Craig Israelsen’s 7Twelve: A Diversified Investment Portfolio with a Plan is an excellent read about a very well-thought-out investment portfolio. Dr. Israelsen named the portfolio “7Twelve” after its components: seven asset classes divided into a total of twelve funds. This, he said, is how an investor can gain investment breadth as well as depth.

In fact, that was one of the main messages of the book: so many investors swear by the simple 60/40 stocks/bonds investment model, which can be very effective but holds a significant level of risk. On the other hand, diversifying beyond large-cap stocks and municipal bonds into international, up-and-coming stocks, as well as investing in commodities and real estate, can give greater variety to a portfolio and safeguard it against economic upheaval. When it was all said and done, stocks made up about 65% of the entire 7Twelve portfolio. But, dividing it into seven asset classes (instead of the traditional two) and adding depth by introducing more than one fund in certain classes provided a greater return with less risk than the two-fund portfolio.

Of particular interest in adding breadth to the portfolio were the real estate and commodities funds. Stocks, whether large-cap or small, correlate strongly with one another; if one fund takes a dive, it’s likely that all of them will. Commodities, on the other hand, represent resources whose sale is often completely unrelated to the trading, climbing, and dipping of the stock market. Many people refer to these funds as “alternative assets”, but in times of what seems like nearly-universal economic struggle, commodities and real estate can become “critical assets. Without them,” Dr. Israelsen said, “a portfolio has lower return and higher risk.”

One of the secrets to maintaining balance throughout so many funds even with a high percentage of stocks is to divide up the amount invested equally into each of the twelve funds. That means that 8.33% of the total portfolio is distributed to a large-cap fund, 8.33% to a mid-cap fund, 8.33% to a small-cap fund, and so on through the remaining nine funds: non-U.S. developed company stocks, non-U.S. emerging company stocks, real estate, natural resources, commodities, aggregate bonds, inflation-protected bonds, international bonds, and U.S. cash. It’s important that the 8.33%-per-fund balance is reestablished on a regular basis (annually, Israelsen said, for the best performance) so that growth and risk management maintain their proper course.

Dr. Israelsen cautioned as well that the 7Twelve portfolio doesn’t need to make up the entirety of your investments. The closer we approach retirement age, the more we need to secure our investments in low-risk funds such as municipal bonds. He expounded upon that idea as well, noting that we ought to pay less attention to our physical, chronological age and more to our individual risk factors: health, dependency of elderly parents, etc. We might be forty years old, but if our spouse has passed away and we have so much to take care of that we can’t work too much outside of the home, it would be wise to rely less on volatile stocks in the greater part of our investment portfolio.

Of course, one of the greatest elements of the success of the 7Twelve portfolio is the patience of the investor; it’s a long game to be played by patient people who are willing to work now and wait awhile for the rest that a good portfolio affords. Throughout his book, Craig Israelsen illustrates that the 7Twelve portfolio is an effective and straightforward way to properly invest your time and money in the right places. I highly recommend it to anyone at any stage in their personal investing.

 

Book can be found for purchase here.

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