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The 7Twelve Portfolio’s Performance for 2010

By JLP | January 4, 2011

Here are the year-end returns for the 7Twelve Portfolio that was detailed in Craig Israelsen’s book, 7Twelve: A Diversified Investment Portfolio with a Plan*:

As you can see, the results looks pretty good—especially when you consider the fact that one-third of the portfolio is in bonds and cash. Dr. Israelsen gives much more detailed information in his book, which I reviewed here. I was also able to conduct an interview with Dr. Israelsen. I’m going to keep tracking this portfolio. I’ll rebalance back to the orginal allocation and post updates monthly or quarterly (as time permits).

*Affiliate Link

Topics: 7Twelve Portfolio, Index Funds, Investing | 17 Comments »


17 Responses to “The 7Twelve Portfolio’s Performance for 2010”

  1. BG Says:
    January 4th, 2011 at 8:47 am

    A 14.26% return while holding 16% in cash-equivalents (TIPS & Money Market), and still beating the S&P 500 — very nice.

  2. Travis Says:
    January 4th, 2011 at 10:05 am

    Looks kinda crappy to me.

    The 3 year beta of this portfolio is .88. This means it is taking on 12% less risk than the S&P 500 index while generating 5.4% less return.

    In other words, its basically matching its expected risk indices and not adding much alpha at all. This could easily be replicated by two or three ETF’s, not 12.

    The fixed income portion is especially troublesome in today’s rising rate environment since it has way too much long duration exposure. 2011 could be very cruel to this portfolio.

    I could easily build a portfolio with 10-20% lower risk than this while producing equal, if not higher, returns.

  3. BG Says:
    January 4th, 2011 at 10:33 am

    Travis: the portfolio beat the S&P 500 in 2010, with obviously less risk due to the cash/bonds. Are you saying that the S&P 500 is beating 7twelve over three year period?

  4. Travis Says:
    January 4th, 2011 at 11:13 am

    No, it underperformed the S&P 500′s gain of +15.06%. And it’s not as risk averse as it appears with so much in cash/bonds since many of its investments are much riskier than the S&P 500.

    I’m just saying you could do a lot better than this portfolio with just a little investing knowledge.

    For starters, 8.33% in money market is crazy in this environment. Dead money with tons of appropriate cash alternatives out there.

    And the fixed income portion of medium to long duration is likely to get hammered with rising interest rates.

    And that’s on top of the fact that indexing like this gives you very little risk-adjusted excess return, or alpha. You’re a slave to the market’s swings with little downside protection.

  5. BG Says:
    January 4th, 2011 at 11:58 am

    Travis) I think the portfolio is 65% equities, 35% bonds/cash.

    The reason that cash/bonds are even in the mix is because the portfolio is supposed to be made up of uncorrelated assets — when something goes up, something else should go down (ideally). With the expectation that everything will trend up with time.

    The portfolio is supposed to be automatically rebalanced (yearly, quarterly, monthly, whatever) — so the gainers are sold to buy more of the losers. This means that you are always buying low and selling high, in an static/index type of model (not an actively managed portfolio).

    I semi-agree with you on the cash part though, as that is purely defensive for a crash scenario (like we had in 2008) — you’d be selling cash to purchase stocks at the bottom of the market in 2008: which I’m sure turned out to be a great move with this portfolio that year. But in 2009 & 2010, the cash portion just held you back.

    Still, a 65% equities portfolio with nearly the same returns as a 100% equities portfolio doesn’t sound bad to me. If you have a better mix: We’d all love to hear it!! (especially if you can accomplish the same feat with less than funds).

  6. Andy Says:
    January 5th, 2011 at 2:47 pm

    My overall 401k return for 2010 was 17.0% using 5 different index funds (Mainly S&P500 and Russell 2500 with some foreign stuff mixed in), a very small amount of company stock, and a little bit of stable value to use as a sort of capacitor to store money when stocks are too high to buy.

    Anyone else beat this? I’d like to learn from you if so.

  7. Travis Says:
    January 6th, 2011 at 8:15 am

    My time-weighted return for 2010 was +32.60% (and +80.02% in 2009).

    Of course, I have a lot of Apple stock on top of my diversified weightings. AAPL was an absolute steal 3 or 4 years ago.

    It’s all about risk though, Andy. It’s hard to say if your risk-adjusted return was any better than the one given the article. I could run one real quick for you if you give me your allocation breakdown.

  8. JLP Says:
    January 6th, 2011 at 8:38 am

    Travis,

    I’m curious…is there a way to back out the AAPL stock and rerun your numbers? Clearly AAPL has helped your results.

  9. Andy Says:
    January 6th, 2011 at 9:20 am

    Travis, yeah, I realize there are a lot of variables. I am talking strictly of my 401k in which the only individual stock I can buy is that of my employer. I do invest in that but not very much… currently a little under 3%. Someday I might creep it up as high as 10% but no more. Otherwise, all index funds and a little bit of stable value for “storage”. More later when I have more time, but I like your numbers! I have a voracious risk appetite but have limited options. 6% into my 401k (and a 6% company match) are all I’ll be able to afford for a long time with how little they’re paying me, so my only hope is the best possible returns.

  10. Travis Says:
    January 6th, 2011 at 9:38 am

    JLP,

    Good question, but it would be hard to back AAPL out (both from a mathematical standpoint as well as a portfolio standpoint). Apple serves as my primary US large cap blend-growth holding, so backing it out would put the rest of my portfolio out of whack. Apple also has a high beta of 1.40ish, so I keep that in mind and generally build the rest of my portfolio with lower-risk investments.

    My four other biggest holdings are active funds and are no slouches either, however. ODMAX was up 82% in 2009, DODFX up 47%, NVOAX up 51%, and my bond fund TPINX was up 19%.

    I don’t yet have the official 2010 numbers on these.

    My overall portfolio beta last time I ran the numbers was around 1.10, so I’m expected to do 10% more than whatever the S&P 500 does. But as you can see, the actual returns are far exceeding this – generating extraordinary amounts of alpha.

  11. BG Says:
    January 6th, 2011 at 11:15 am

    Travis) You ‘core’ holding is a single stock?!?

    Your investment style is definitely not for me — way too much risk. If Steve Jobs dies, AAPL would tank 60+% overnight. Also, those funds you mention (with 5.25% sales-loads) are not available in my 401-k.

    Yes, I concede that someone get make huge returns, while taking on huge amounts of risk.

  12. Travis Says:
    January 6th, 2011 at 12:38 pm

    Actually, with a beta of 1.10 my risk is only 25% higher than the model used in this article – the model which you called fairly low risk with so much in cash/bonds.

    That’s not extreme by any measure.

    I’m young. A beta of 1.10 is appropriate if you believe in stocks for the long-term, and it’s rewarded me handsomely. For 25% more risk, you are talking about double or triple the returns.

    I buy the funds with zero loads. And if they are inside a 401k plan, there would be zero loads as well.

  13. BG Says:
    January 6th, 2011 at 4:59 pm

    Travis) Could you explain this ‘beta’ thing for me? You seem to indicate that it is a risk indicator, does it take into account the risk of what happens to the stock if Steve Jobs dies?

    In your portfolio, if Steve Jobs dies (and AAPL tanks because of that), you will suffer massive losses. In JLP’s portfolio, it probably wouldn’t even register as a blip; yet you claim your portfolio is less “risky”.

    Perhaps we have different definitions of ‘risk’? I’m not keen on the math behind ‘beta’, but it looks to be just a correlation indicator: if AAPL has a beta of 1.4 to the S&P 500, then AAPL is expected to do 40% more of what the S&P 500 does (either up or down).

    But since AAPL is not a diversified index/mutual fund, it has extremely high risk because of that fact: which you don’t appear to be taking into account.

    BTW: congratulations on the amazing run with that stock! You took on the extra risk (whether you realized it or not) and got rewarded handsomely for it.

  14. Travis Says:
    January 7th, 2011 at 10:03 am

    Beta is the primary risk measure I use for portfolios. It is much more than a measure of correlation – it’s regression analysis, and it gives you a better long-term picture than standard deviation. It measures your portfolio’s risk against the market. A beta of 1.0 implies a portfolio that is equally as risky as the market.

    You’re right the beta of a stock is much more fluid than the beta of a diversified fund or index. Still, I would argue that the beta reflects most of your fears. That’s what it does. And don’t forget Apple stock did plummet from $200 to $80 in 2008. Yes, my portfolio was down more than the market that year, but my one position in Apple did not kill my entire portfolio. And don’t forget about upside risk. A stock can also do better than an index, so beta figures that in as well.

    And I never said my portfolio was less risky. I said it was 25% more risky than the one in the article. What I did say was that I could build a less risky portfolio of funds and indices (no Apple stock) that generates equal or higher returns.

  15. BG Says:
    January 7th, 2011 at 11:56 am

    “And I never said my portfolio was less risky.” — that’s right, I misread your post.

    “What I did say was that I could build a less risky portfolio of funds and indices (no Apple stock) that generates equal or higher returns.”

    That’s what I want to see!
    :)

  16. Andy Says:
    January 10th, 2011 at 11:35 am

    At this point my head is spinning a little! Guess I’ll stick with my current contrarian strategy for a while. Though I did notice that the target 2040 fund only did slightly worse than me (about 16.2% for 2010). I’ll be keeping an eye on that one. If I could be completely hands-off and get only slightly worse returns, there are other things I could do with my time.

  17. portfolio Says:
    January 25th, 2011 at 6:45 pm

    Travis
    yep–I’m sure you could have built a portfolio that beat last years returns…if you are investing a year at a time, then I guess you’re a genius. Except most folks invests for many years.

    I’ve been using the 7/12 for myself, and clients, for almost 4 years— and I would wager anything you claim to have, that you havent beaten me over that–or any other period.
    By carefully selecting the individual investments that fill the 12 classes, we have returned about 11.5% annual(back tested, of course) for the last 20 years. Beat that.
    How much were you down in 2001-2002? How about 2008-2009?
    Me? Positive returns every year…
    This potrfolio works..period. But, it takes some work. And you have to use different investments than the Dr. uses.

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