I once knew a guy who was really into woodworking. One of the more fascinating things about him was that he not only made his own furniture but also was quite proud of his collection of hand-made woodworking tools. I once asked him why he preferred those tools to mass-produced alternatives. Among several reasons, “They do what I want”.
Some casual investors may wonder why I spend so much time investigating things like modeling mid caps and figuring out how to measure the error of older international bond data in backtesting calculations. While I certainly find this kind of information intellectually interesting, I admit that it sometimes becomes a chore and I can see why most people steer clear. The upside to all the groundwork, however, is that it expands my collection of tools and allows me to do what I want — explore interesting portfolios previously off limits simply due to lack of data.
Like, for example, the 7Twelve Portfolio.
The 7Twelve Portfolio is the brainchild of Craig Israelsen, an Executive-in-Residence in the Financial Planning Program at Utah Valley University and the author of 7Twelve: A Diversified Investment Portfolio with a Plan. The name is derived from his recommendation to equally divide your portfolio between 12 funds in 7 asset categories: US stock, non-US stock, real estate, resources, US bonds, non-US bonds, and cash.
You may immediately notice that the chart above has only eleven assets. While I’m excited to finally have good mid cap and international bond data that was not previously available, TIPS and natural resources are still hard to come by. But luckily, I do have pretty good proxies for those two assets (intermediate treasuries and commodities, respectively) and am confident that that the models are accurate enough for general backtesting and comparison purposes. As always, I highly recommend reading Israelsen’s own explanation for why he chooses the assets he does.
The thing I appreciate most about the 7Twelve Portfolio is the idea that there are seven equally important asset categories. Too many portfolio discussions boil them down to only two — stocks and bonds — and simply debate the ideal percentage of stocks. But I think that greatly over-simplifies things, and I like how Israelsen steps back and takes a more holistic approach that appreciates diversification breadth as well as depth.
For example, one might think simply by glancing at the number of funds that the most similar alternative portfolio is the Merriman Ultimate. But number of funds does not tell the whole story. Structurally speaking, the 7Twelve is actually more similar to the Ivy Portfolio.
Where the Merriman Ultimate focuses on deep stock diversification but defaults to a traditional 60% stock allocation, the 7Twelve Portfolio starts with broad asset categories similar to the Ivy Portfolio and subdivides them from there. The resulting portfolio is lighter on stocks than many traditional portfolio recommendations, but the end results have been remarkably consistent.
And since consistency is a very important factor for retirees, the 7Twelve portfolio has also posted very nice (estimated) long-term withdrawal rates near 5%.
Overall, I’m pretty darn impressed with the 7Twelve portfolio. I think it could be a particularly interesting option if you’re drawn to the breadth of the Ivy or Swensen portfolios but find the additional asset depth appealing, if you like the stock depth of the Merriman Ultimate but want to expand your thinking to broader asset categories, or even if you like the Golden Butterfly but are turned off by the gold. In my opinion, the 7Twelve portfolio is built on a solid foundation and I’m happy to add it to the site.