough markets.

Before delving into what 2012 could deliver, let’s recap how MarketWatch’s 10 investment ideas for 2011 did. Not bad, in fact, especially considering the almost daily assaults on the markets. Read more: The 10 investment ideas we thought would make you money in 2011.

Most of the picks MarketWatch made in December 2010, based on recommendations and research from investment professionals, beat the Standard & Poor’s 500 IndexSPX +0.29% — though that’s not saying much about a year when the U.S. benchmark was flat on a price basis and up 2.1% with dividends reinvested.

The best advice was to run with the “Dogs of the Dow.” This strategy of buying the 10 highest-yielding stocks in the Dow Jones Industrial Average DJIA -0.02%  and holding for 12 months rewarded investors with stellar gains, up 17% for the year including reinvested dividends.

Adding consumer-staples stocks to consumer-discretionary stocks was another winner, with the staples sector gaining 10.5% and discretionary shares up 4.4%. Energy and technology sectors also outperformed the market, as did growth stocks.

The biggest losers: Materials-sector stocks, down almost 12%. Emerging-markets infrastructure plays and industrial-sector stocks also lost ground.

Nowadays investors’ mood is mixed at best. Mutual-fund shareholders have piled into bonds and fled U.S. stocks for several years; surveys of investment advisers show cautiousness about buying stocks, and hedge-fund managers appear increasingly bullish. Bond investors, meanwhile, have to question when this epic bull market will end.

Looking ahead, investors should tune out the noise, turn on the head lamps, and consider these 10 ways to position your portfolio in 2012:

1. Stick with 2011’s winners

Buy what’s worked and head for the beach? Not quite. But many of the headwinds investors fought in 2011 haven’t disappeared and could worsen, which means that some of last year’s winners could repeat.

Geopolitical and economic risks will, as always, impact financial markets and consumer prices short-term, with accompanying high volatility. Yet broadly speaking, in the current anemic global climate, where economic growth is increasingly scarce, pressure on interest rates and inflation isn’t much of an immediate threat.

U.S. stocks trounced their international counterparts, and look to do so again in 2012. Large-caps outperformed small- and midcaps, and growth-stock investors bested more bargain-minded value buyers. Expect more of that as well.

The hunt for yield is another priority. The Dogs of the Dow perform in volatile, tug-of-war markets and seem poised for another round. The 2012 Dogs are unchanged from 2011 except Procter & Gamble Co. PG -0.42%  has replaced McDonald’s Corp. MCD -0.01% . AT&T Inc. T -0.10%  is again the highest-yielding Dow component.

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Bull markets, past and present: Is the rally over?

MarketWatch columnist Mark Hulbert notes that the U.S. bull market has run much longer than others in history — and that might suggest it's run its course. Interview with Laura Mandaro. Photo: Getty Images.

In a slow-growth world where developed nations are deleveraging — much of Europe is likely to be mired in recession this year and the U.S. will be lucky if growth nears 2% — expect bond yields to remain low.

The riskiest play is long-term Treasurys. If the 30-year Treasury yield slides to 2% or 2.5% — perhaps in a euro-sparked panic — that probably would be the last gasp of the Treasury bond bull. Still, investors would win big on a total return basis, though not as much as in 2011.

As an alternative to volatile long- and intermediate-term Treasurys, consider high-quality corporate bonds, municipal bonds and income-producing stocks.

2. Own defensive stocks in a deleveraging age

Focus on capital preservation and the preservation of cash flow.

From a stock perspective, the classic defensive sectors include yield-rich consumer staples, health care and utilities.

Among these three, only the consumer-staples sector gets an enthusiastic nod from analysts at S&P Capital IQ. Utilities, especially shares of electric companies, enjoyed a tremendous run in 2011, up 14.5%. And while these companies offer hefty dividends, valuations have increased considerably and the S&P analysts expect market performance from the group in 2012. The analysts are also neutral about the health-care sector, which gained 10.2% last year.

3. Add some economic sensitivity

“A balanced sector approach that emphasizes both cyclical and defensive themes is critical to navigating this manic market,” said Alec Young, global equity strategist at S&P Capital IQ, in a recent research report.

That means you have to temper the urge for flight and beef up the portfolio with some fight. Put some money into cyclical sectors that lagged in 2011, including materials, industrials, energy and technology.

“Some of the beaten-down cyclical groups will come back,” said Doug Ramsey, chief investment officer at mutual fund firm Leuthold Group. Topping his list: shares of railroads, chemicals, industrials and materials.

4. Stick with dividend-paying growth stocks

U.S. corporate balance sheets — the fundamentals — are in excellent shape overall. Still, in a slow-growth climate the advantage goes to the best of the best. These companies tend to be found in areas that are less economically sensitive. They’re typically large-caps, with a “wide moat” of business, strong cash flow and a history of using capital for productive purposes including acquisitions, share buybacks and regularly higher dividend payments.

“Gravitate more to the income-oriented sectors of the U.S. market for the time being,” said David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates, in a recent research report.

As examples of high-quality companies whose dividend yields top Treasurys, he points to AT&T, 3M Co. MMM -0.45% , Exxon Mobil Corp. XOM -0.18% , Emerson Electric Co.EMR -0.42% , McDonald’s, Johnson & Johnson JNJ -0.12%  , Colgate-Palmolive Co.CL -0.51%   and Wal-Mart Stores Inc. WMT -0.49%  

Other defensive, cash-rich growth stocks on Rosenberg’s suggested list include Procter & Gamble and Microsoft Corp. MSFT -0.04%   Read more: Low-risk investing in highly volatile markets.

To be sure, this is an increasingly crowded trade. Many of these companies were “discovered” over the past year, as investors rotated to large-cap, higher-yielding payers. That’s one reason why last year’s best U.S. market sectors were utilities and consumer staples. McDonald’s, for instance, soared 35% in 2011.

So stay the course for now, but remember Bob Farrell’s rule and watch for weakness in this group heading into 2013, when smaller-cap stocks could begin to improve.

5. Consider small-cap stocks

Small-caps were market leaders for years, but despite a strong fourth-quarter 2011 showing the group has lost that poll position.

The Russell 2000 Index RUT +0.67%  fell 4.2% in 2011, while the large-cap Russell 1000 Index RUI +0.36% gained 1.5%.

But that dismal 2011 result might be a silver lining for small-caps.

“The best secular investment theme in the global equity markets is U.S. small-caps,” Richard Bernstein, CEO of investment firm Richard Bernstein Advisors, wrote in a December report to clients.

“Companies in the Russell 2000 have been producing positive earnings surprises at a better rate than most other regions of the world,” he added. “Although smaller U.S. companies’ earnings fundamentals are not yet superior to their larger U.S. counterparts...that relationship is likely to reverse.”

Moreover, small-caps’ general lack of international exposure could be a plus if, as expected, the U.S. dollar strengthens, according to Steven DeSanctis, small-cap strategist at Bank of America Merrill Lynch. A stronger dollar is a negative for larger companies with sizeable overseas operations. DeSanctis favors the larger and higher-quality small-cap names, which he noted could benefit from increasing merger and acquisition activity.

Yet with so much uncertainty looming over global markets and the prospect of continued volatility, putting money into small caps would require a big leap of faith for an investor in 2012. That said, look for attractive entry points to this unloved group.

6. Consider high-quality European stocks

Recession in the euro zone is not only expected, but may already have arrived. Shares of European stocks have been shorn — the average European stock mutual fund lost 15% in 2011. As always after a big selloff, there’s a case to be made that the worst is priced into these markets — although another leg down can’t be ruled out.

At the risk of trying to catch a falling knife, Michael Harnett, chief global equity strategist at Bank of America Merrill Lynch, told investors in a December research report to buy the “best and the distressed” in Europe.

“European stocks are the most oversold they have been relative to U.S. equities in 20 years,” he said. “Go shopping for high quality European equities with strong earnings, healthy balance sheets and solid margins.”

Merrill’s recommended large-cap European stocks to weather recession include AstraZeneca Plc AZN -0.40%  , Telefonica S.A. TEF -0.18% , Total S.A. TOT -0.14% and BP Plc BP +0.05% .

7. The U.S. dollar is the one-eyed king

“Muddling through” the recessionary morass is the most likely scenario analysts at Brown Brothers Harriman & Co. see for Europe.

“One of the results will be a weaker euro EURUSD +0.12%  ,” the BBH analysts noted in a recent report. “But barring an outright collapse, depreciation is likely to be broadly welcomed by European officials and businesses. A weaker euro is also consistent with the easing of monetary policy.”

The U.S. dollar will be the beneficiary of a weaker euro. The U.S. Dollar Index DXY -0.08% gathered steam heading into 2012 ; a proxy for the dollar, PowerShares DB US Dollar Index Bullish Fund UUP +0.04% , gained almost 6% in the last half of 2011. BBH analysts expect the euro to bottom at 1.20 in the second quarter of 2012 and end the year at 1.27 — about where it recently traded. 

Said A. Gary Shilling, president of investment advisory firm A. Gary Shilling & Co., Inc. “The dollar should continue to appreciate, especially against the euro but also against commodity currencies” such as the Australian dollar AUDUSD -0.09%  , Canadian dollarUSDCAD -0.21%  and Mexican peso. USDMXN -0.17%  

“The dollar in the long run is likely to remain the world’s primary international trading and reserve currency,” Shilling noted. “There are,” he added, “no substitutes for the buck in the foreseeable future.” Read more: Look for 2012 to be the year of the dollar.

Of course, a stronger dollar means U.S.-based multinationals will lose a tailwind they’ve ridden for several years. Sales earned abroad are worth more when repatriated in weaker dollars, and no sector is more heavily exposed to developed and emerging markets than technology.

8. Stick with gold

Bank of America Merrill Lynch strategist Harnett expects the Federal Reserve, the European Central Bank and others to pump more money into a debt-laden global financial system, and that development would favor gold GC2G +0.14%  .

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Gold, commodities poised to rise

Michael Cuggino, manager of the Permanent Portfolio Fund, tells Jonathan Burton prices of gold, copper and other commodities will rise to reflect modest, but real, economic growth. Photo: Getty Images.

“Gold remains one of the best ways to play this attempt by global policymakers to mitigate the negative impact of debt deleveraging,” he noted in a research report.

Rosenberg, the Gluskin Sheff economist, agreed: “So long as policymakers ensure that real short-term rates are negative — this is a very key indicator for gold — one should expect to see the secular price trend remain tilted to the upside,” he said.

Analysts at S&P are also positive about the yellow metal. The firm sees gold trading in a sideways pattern for much of the year before breaking out to the upside. Gold will finish 2012 at around $1,900 an ounce, S&P said.

In addition to exchange-traded fund proxy SPDR Gold Trust GLD -0.18%  and iShares Gold Trust IAU -0.19% , such a rebound would be favorable for gold miners, including S&P favorites Barrick Gold Corp. ABX -0.41% , Newmont Mining Corp. NEM +0.34%  and Randgold Resources Ltd. GOLD +0.12%   

9. Vote for the presidential cycle

Observers of the U.S. stock market’s four-year “presidential cycle” know that 2011 didn’t live up to history. The third year of a president’s term has been the best, with the S&P 500 gaining 16% on average since 1945 without reinvested dividends, S&P data show. Last year the S&P 500 finished flat.

Election years usually aren’t as robust as the third, with the market up around 6% on average. Typically, the market’s best sectors include consumer staples, energy and Industrials, with technology, materials and utilities posting below-average results.

Importantly, the U.S. market has done well in election years when an incumbent president is running again, regardless of the outcome, according to the Stock Trader’s Almanac. In addition, subpar third years of the cycle since 1945 have not led to a weak election year.

10. Volatility reigns; emphasize safety and income

The high volatility that shook investors in 2011 isn’t likely to subside this year. The challenge is to stay in the ring without getting knocked out.

Gluskin Sheff’s Rosenberg is steering investors to “safety and income at a reasonable price” as the global economy moves through what he called “the mother of all deleveraging cycles.”

Accordingly, he said, focus on high-quality stocks and bonds, income-producing oil and gas partnerships and real-estate investment trusts, precious metals and companies that produce or supply goods and services that people not only want, but must have.

“For 2012, tactical strategies will also be crucial, at least as much as in the roller-coaster ride of 2011,” Rosenberg added. “Investors should be making a special effort to fight dogma and keep an open mind.” 

Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.