An Introduction to the 7 Twelve Portfolio

Some of you may remember when I wrote about Craig Israelsen’s portfolio a couple of years ago. Back then, his portfolio consisted of evenly weighting seven asset classes into a portfolio. The goal of the portfolio was to offer lower risk (through diversification) and a good return. You can read my posts about the Israelsen Portfolio here.

Dr. Israelsen sent me an email recently to let me know that he had published a book on his portfolio and asked if I would take a look at it. The book, 7Twelve: A Diversified Investment Portfolio with a Plan*, detailed a somewhat altered portfolio from the one I wrote about in the beginning. The 7 Twelve portfolio is composed of 7 asset classes with 12 mutual funds (or exchange-traded funds) representing those asset classes:

U.S. Stock

1. Large companies
2. Medium-sized companies
3. Small companies

Non-U.S. Stock

4. Developed companies
5. Emerging companies

Real Estate

6. Real estate


7. Natural resources
8. Commodities

U.S Bonds

9. Aggregate bonds
10. Inflation-protected bonds

Non-U.S. Bonds

11. International bonds


12. Cash

As you can see, it’s a pretty diversified portfolio. Each fund represents 8.3% of the total portfolio. Based on that, over 33% of the portfolio would be in bonds and cash.

The book goes into a lot of detail about the portfolio. The author even has a list of mutual funds and exchange-traded funds for each of the asset classes, which is very helpful. Browsing through the list, I’m certain an investor could construct a low cost portfolio.

As far as rebalancing goes, Dr. Israelsen used monthly rebalancing in his examples. I would probably rebalance once a year.

I’ll be looking more into the 7 Twelve portfolio in the next few days. I’m even working on an email interview with Dr. Israelsen. Right now I just wanted to give you an introduction to the concept and the book. For more information, check out Dr. Israelsen’s website, For those who are interested, you can check out the latest performance report.

*Affiliate Link

Warren Buffett’s Search for the Next Walmart

I just read an interesting Motley Fool interview with Prem Jain, author of Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing*, a book that has been in my to-be-read stack for a couple of months. Professor Jain was asked for pointers that investors can use in assessing company management. His response:

1. Is the management competent?

2. Are management incentives aligned with the shareholders?

For the first point, Professor Jain said that he looked at “…earnings, the return on equity, and the allocation of cash flows for more than 25 years.” He also mentioned that a “…a carefully computed return-on-equity ratio is probably the most important metric for determining management competence.” Nothing really surprising here.

On the second point, I thought this was interesting:

“I check the number of shares held by the CEO and other top managers in the company. I am suspicious of CEOs who are awarded a large number of stock options but hold only a small number of shares.” Professor Jain also likes to see management promoted from within the company and management types that live a frugal lifestyle.

I, too, like to see management with large stakes in the company’s stock (preferrably not options that can be manipulated with short-term earnings) rather than large paychecks. I also don’t like huge severance packages because they present a moral hazard. CEOs that drive a company into the ground should not be fired and walk away with a huge severance package.

I guess I’m going to have to get Professor Jain’s book off my shelf and give it a read.

*Affiliate Link

Jeffrey Hirsch: Dow 38,000 by 2025

Fox Business just ran a story about Jeff Hirsh’s prediction that the Dow will begin a superboom in 2017 that will send it to 38,000 by 2025. Hirsh says that between now and 2017, we will see a sideways market.

To get to that number, the Dow would have to have an average rate of return of 8.73% over the next 15 years (I did some rounding). If you use 2017 as your starting point and today’s market level (since Hirsch is predicting a sideways market between now and 2017), you’re looking at a 14.97% rate of return.

Hirsch says that to get from here to there, we’re going to need some sort of technological advancement to get companies hiring, which will create the boom.

When you think about it, an 8.73% annual rate of return isn’t unheard of. It’s just that it’s hard to map out the road from here to there given our current economic situation.

I’ll post a link when one becomes available.

Thoughts? Does the Dow at 38,000 by 2025 seem like a stretch to you?

Ten for Tuesday, September 28, 2010

This is the final Ten for Tuesday for the month of September. Hard to believe we are nearly 3/4ths of the way through the year.

1. First off, Moolanomy is hosting a giveaway. The winner of the giveaway will get a $150 gift card. That’s a nice giveaway!

2. The Unintentional Housewife’s Budget Tip #3: Use Cash

3. Don’t let life get you down. Instead, Swing Away

4. Budgets Are Sexy has 5 things he feels kinda bad about.

5. Jonathan take a look at a variable annuity fee breakdown.

6. Jill has 5 steps to building and keeping good credit.

7. FMF: This couple is killing me.

8. Larry Swedroe likes The Coffeehouse Investor. So do I.

9. Are you broke? Try budgeting.

10. Finally, Emily writes about the important role that the employer match plays in retirement planning.

BlackBerry to Introduce the PlayBook Next Week?

It seems everyone is trying to get into the tablet market these days. According to some of the headlines I’m seeing this morning, BlackBerry may introduce their own version of the table computer next week.

I have been a BlackBerry user for nearly two years. I love my BlackBerry Bold 9000 and I’ll probably stick with BlackBerry with my next phone.

That said, I wonder: Is it a good move for BlackBerry to try to get into the tablet market? For one thing, BlackBerry does not have the apps available that Apple has nor does it have iTunes. In other words, what would be the purpose of the BlackPad? I could see BlackBerry focusing on the corporate market by offering the following features:

• Presentation software that’s compatible with Power Point. I read an article in a financial planning magazine about how some planners are using iPads in their business because they are easier to use in client meetings than a laptop.

• USB slot(s). The iPad doesn’t have a USB slot. I’m not sure how important this is but I would think it would be helpful backing up software and information.

• Docking station so that it can run like a computer when at home or at the office.

• Build up an app store. This is killing BlackBerry as far as I’m concerned.

Regardless, I’m still not sure I would be interested in a BlackPad (or any pad for that matter).

The Recession is Over?

According to the NBER, the recession is over. Not only that, it ended in June, 2009:

The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

The very next paragraph is also important (underlining mine):

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

That first sentence confuses me. A “trough” marks the end of the declining phase but the committee did not conclude that conditions have improved? I guess what they are saying is that things haven’t really gotten better but they also haven’t gotten worse.

To me, it feels like we are still in a recession. Sure, we may not be “officially” in a recession but things definitely have not felt “better.” I realize “feelings” aren’t the same as facts. The S&P 500 Index is up nearly 28% (July 2009 – intraday, September 27, 2010) but unemployment is still over 9.6% (much higher if you include those who have given up looking for work) and GDP, although growing, only grew at an annual rate of 1.6% during the second quarter. To top all that off, the government is still fretting about the economy. So, although we may not be in a recession, try telling that to an unemployed person.