Craig L. Israelsen, Ph.D., is an Associate Professor at Brigham Young University in Provo, Utah where he teaches Personal and Family Finance to over 1,200 students each year. The Israelsen Seven Equally Weighted is aimed to protect the portfolio against losses.
The portfolio has seven different asset classes and twelve different funds. Each fund has the same weight 8.3% so each asset class has a different weighting. The table below provides the weightings for each asset class, the funds that will be used to review performance and the ETF equivalent.The highly diversified portfolio with low aggregate correlation avoids losses effectively, reducing the standard deviation of return.
We uses the 13 funds proposed to form an investment plan Israelsen 7Twelve . The funds cover 6 major assets: US Equity, Commodity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
|LARGE BLEND||VTI||Vanguard Total Stock Market ETF|
|MID-CAP BLEND||VO||Vanguard Mid Cap ETF|
|SMALL BLEND||VB||Vanguard Small Cap ETF|
|Foreign Large Blend||EFA||iShares MSCI EAFE Index|
|DIVERSIFIED EMERGING MKTS||VWO||Vanguard Emerging Markets Stock ETF|
|Global Real Estate||RWX||SPDR DJ Wilshire Intl Real Estate|
|COMMODITIES||GLD||SPDR Gold Shares|
|COMMODITIES BROAD BASKET||DBC||PowerShares DB Commodity Idx Trking Fund|
|Intermediate-Term Bond||AGG||iShares Barclays Aggregate Bond|
|Inflation-Protected Bond||TIP||iShares Barclays TIPS Bond|
|WORLD BOND||BWX||SPDR Lehman Intl Treasury Bond|
|REAL ESTATE||VNQ||Vanguard REIT ETF|
|Asset Class||Number of funds|
|Emerging Market Equity||1|
Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.
Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.
The following table shows how these model portfolios are compared with the original lazy portfolio:
Portfolio Performance Comparison (as of 10/10/2013)
|1Yr AR||3Yr AR||5Yr AR||5Yr Sharpe||10Yr AR||10Yr Sharpe|
|Israelsen 7Twelve Strategic Asset Allocation – Equal Weight Moderate||2.2%||4.6%||5.0%||10.9%||0.69||7.7%||0.5|
|Israelsen 7Twelve Strategic Asset Allocation – Optimal Moderate||5.5%||8.6%||6.7%||11.0%||0.68||6.2%||0.39|
|Israelsen 7Twelve Tactical Asset Allocation Moderate||6.0%||9.7%||6.6%||9.7%||0.95||10.4%||0.87|
|7Twelve Original Portfolio||6.7%||7.7%||6.3%||10.5%||0.59|
**YTD: Year to Date
All of these portfolios have comparable performance in the last 5 years. The tactical portfolio has the worst 5 year return, though is not far off from the rest. However, this portfolio has the highest Sharpe ratio due to its dramatic risk reduction including lower standard deviation and lower draw down.
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.