A Portfolio For All Seasons

Almost everyone agrees that an investment portfolio needs to be diversified. However, there is a great deal of disagreement on what sort of diversification makes sense in a given market or at different phases of life. Craig Israelsen, Ph. D, a professor at Brigham Young University has examined a number of possible models and proposes a 7Twelve Portfolio as core portfolio for all seasons. He considers the core portfolio as the foundational, unchanging part of a portfolio that does not vary over time. Like most students of investment, Israelsen allows that this core will become a larger or smaller portion of an entire portfolio over time but it will never go to zero, even in extreme old age.

First Israelsen would suggest that an investor place 65% of his assets in equity and diversifying assets and 35% in bonds and cash. These two broad classes are then broken down into 7 components and then into 12 sub-components as listed below. Each sub-component is allocated an equal 8.33% of the total. Exchange Traded Funds (ETF) or mutual funds are the preferred vehicle for the professor’s model.

1.0 Equity and Diversifying Assets

1.1 U.S. Equity (Note: 25% of the total is invested in U.S. Equities)
1.1.1 Large Cap
1.1.2 Mid Cap
1.1.3 Small Cap

1.2 Foreign Equity
1.2.1 Developed Markets
1.2.2 Emerging Markets

1.3 Real Estate
1.3.1Global Real Estate

1.4 Resources
1.4.1 Natural Resources
1.4.2 Commodities

2.0 Bonds and Cash

2.1 U.S. Bonds
2.1.1 U.S. Aggregate Bonds
2.1.2 Inflation Protected Bonds (TIPS)

2.2 Foreign Bonds
2.2.1 International Bonds

2.3 Cash
2.3.1 U.S. Money Market

Comparing his model portfolio to a core consisting of 100% in U.S. stocks and the more typical portfolio split 60% U.S. stocks and 40% bonds, the results are pretty dramatic. Across the “lost decade” between 2000 and 2010 an all stock portfolio would have lost money, a 60/40 portfolio would have provided a 2.56% annualized return. A 7Twelve asset core would have doubled in value over the worst decade in 80 years, not too shabby.

Israelsen contends that his research indicates this is a core portfolio for all seasons. He believes it will provide the best possible protection regardless of investor age or the current financial situation. I would certainly have some questions for the good professor. What is a U.S. Aggregate Bond Fund? Why so little cash? Why didn’t energy make the cut as a sub-category? I am familiar with U.S. REITs and I have seen foreign companies with extensive real estate holdings, but I am not familiar with Global real estate funds. Also, Israelsen reminds me that I lack any position in developing markets. I know this is a mistake, but the BRIC countries, Brazil, Russia, India, and China are all a little scary to this aging American Investor.

I have posted a number of articles on various diversification strategies and will continue to do so as I discover new ideas I think are worth consideration or really bad strategies. This one sounds pretty solid. More information on this topic can be found on line at:

www.reit.com
http://www.7twelveportfolio.com/