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.

 

Asset Class Ticker Name
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
ROOT CASH CASH
REAL ESTATE VNQ Vanguard REIT ETF

 

Asset Class Number of funds
Balanced Fund 0
REITs 2
Fixed Income 3
Commodity 2
Sector Fund 0
Foreign Equity 1
Emerging Market Equity 1
US Equity 3
Other 1
Total 13

Using these funds as candidates, we generate and monitor 3 model portfolios using asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA). 

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)

Ticker/Portfolio Name YTD
Return**
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. 

Disclosure:

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.