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The 7 Twelve Portfolio
Old 06-22-2017, 05:06 PM   #1
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The 7 Twelve Portfolio

So sometime during the 2009 market meltdown i read about this 7 twelve strategy. It seemed brilliant. At the time, its performance crushed everything they compared it to. I didnt go into it for 2 reasons, 1) By the time i read up on it i was already committed to my AA that me and the bride agonized over. 2) I had already tried thru my broker every other hair brained scheme that was a great idea until i invested, then they turned into dogs. Somehow word must have gotten out that the Blue Collar Guy was invested in it, seems it turned into a loser too. Yeah ill stick to my AA, thank you Mr Bogle i owe you Sir.
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Old 06-23-2017, 03:45 AM   #2
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I looked up the 7Twelve portfolio online. It consists of 12 funds across 7 different asset classes.

I see several problems with it.

Very complicated. If one wants diversification they can get it easily and at low cost via 3 funds: a US total market index fund, an ex US total market fund, and a total bond fund. Or just buy the Total World Fund and a total bond fund.

The 7Twelve holds over 8% in cash.

This idea feels like Paul Merriman's Ultimate Buy and Hold Strategy, which has shown good results, and if I wanted a complicated allocation with lots of funds to buy and manage I guess I would go with that one.

But there are better, simpler ways to get diversification at a low cost.
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Old 06-23-2017, 06:59 AM   #3
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In a nutshell... equal 8.3% pieces.



I wonder what low-cost core funds are available for Natural Resources and Commodities. My slice & dice AA has many of their pieces (excluding Real Estate, Natura Resources, Commodities and TIPS but adding Emerging Market Debt). Interesting idea.
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Old 06-23-2017, 07:08 AM   #4
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7Twelve Portfolio: Back-Tested Performance

"The 47-year standard deviation of return for the multi-asset portfolio is roughly 40% smaller than the standard deviation of the S&P 500 Index (meaning it is 40% less volatile) – yet the 47-year performance is nearly the same."
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Old 06-23-2017, 07:50 AM   #5
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OP... thanks for sharing. I had not heard of 7Twelve before. I read "Asset Allocation: Balancing Financial Risk" by Roger Gibson many years ago. One of the take a ways was that even a small investment in a diversifier such as commodities could have a significant improvement on risk -- volatility reduction. I did not see much free info on 7Twelve.
I have not always been as rigorous at rebalancing as I should, but I have used more than 3 or 4 funds. Just looking at US equities, large cap, mid cap and small cap often behave differently. Investing in these using low cost index funds and rebalancing as the AA shifts should be beneficial long term. Just using a single US equity fund would ebb and flow. The same would happen in international: EM, Europe and Asia.

So if one uses a 3 fund AA, why rebalance? If you could find a low cost world stock fund, what would be the advantage of using 2 equity funds? OK, you can decide your allocation to each fund.

I can't see why 3 funds verse 12 funds would be much more complicated unless I was doing all the math using a pencil. In a spreadsheet the can pull data from the internet it would update, tell you when your out of balance and the trades that need made. To me this seems straight forward.

8% cash does seem high to me. Some retirees take at least a years spending in cash. I would think this would count toward it. Also some hold several years of spending (2 to 5 years) to protect against a down turn. Again I would count this against the cash allocation. So maybe this is not as high as it first sounds... but still seems high to me.

I think the question is really "how many diversifiers are you wanting to support?"
Why would one complicate it with 3 funds when 2 would do?
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Old 06-23-2017, 09:00 AM   #6
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I think this portfolio was invented by Craig Israelsen after a big run-up in commodities and real estate. And TIPS had done quite well, too.

In fact, TIPS were going to solve all the problems of folks who were too risk averse to invest in equities. We don't hear much from Zvi Bodie anymore, but I think that's because he's aged out of being a finance professor.

The commodities (oil, gold, minerals) kind of stopped going up and went down.

So whenever an asset class goes into the tank and stays there people stop rebalancing into it.

And that's the problem with dividing things up into too many fractions. There is no place to hide if a well-separated asset class does poorly for years and years. So in some sense, the 3-fund portfolio espoused by bogleheads with US stocks, foreign stocks, and bonds leaves many hiding places for poorly performing things to hide out for awhile, thus no one has to think about them until they get noticed again.
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Old 06-23-2017, 09:03 AM   #7
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Quote:
Originally Posted by bingybear View Post
... Why would one complicate it ... when 2 would do?
This.

Large CAP + Mid Cap + Small Cap = Total US Market
Developed + Emerging = Total International Market

Real Estate, Natural Resources, and Commodities are already represented in a Total US Market portfolio, so additional concentration is simply a tilt that may or may not work out over the ten years it would take to run the experiment. Also, the academic research says that if you want a tilt, value and small-caps are the ones to choose. I'm a little skeptical going forward because everyone knows this, so it seems like value and small-cap prices are likely to be higher and hence they become less of an opportunity. But, again, running the experiment is a ten year task.

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Old 06-23-2017, 10:27 AM   #8
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Originally Posted by OldShooter View Post
This.

Large CAP + Mid Cap + Small Cap = Total US Market
yes and no. Say you buy
Large CAP x%
Mid Cap y%
Small Cap z%

and lets assume that on the day this is purchased that these % make your equation true. Now when the original % get to some predefined level of out of balance you rebalance to the original percentages. The question is after rebalancing a number of times... do the equations still hold true?
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Old 06-23-2017, 11:01 AM   #9
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Originally Posted by bingybear View Post
yes and no. Say you buy
Large CAP x%
Mid Cap y%
Small Cap z%

and lets assume that on the day this is purchased that these % make your equation true. Now when the original % get to some predefined level of out of balance you rebalance to the original percentages. The question is after rebalancing a number of times... do the equations still hold true?
Yes, of course the arithmetic of the allocation could make the equation less than exact, but I think the question is, actually: "So what?"

Even the robovisor advertisements (Betterment, etc.) only credit rebalancing with a 50bps edge and they are talking about much more macro rebalancing than fussing within US categories. And, if careful rebalancing at this level is effective, it is probably another ten year experiment to know the answer. So. with respect, I have no interest. YMMV of course.

One of the issues, always, is "Is the military carefully preparing to fight the last war?" The futility of the Maginot Line illustrates. I think that too much, too micro, rebalancing has aspects of this as well. Again, YMMV.
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Old 06-23-2017, 05:32 PM   #10
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Sums it up for me:

"Firstly, advisory firms (including robo-advisors) have an incentive to make their portfolios look smart/complicated. If it’s a simple total market portfolio, people might wonder: why not just handle it on their own? Or why not just use a less expensive target-date fund?"

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YMMV
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Old 06-26-2017, 08:02 PM   #11
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I don’t understand how anyone finds this a difficult concept or difficult to implement. I think it would take me 30 minutes to set up and an hour to adjust once a year. What am I missing? 12 funds and you pick a rebalance time and rebalance.
And you should expect this type of portfolio to be outperformed since 2009 in a one way up market with no inflation --- it makes it’s ground when the market declines or inflation rears it’s ugly head. Would be a better portfolio for someone already retired as it would lessen the chance of withdrawal rates getting too high. I think it is a sound strategy. Up 65% since 1/1/2009
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Old 06-26-2017, 10:10 PM   #12
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I use 7Twelve heavily. I follow Israelson's writings and attended his last annual webinar.

7Twelve has been called "stock-like returns with bond-like risk," and the annual return / std deviation numbers bear that out to some extent.

I implemented the strategy at Schwab recently, and was able to do it with 10 no-transaction-fee ETFs and two transaction fee. So buying the whole portfolio cost me ten bucks.
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