The Israelsen 7Twelve is intended to protect the portfolio against losses. The portfolio has 7 different asset classes and 12 different funds. Each fund has the same weight of 8.3% or 1/12 of the overall portfolio.
7Twelve, a multi-asset balanced portfolio, is developed by Craig Israelsen, Ph.D. in 2008, today he is a principal at Target Date Analytics. As a difference from a traditional two-asset 60/40 balanced fund, the 7Twelve strategy covers various asset classes in an investment portfolio. The purpose is to improve performance and reduce risk. This represents a totally new school of a balanced portfolio.
The number 7 describes the number of asset classes proposed to add to your portfolio. The number 12 (twelve) outlines the number of separated mutual funds that fully represents the 7 asset classes in your portfolio.
Craig Israelsen was a teaching family finance at Brigham Young University. One day he got an interesting question: What should be in a diversified portfolio? Even if he thought how the question is interesting, Israelsen didn’t have the right answer at that very moment. The subject was so provocative that Israelsen developed a unique formula for portfolio diversification. It was 2008.
which has been catching on with financial planners. The name 7Twelve Portfolio came from Israelsen himself.
The reason is simple. His new portfolio consists of 12 equal parts of mutual funds pulled from seven fund types: real estate, natural resources, U.S. equity, non-U.S. equity, U.S. bonds, non-U.S. bonds, and cash. But it was the first version based on historical data to 1970. Later, as the markets changed, he added U.S. midcap, emerging markets, natural resources, inflation-protected bonds, and non-U.S. bond funds.
Each mutual fund in the 7Twelve strategy is equally weighted and represents 1/12th of the portfolio. This allocation is managed by adjusting the portfolio back to equal parts monthly, quarterly or annually.
7Twelve model is the “core” of an investment portfolio. Any investor may add individualized assets around the core. But one thing is obvious, using 7Twelve can improve the efficiency and the portfolio performance for the investor because it is a strategic model and doesn’t rely on tactical moves or changes.
Investing by using 7Twelve strategy
There are some statistical data that support the idea of how Israelsen’s portfolio model is better than traditional. For example, if we observe the Vanguard Balanced Index fund (consists of 60% U.S. stocks and 40% U.S. bonds) from 1999 to the end of 2014, we will find that it had an average annual compound return of 5.7%. In the same period, the 7Twelve portfolio would return 7.6%, as Israelsen calculated it. The result showed that the 7Twelve portfolio had smaller losses in bad years, and that is the point of a well-diversified portfolio, right?
Some experts argued with Israelson, claiming that he made 7Twelve by back-testing which allocations have had the best performances in the recent past. If yes, why and how would he equally weight assets? In such a case, the returns would be different.
The value of 7Twelve is its simplicity. Actually, it can be easily adjusted for each investor individually.
7Twelve portfolio gives a wide diversification because all known asset classes are covered. So, you can get excellent diversification across many asset classes. Simplicity is a great part. It is so easy to follow 12 funds or ETFs, equal-weighted. Moreover, this model is one of the rare that includes mid-cap stocks. Maybe the most useful part is a great opportunity for rebalancing monthly, quarterly or annually. That possibility is giving reduced risk and increased returns.
Rebalancing the 7Twelve Portfolio
Rebalancing is an important part of the 7Twelve plan. It is very simple. All you have to do is bringing each of the 12 funds in your particular 7Twelve model back to their given allocation (1/12 or 8.33% in the core 7Twelve model).
For example, if you had some funds that performed better in the, let’s say the prior quarter, just deposit more into the funds that were underperformed in the same quarter. In this way, you are rebalancing the account of all funds in your portfolio. That is how you have to manage your portfolio, without emotions.
Let’s say your investment 7Twelve portfolio is $10.000 worth. If you don’t re-balance it, you will lose 13 bps over 20 years. That is empirical evidence. In money, it is almost $920.
The full info you can find HERE
It is a strategic portfolio. All you have to do is to set the percentages and rebalance them when they get out of balance. And you can stay relaxed until some market events ask for you to rebalance. Generally, a good idea. Just view this portfolio graphically.
Every single investor would admit that diversified investing is a great and ultimate thing for everyone in the market. But the reality shows that the ordinary investor hasn’t too much experience in building a diversified investment portfolio. Most investors are holding a portfolio of several mutual funds. That isn’t diversification. 7Twelve provides investors the possibility to build a diversified, multi-asset portfolio.
In many articles and books, Craig Israelsen explained how simple it is to maintain a strong portfolio with a plan. And it is. Moreover, it provides investors to reduce risks of investing.
The deeply diversified portfolio avoids losses efficiently, decreasing the usual deviation of return, and frequency of losses. A well-diversified non-correlated portfolio provides a good return and low volatility.
What people don’t like about 7Twelve? Firstly, some think there are too many commodities.
Secondly, some stated that this strategy is boring. Investors who like to check their portfolios every hour a diversified portfolio could be. The same comes to investors that like to detail-manage their investment. But no one says this is an unreasonable portfolio. Contrary. Literally, you can find plenty of good portfolios and this is one of them. The main problem is that only a small number of investors have been using this portfolio for a long time despite the fact it is created more than 10 years ago.
The most important thing is to choose one and stick with it, through the highs and deeps.