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.

The following shows the index funds and its latest holdings of an independent portfolio tracked on MyPlanIQ.com: 7Twelve Original Portfolio

Asset Fund in this portfolio Price change* Percentage
US Equity VFINX (Vanguard 500 Index Investor) 0.25% 7.46%
US Equity VIMSX (Vanguard Mid Cap Index Inv) 0.44% 8.61%
US Equity NAESX (Vanguard Small Cap Index Inv) 0.61% 8.84%
Non US VDMIX (Vanguard Developed Markets Index Inv) 0.09% 7.14%
Non US VEIEX (Vanguard Emerging Mkts Stock Idx) 0.83% 9.30%
REIT VGSIX (Vanguard REIT Index Inv) 0.46% 8.46%
Resources FNARX (Fidelity Select Natural Resources) 0.28% 13.02%
Resources QRAAX (Oppenheimer Commodity Strat Total Ret A) 0.0% 3.53%
US Bonds VBMFX (Vanguard Total Bond Market Index Inv) 0.19% 8.52%
US Bonds VIPSX (Vanguard Inflation-Protected Secs Inv) 0.23% 8.40%
Non US Bonds OIBAX (Oppenheimer International Bond A) 0.0% 8.35%
CASH CASH (CASH) 0.0% 8.37%

* Day change on 01/06/2014.

The following shows the corresponding ETF funds used in the portfolio: 

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

In addition to the original portfolio 7Twelve Original Portfolio , we construct an investment plan  Israelsen 7Twelve using the above funds. We then also generate two asset allocation portfolios using 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 shows how these portfolios have performed in 2013 and in the past 1,3,5 and 10 years:

 Portfolio Performance Comparison

Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Israelsen 7Twelve Strategic Asset Allocation – Equal Weight Moderate 1.8% 4.6% 10.0% 0.78 7.0% 0.45
Israelsen 7Twelve Strategic Asset Allocation – Optimal Moderate 6.0% 6.1% 10.6% 0.8 5.7% 0.35
Israelsen 7Twelve Tactical Asset Allocation Moderate 10.2% 7.7% 9.4% 0.92 10.1% 0.84
7Twelve Original Portfolio 7.1% 5.7% 11.8% 0.77    
VBINX (Vanguard Balanced Index Inv) 15.3% 10.3% 12.6% 1.07 6.8% 0.47

**YTD: Year to Date

Year by year detailed comparison >> 

One can see that the diversification hurt a bit on the 7Twelve original portfolio, compared with the 60% US stocks and 40% bonds Vanguard balanced index portfolio VBINX. Furthermore, the trend following momentum based  tactical portfolio using these funds has done better for the past 1 and 3 years, losing in the 5 year period. 

The diversification in emerging market stocks, commodities and international bonds hurt the portfolio in 2013. However, we believe the diversification of the twelve funds in this portfolio will deliver solid returns in a long period of time. 

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.