7Twelve Portfolio Overview
Background and Philosophy
The 7Twelve Portfolio was developed by Dr. Craig Israelsen, a financial expert and professor at Utah Valley University. Israelsen designed this portfolio in 2008 to provide broad diversification across multiple asset classes while maintaining simplicity. The philosophy behind the 7Twelve Portfolio is rooted in the idea of reducing volatility and risk through equal-weighted allocations to 12 different ETFs, representing seven distinct asset classes. This approach aims to smooth out returns over time by avoiding overexposure to any single asset class.
Asset Allocation and Diversification
The 7Twelve Portfolio consists of 12 ETFs, each allocated approximately 8.33% of the portfolio. The asset classes covered include:
- Cash Equivalents (BIL)
- U.S. Bonds (BND, VTIP)
- International Bonds (BNDX)
- Commodities (GSG, IAU)
- U.S. Stocks (IJH, VIOO, VV) (covering large, mid, and small caps)
- International Developed Stocks (VEA)
- Emerging Market Stocks (VWO)
- Real Estate (VNQ)
Diversification & Risk Level: The 7Twelve Portfolio is highly diversified, spreading risk across equities, fixed income, commodities, and real estate. This structure helps mitigate downturns in any single market segment. However, the inclusion of commodities and small-cap stocks may introduce additional volatility compared to a simpler stock/bond portfolio.
Pros:
- Broad diversification reduces reliance on any single asset class.
- Equal weighting ensures no single holding dominates performance.
- Rebalancing opportunities arise from diverging asset class performance.
Cons:
- Higher complexity with 12 holdings compared to simpler portfolios.
- Commodities and small-cap stocks can be volatile.
- May underperform during strong bull markets in large-cap stocks.
Application for Retirement Accounts (401(k) & IRA)
The 7Twelve Portfolio can be adapted for retirement accounts, though investors may need to adjust based on available fund options in their 401(k) or IRA.
Implementation in a 401(k):
- Look for index funds or ETFs that match the asset classes in the 7Twelve Portfolio.
- If an exact match isn’t available (e.g., no commodity fund), allocate that portion to a broader asset class (e.g., stocks).
- For example:
- U.S. Stocks: Use an S&P 500 or total market fund.
- International Stocks: Use a developed markets fund.
- Bonds: Use a total bond market or Treasury fund.
IRA Adaptation: Since IRAs typically offer more flexibility, investors can directly purchase the ETFs listed in the 7Twelve Portfolio.
Note: Many 401(k) plans do not offer commodity funds, so investors may need to allocate that portion to equities or bonds instead.