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%|
* Day change on 01/06/2014.
The following shows the corresponding ETF funds used in the portfolio:
|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|
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
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.
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.