Risk Parity

7Twelve Portfolio by Craig Israelsen

7Twelve Portfolio

The 7Twelve Portfolio by Craig Israelsen is an asset-based approach to diversification that balances portfolio returns by investing in a wide variety of unique asset types.

7Twelve Portfolio by Craig Israelsen

Asset Allocation

  • 12.5% Large Cap Blend¹
  • 12.5% Small Cap Blend¹
  • 8.3% International Stocks
  • 8.3% Emerging Markets
  • 17% Intermediate Bonds²
  • 8.3% International Bonds
  • 8.3% Cash
  • 16.6% Commodities³
  • 8.3% REITs
Asset Notes

1. Israelsen specifically recommends equal parts large cap blend, mid cap blend, and small cap blend. The data here simplifies that to half large caps and half small caps. Because most large cap index funds include mid caps and many small cap funds also have more mid caps than you might expect, the results should be very similar. But if you want to follow his recommendation to the letter, you might consider looking for a separate mid-cap fund.

2. Israelsen specifically recommends equal parts nominal bonds and TIPS.  Since I don’t have specific data for TIPS, I allocated this portion to intermediate term bonds.  While this is a pretty good proxy that should model the design intent reasonably well, be sure to read Israelsen’s justifications for why he chooses the bonds he does.

3. He specifically recommends 8.3% commodities and 8.3% natural resources, but good data for natural resources is not available.  Keeping with his theme of having two equal segments in the “resources” category, I allocated the natural resources to the commodities portion.  There’s a decent amount of overlap in commodities and natural resources ETFs, so I anticipate this will not change the results all that much.

4. The Portfolio Charts tools use round numbers, so I reallocated the portfolio slightly while preserving the original design intent as closely as possible.

Local Interpretations

Find country-specific versions and appropriate ETFs using the Performance charts.

Author

Craig Israelsen

Craig L. Israelsen, Ph.D., is an Executive-in-Residence in the Financial Planning Program at Utah Valley University. He talks about the 7Twelve Portfolio in his book 7Twelve: A Diversified Investment Portfolio with a Plan.

Overview

In contrast to the old-school definition of diversification in terms of company count, the 7Twelve Portfolio seeks to enhance performance and reduce risk by diversifying among a wide variety of different asset types. The name is derived from the 12 different funds in the portfolio spread across 7 different asset classes.

  1. US Stock (large, mid, and small caps)
  2. Non-US Stock (developed, emerging)
  3. Real Estate
  4. Resources (natural resources, commodities)
  5. US Bonds (nominal, TIPS)
  6. Non-US Bonds
  7. Cash

Israelsen describes the thought process of mixing asset types as similar to making salsa, where individual ingredients may seem bland or way too spicy on their own but are all critical to the success of the recipe. The 7Twelve Portfolio assets are weighted in equal proportions, and he classifies it as a “core” portfolio that should be built around rather than tweaked. For example, his age based models all equally weight the same assets where the only difference is the percentage of cash that can be increased to reduce risk for older investors.

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The 7Twelve Portfolio And The Power Of Broad Diversification

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Alternatives

Portfolios with a similar structure or design intent

Ivy Portfolio — Broad equal weight diversification across many of the same asset categories

Golden Butterfly — Similar percentages of stocks, bonds, and real assets

Pinwheel Portfolio — Domestic and international diversification with targeted tilts

Performance

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

Click to open

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

The interactive charts are sophisticated tools that push the limits of some mobile devices. If it doesn’t work, don’t give up! Visit this page on a laptop or desktop for the full experience.

All Seasons Portfolio by Ray Dalio

All Seasons Portfolio

The All Seasons Portfolio by Ray Dalio is a simplified version of his famous All Weather fund that can be easily implemented by everyday investors.

the All Seasons portfolio by Ray Dalio

Asset Allocation

  • 30% Total Stock Market
  • 40% Long Term Bonds
  • 15% Intermediate Bonds
  • 7.5% Commodities
  • 7.5% Gold
Asset Notes

The Portfolio Charts tools use round numbers, so I reallocated the portfolio slightly while preserving the original design intent as closely as possible.

Local Interpretations

Find country-specific versions and appropriate ETFs using the Performance charts.

Author

Ray Dalio

Ray Dalio is the founder and chief investment officer of the world’s largest hedge fund, Bridgewater Associates. You can read about his thoughts on the All Seasons Portfolio in the Tony Robbins book MONEY Master the Game.

Overview

The All Seasons Portfolio is built on the philosophical foundation of Dalio’s All Weather Fund, a popular hedge fund among institutional investors. According the All Weather Story, the original goal of the fund was to answer a deceptively simple question:

What kind of investment portfolio would you hold that would perform well across all environments, be it a devaluation or something completely different?

Dalio and his Bridgewater team concluded that while individual assets are unpredictable, they react in understandable ways based on cash flows in the prevailing economic environment. They arranged those environments into four quadrants:

All Weather Fund four quadrants, the foundation for the All Seasons Portoflio

By filling each quadrant with assets that respond to each economic condition and balancing the asset weights to achieve risk parity for each situation, Dalio designed a portfolio capable of succeeding no matter what happens in the markets.

While the institutional All Weather fund includes a lot of active management and a number of investments not available to everyday investors, the All Seasons portfolio is a simplified version that he recommends to individuals looking to build an autopilot portfolio using the same All Weather philosophy.

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Investing for All Seasons

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Alternatives

Portfolios with a similar structure or design intent

Permanent Portfolio — A similar investing philosophy built around economic risk parity

Larry Portfolio — Similar portfolio structure to balance volatility risk between assets

Swensen Portfolio — Another portfolio that uses institutional investing concepts

Performance

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

Click to open

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

The interactive charts are sophisticated tools that push the limits of some mobile devices. If it doesn’t work, don’t give up! Visit this page on a laptop or desktop for the full experience.

The Larry Portfolio by Larry Swedroe

Larry Portfolio

The Larry Portfolio by Larry Swedroe balances small percentages of risky stocks with large percentages of safe bonds to maximize returns while minimizing risk.

The Larry Portfolio by Larry Swedroe

Asset Allocation

  • 15% Small Cap Value
  • 7.5% Int’l Small Cap Value
  • 7.5% Emerging Markets¹
  • 70% Intermediate Bonds
Asset Notes
  1. Swedroe specifically recommends emerging market value.  I don’t have data for this asset, so allocated the portion to emerging markets.  I anticipate the numbers to be reasonably close, but be sure to read Swedroe’s reasoning for why he chooses the fund he does.

The Portfolio Charts tools use round numbers, so I reallocated the portfolio slightly while preserving the original design intent as closely as possible.

Other Versions

Swedroe seems to have shared a few different versions of the same basic idea over the years. For example, the Swedroe Min Fat Tails Portfolio documented by Meb Faber contains 15% small cap blend, 15% emerging markets, 35% T-Bills, and 35% TIPS.

Local Interpretations

Find country-specific versions and appropriate ETFs using the Performance charts.

Author

Larry Swedroe

Larry Swedroe is a financial author and the Chief Research Officer at Buckingham Strategic Wealth. You can read about the Larry Portfolio in the book Reducing The Risk of Black Swans by Swedroe and Kevin Grogan.

Overview

Larry Swedroe is one of the more prolific financial authors out there today, and if I had to pick the two topics where he carries the most weight they would be factor investing and risk management. The Larry Portfolio combines those two specialties into a single portfolio that simultaneously increases returns and reduces risk. It accomplishes those goals with very deliberate asset choices built into an intelligent risk management framework.

The Larry Portfolio is discussed in Swedroe’s book Reducing The Risk of Black Swans, which is an educational treatise on how to avoid unexpected catastrophic losses. The basic idea is to mix small percentages of assets with the highest expected returns (but also the highest uncertainty) with large percentages of stable bonds to protect yourself even if the risky assets totally tank. That idea of adjusting asset percentages inversely proportional to their volatility is called “risk parity”. And the Larry Portfolio is a prime example of that sophisticated financial concept distilled into a simple portfolio that anyone can build for themselves.

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Black Swans And The Larry Portfolio

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Alternatives

Portfolios with a similar structure or design intent

All Seasons Portfolio — Similar portfolio structure to balance volatility risk between assets

Merriman Ultimate — Shares a strong belief in the small and value factors

Permanent Portfolio — Also balances a smaller percentage of stocks with other assets

Performance

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

Click to open

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

The interactive charts are sophisticated tools that push the limits of some mobile devices. If it doesn’t work, don’t give up! Visit this page on a laptop or desktop for the full experience.

Permanent Portfolio by Harry Browne

Permanent Portfolio

The Permanent Portfolio by Harry Browne aims to protect and grow your money in an unpredictable world by diversifying across four fundamental economic conditions.

Permanent Portfolio by Harry Browne

Asset Allocation

  • 25% Total Stock Market
  • 25% Long Term Bonds
  • 25% Cash
  • 25% Gold
Other Versions

Browne specifically chooses T-bills for the cash portion of the portfolio, and the charts all show the returns according to his recommendation. However, if you read about the Permanent Portfolio it’s pretty common for its followers to choose short term bonds. The charts with short term bonds are pretty similar.

Local Interpretations

Find country-specific versions and appropriate ETFs using the Performance charts.

Author

Harry Browne

Author, politician, and investment adviser. An advocate for free markets and free people, Harry Browne was the Libertarian presidential nominee in 1996 and 2000. He talks about the Permanent Portfolio in his book Fail-Safe Investing.

Overview

The Permanent Portfolio is built on the idea that while the future is unknowable, the economy fluctuates between a few known states — prosperity, recession, inflation, and deflation. While some portfolio managers apply the idea of “risk parity” to balance the volatility risk between assets, Harry Browne believed in using the same idea to balance economic risk. So he chose four assets that he saw as uniquely qualified to respond positively in each of the four economic conditions.

Prosperity: stocks
Recession: cash
Inflation: gold
Deflation: long term treasuries

Brown equally weighted the four assets to protect and grow his money no matter what happens in the market. And the resulting portfolio has proven to be one of the most consistent on record with dependable returns, low drawdowns, and high withdrawal rates.

In addition to Browne’s own writings, An excellent modern guide is The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy by Craig Rowland and J. M. Lawson.

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Alternatives

Portfolios with a similar structure or design intent

Golden Butterfly — My own evolution of the Permanent Portfolio tilted towards prosperity

All Seasons Portfolio — A similar investing philosophy built around economic risk parity

7Twelve Portfolio — A portfolio that broadly diversifies across many asset categories

Performance

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

Click to open

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

The interactive charts are sophisticated tools that push the limits of some mobile devices. If it doesn’t work, don’t give up! Visit this page on a laptop or desktop for the full experience.

Weird Portfolio

The Weird Portfolio by Value Stock Geek combines factor investing and risk parity concepts into an asset allocation designed to maximize returns and minimize stress.

Weird Portfolio by Value Stock Geek

Asset Allocation

  • 20% Small Cap Value
  • 20% International Small Cap Blend
  • 20% Long Term Bonds
  • 20% REITs¹
  • 20% Gold
Asset Notes

1. Value Stock Geek specifically calls for 10% US REITs and 10% international REITs. Since I don’t have data for international REITs, I included them in the US allocation. Be sure to read his explanation to understand his full design intent.

Local Interpretations

Find country-specific versions and appropriate ETFs using the Performance charts.

Author

Value Stock Geek

Value Stock Geek is a DIY value investor who discusses investing in his newsletter, on his podcast, and on Twitter. He writes about his portfolio philosophy in his free online book The Weird Portfolio.

Overview

Value Stock Geek has an interesting and refreshingly honest approach to investing. Because he is a natural stock picker and value investor who enjoys researching individual companies, one might think that he’d not be the biggest fan of passive asset allocation. But to the contrary — the Weird Portfolio is his solution for establishing a secure investing foundation that allows him to invest in what he calls his “speculative” portfolio without worry.

True to his value investing moniker , the Weird Portfolio commits to small and value stock allocations over traditional cap-weighted funds. Beyond simply expanding into international markets, it also incorporates modern risk parity concepts with multiple volatile assets like gold, REITs, and long term treasuries to balance each other out and generate consistent returns in any economic condition.

With multiple complementary assets including international diversification and factor investing ideas, the Weird Portfolio may indeed seem strange in an old-school sense but is a decidedly contemporary mix of popular investing concepts.

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Alternatives

Portfolios with a similar structure or design intent

Ivy Portfolio — Very similar structure with less-tilted versions of each asset

Golden Butterfly — Similar economic philosophy with a few different assets

Larry Portfolio — Shared interest in factor investing and international stocks

Performance

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

Click to open

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

The interactive charts are sophisticated tools that push the limits of some mobile devices. If it doesn’t work, don’t give up! Visit this page on a laptop or desktop for the full experience.

The Golden Butterfly Portfolio by Portfolio Charts

Golden Butterfly Portfolio

The Golden Butterfly Portfolio by Tyler prioritizes consistently desirable investment growth by balancing economic conditions with an eye towards prosperity.

The Golden Butterfly Portfolio by Portfolio Charts

Asset Allocation

  • 20% Total Stock Market
  • 20% Small Cap Value
  • 20% Long Term Bonds
  • 20% Short Term Bonds
  • 20% Gold
Asset Notes

When I first wrote about the Golden Butterfly, I chose large cap blend to clearly contrast that portion of the portfolio from small cap value. When Portfolio Charts grew to include more countries, however, I switched to a total stock market fund (along with several other portfolios) to better translate data between markets. Because TSM funds are by definition 85% LCB, the numbers should be very similar either way. But you can also see the difference for yourself using the My Portfolio tool.

Local Interpretations

Find country-specific versions and appropriate ETFs using the Performance charts.

Author

Tyler

I’m a mechanical engineer, investing researcher, spreadsheet aficionado, and the author of Portfolio Charts. The Golden Butterfly is a portfolio idea born of my ongoing exploration.

Overview

The Golden Butterfly Portfolio is built on the idea of economic risk parity, similar to the Permanent Portfolio which shares four of its five assets. But while the Permanent Portfolio equally balances prosperity, recession, inflation, and deflation, the Golden Butterfly tilts the assets towards prosperity with an additional allocation to small cap value.

While to some that may seem like a trendy choice destined to underperform, the data reveals a remarkable truth. The Golden Butterfly is one of the best risk-adjusted portfolios out there, pairing the famous consistency of the Permanent Portfolio and the growth rates of far more aggressive options. With a tight band of growth paths that are helpful for future estimates and notably high withdrawal rates that are great for retirees, it’s a particularly dependable portfolio option suitable for both accumulators and retirees alike.

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The Theory Behind the Golden Butterfly

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Alternatives

Portfolios with a similar structure or design intent

Permanent Portfolio — The same fundamental portfolio without small cap value

All Seasons Portfolio — A similar investing philosophy built around economic risk parity

Pinwheel Portfolio — Another original idea designed for portfolio consistency

Performance

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

Click to open

Change the home country to translate the portfolio to local assets, currency, and inflation.

If the chart doesn’t load after a few seconds, refresh your browser.

The interactive charts are sophisticated tools that push the limits of some mobile devices. If it doesn’t work, don’t give up! Visit this page on a laptop or desktop for the full experience.