Archives For 7Twelve Portfolio

This past weekend’s WSJ had an article outlining some things investors can do to protect themselves from a falling dollar. Here’s a quick summary of that article:


The classic stock play during periods of dollar weakness is large-cap companies that export heavily: Companies in the S&P 500 index derive nearly half of their revenues from abroad, notes Howard Silverblatt, senior index analyst at Standard & Poor’s.

Such companies benefit from a weaker dollar in two ways. In the shorter term, profits rise as companies convert their foreign sales into dollars. In the longer term, their products become more competitive in overseas markets, boosting revenue as well.


During the 12 months beginning in April 1986, the dollar fell 15%, while yields on the 10-year Treasury rose only from 7.4% to 7.5%. By the end of the year, she notes, yields had spiked to 8.9%, as the dollar plummeted an additional 11%.

Basically, if the dollar’s falling, you don’t want to be in U.S. Treasurys. Instead, look to invest internationally through mutual funds.


Commodities can serve as a hedge against the falling dollar because they are priced in the U.S. currency—so as the dollar weakens the price of the commodity rises. That’s one reason why the S&P GSCI Commodity Index, a basket of energy, metal and agricultural commodities, has gained 19% this year.

The article is quick to point out that commodities have risen significantly over the last 12 months and any sort of reversal in the dollar would spell trouble for commodities. In other words, bubbles can form in commodities too.


Two factors are particularly crucial in foreshadowing whether a currency will appreciate in the long-term: a nation’s interest rates and its current-account balance, or the amount of money owed to it by other nations (or the amount it owes others). When interest rates rise, like in Brazil and Australia, investments denominated in those currencies become more attractive to investors seeking yield.

Personally, I think playing currencies is no different than gambling. I’m sure the FOREX people would disagree.

All of this is fine and good but these moves come with risks and entail a certain amount of market timing. In other words, a person would make these moves IF they thought the dollar was going to continue sliding. A different and better way to handle this would simply be through diversification. Consider using the 7Twelve Portfolio, which invests in 7 different asset classes, using 12 different funds. You can read about the strategy here.

I have been meaning to post an update on the 7Twelve Portfolio but haven’t done so this year. Here are the latest numbers as of this morning’s prices (you can click on the graphic to view a PDF version):

For those of you not familiar with the 7Twelve Portfolio, I would suggest you start here:

An Introduction to the 7Twelve Portfolio

10 Questions for Craig Israelsen, Author of “7Twelve”

The 7Twelve Portfolio’s Performance for 2010

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

Here are the total returns for the 7 Twelve Portfolio through October 2010 (Click to see a larger version):

NOTES: This portfolio assumes $1,000,000 initial investment with a 5% income withdrawal on December 31, 2009 for a net investment of $950,000. The portfolio also does not include trading costs.

The Vanguard REIT Index ETF is up over 24% year-to-date and now makes up 9.49% of the total portfolio.

This is a continuation of yesterday’s post.

I ran the numbers under the following two scenarios:

• $500 per month with no rebalancing.

• $500 per month with annual rebalancing.

Here are what the numbers look like:

I have to say that this one surprised me until I considered everything that has happened over the last 19 years. So much of portfolio returns are due to timing. The equity portion of the portfolio grew nicely throughout the 90s but cratered with the bursting of the internet/tech bubble in the early 2000s and then again in 2007 and 2008.

So there you have it. Bonds beat stocks in this scenario so bonds are better, right? Not so fast. Take a look at the next graphic, which is like the first graphic only this time, the portfolio is rebalanced back to the original allocation at the end of each year.

Rebalancing was the difference maker. The sweet spot seems to be around a 50/50 split between stocks and bonds. Rebalancing is important because it adds a sense of discipline to the portfolio in that investors are selling appreciated assets and buying more of assets that have decreased in value. This was particularly important over the last 19 years due to the way the stock market behaved.

It’s important to note that we shouldn’t focus too much attention on a two asset portfolio. This was more of an exercise in seeing how stocks and bonds work together.

What does the future hold? Well, that’s anybody’s guess. If we have inflation (as many economists are expecting), U.S. bonds will not do well. If we don’t get our economy back under control, stocks won’t perform well either.

That’s why at this point in the game, I’m thinking a prudent portfolio is something like Craig Israelsen’s 7Twelve portfolio, which invests in 7 different asset classes via 12 different funds/ETFs. For those who are interested, I interviewed Dr. Israelsen recently.

I spent some time over the weekend putting together a real life 7Twelve Portfolio using exchange-traded funds. Here is what I found:

Not too bad for a diversified portfolio. I don’t have a lot of history for this portfolio. I’ll try to go back as far as I can using exchange-traded funds. You can view performance of the strategy by viewing the performance update PDF from the 7Twelve website.


10 Questions for Craig Israelsen, Author of “7Twelve”

I’m excited about this giveaway, which is a copy of Craig Israelsen’s “7Twelve: A Diversified Investment Portfolio with a Plan.” I wrote about the book recently (here) and I posted an interview with Dr. Israelsen. I would recommend you read both posts and then, if you think you would like a chance to win a copy of the book, leave a comment below. Please remember my two rules:

1. You must be a resident of the U.S. or Canada.


2. You can only enter one time.

The winner will be announced on Monday morning. Good luck.