1 After the Fall: Asset Allocation and Rebalancing Craig L. Israelsen, Ph.D. Brigham Young University April

2 This document is a research report presenting portfolio research and analysis. This document is neither investment advice nor an investment solicitation. 7Twelve Implementation of the 7Twelve portfolio is no guarantee of performance This is a copyrighted document, copying for redistribution is prohibited unless written permission is obtained from Craig L. Israelsen. Copyright © 2009 Craig L. Israelsen All rights reserved

Asset Allocation Accumulation Phase 3

4 Historical Asset Returns 39-Year Period from Annualized Return (%) Std Dev of Annual Returns Growth of $10,000 REIT ,834 US Small Stock ,357 Commodities ,818 US Large Stock ,485 International Stock ,977 Bonds (Intermediate) ,633 Cash ,237 Inflation (CPI) ,979

5 Data ► Large-cap US equity represented by the S&P 500 Index. ► Small-cap US equity represented by the Ibbotson Small Companies Index from , and the Russell 2000 Index from ► Non-US equity represented by the MSCI EAFE Index. ► Real estate represented by the NAREIT Index from and the Dow Jones Wilshire REIT Index from ► Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became the S&P GSCI Commodity Index. ► U.S. intermediate term bonds represented by the Ibbotson Intermediate Term Bond Index from and the Lehman Brothers Intermediate Term Government Bond index from (a Barclays Capital index as of late 2008). ► Cash represented by 3-month Treasury Bills.

6 Historical Upside and Downside Largest One-Year Gain (%) Worst One-Year Loss (%) Worst 3-Year Cum Loss (%) Bonds 25.42(1.75)6.43 Cash REIT 48.99(39.20)*(31.85) US Large Stock 37.58(37.00)*(37.61) Commodities 74.96(46.49)*(39.72) US Small Stock 57.40(33.79)*(42.24) International Stock 69.44(43.38)*(43.32) * Worst One-Year Loss Occurred in 2008

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8 Correlation of Major Asset Classes ( ) Large US Equity Small US Equity Non-US Equity US Bonds CashREIT Small US Equity 0.78 Non-US Equity US Bonds (0.12) Cash (0.01)0.39 REIT (0.03)0.15 Commodities (0.07)(0.15)0.03(0.21)0.09(0.04) Aggregate (Average) Correlation in Equal-Weighted 7-Asset Portfolio = 0.19

9 Year Large US Equity Small US Equity Non-US Equity Intermediate Term US Bonds CashReal EstateCommodities Equally Weighted Multi- Asset Portfolio (17.43)(11.66) (4.00) (14.69)(30.90)(14.92) (15.52) (26.47)(19.95)(23.16) (21.40)39.51(5.16) (17.22) (11.92) (7.16) (4.92)2.03(2.28) (23.01) (1.86) (7.30) (8.80) (6.59) (3.10)(19.48)(23.45) (23.44)29.08(3.26)

10 Year Large US Equity Small US Equity Non-US Equity Intermediate Term US Govt Bonds CashReal EstateCommodities Equally Weighted Multi- Asset Portfolio (6.13) (12.17) (12.33) (1.82)7.78(1.75) (14.07) (2.55) (17.01)(35.75) (2.58) (9.10)(3.02)(14.17) (11.89)2.49(21.44) (31.93)(5.48) 2002 (22.10)(20.48)(15.94) (1.65) (15.09) (1.57) (17.56) (37.00)(33.79)(43.38) (39.20)(46.49)(26.85)

11 Multi-Asset Portfolio vs. Single Assets Large US Equity Small US Equity Non-US Equity US Bonds Cash Real Estate Commodities Equally Weighted 7-Asset Portfolio 39-Year Average Annualized % Return Year Standard Deviation of Annual Returns Growth of $10, ,485448,827285,009210,633103,237513,069399,818442,671 Number of Years with Negative Returns Worst One-Year % Return (37.00)(33.79)(43.38)(1.75)1.05(39.20)(46.49)(26.85) Worst Three-Year Cumulative % Return (37.61)(42.24)(43.32) (31.85)(39.72)(12.28)

What Was Different in 2008? Commodities and real estate did not help out as in prior equity downturns. Prior to 2008, the worst one-year return for the Multi-Asset Portfolio was (5.48) 12 Year Large US Equity Small US Equity Non-US Equity Intermediate US Govt Bonds Cash Real Estate Commodities Equally Weighted Multi-Asset Portfolio 1973 (14.69)(30.90)(14.92) (15.52) (26.47)(19.95)(23.16) (21.40)39.51(5.16) 2000 (9.10)(3.02)(14.17) (11.89)2.49(21.44) (31.93)(5.48) 2002 (22.10)(20.48)(15.94) (1.65) 2008 (37.00)(33.79)(43.38) (39.20)(46.49)(26.85)

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14 Portfolio Mix (Equity/Fixed Income) Large US StockBonds 60/4060%40% 40/6040%60% Typical “Balanced” Portfolios

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Asset Allocation Distribution Phase 16

17 Retirement Distribution Portfolio $1,000,000 starting balance, 5% initial withdrawal, 3% annual increase in dollar amount of withdrawal Equally-Weighted 7-Asset Portfolio60/40 Portfolio *40/60 Portfolio ** 39-Year Period Annual End-of-Year Cash Withdrawal Annual Portfolio Return End-of-Year Account Balance ($) Annual Portfolio Return End-of-Year Account Balance ($) Annual Portfolio Return End-of-Year Account Balance ($) , %963, %1,040, %1,066, , %1,064, %1,115, %1,132, , %1,192, %1,212, %1,200, , %1,154,855(7.47%)1,066,987(3.86%)1,099, ,275(5.16%)1,039,039(13.07%)871,257(6.37%)972, , %1,191, %1,036, %1,108, , %1,364, %1,174, %1,233, , %1,454,161(3.10%)1,076,955(1.06%)1,158, , %1,630, %1,065, %1,141, , %1,952, %1,147, %1,205, , %2,324, %1,334, %1,343, , %2,308, %1,283, %1,334, , %2,613, %1,508, %1,582, , %3,067, %1,689, %1,729, , %3,228, %1,773, %1,845, , %3,895, %2,161, %2,201, , %4,565, %2,435, %2,457, , %4,796, %2,465, %2,480, , %5,593, %2,688, %2,655, , %6,471, %3,248, %3,105, ,306(3.26%)6,169, %3,222, %3,155, , %7,188, %3,900, %3,713, , %7,544, %4,090, %3,885, , %8,260, %4,373, %4,134, , %8,370, %4,275,773(0.52%)4,010, , %9,820, %5,381, %4,856, , %11,477, %6,102, %5,312, , %12,614, %7,401, %6,156, , %12,621, %8,807, %7,059, , %14,541, %9,818, %7,556, , %15,900,456(1.27%)9,572, %7,634, ,004(5.48%)14,904,788(3.77%)9,087, %7,532, ,754(1.65%)14,530,105(9.40%)8,103,848(3.06%)7,173, , %18,025, %9,440, %7,962, , %20,557, %10,008, %8,283, , %22,396, %10,229, %8,389, , %25,140, %11,210, %8,967, , %26,551, %11,810, %9,470, ,739(26.85%) 19,269,561 (18.03%) 9,527,751 (8.54%) 8,508,152 Total Withdrawal 3,457,972 7-Asset Portfolio = 14.3% each in US large stock, US small stock, non-US stock, bonds, cash, REITs, commodities * 60/40 Portfolio = 60% S&P 500, 40% Lehman Brothers Intermediate Bond Index (now Barclays Capital) ** 40/60 Portfolio = 40% S&P 500, 60% Lehman Brothers Intermediate Bond Index (now Barclays Capital)

$1,000,000 starting balance, 5% initial withdrawal, 3% annual increase in dollar amount of withdrawal Retirement Distribution Portfolio End-of-Year Account Balance: $1,000,000 starting balance, 5% initial withdrawal, 3% annual increase in dollar amount of withdrawal 18

Rebalancing 19

7-Asset Model 20

Growth of $10, $10,000 / 7 = $1,428 $1,428 starting balance in each of the 7 assets Large US Equity Small US Equity Non-US Equity US Bonds CashREITCommodities Total Portfolio Value (Growth of $10,000) Annually Rebalanced (balances at the end of 2008 before final rebalance) 54,46157,23648,94695,46287,75152,55946,257442,671 Buy-and-Hold 48,78464,11840,71630,09014,74873,29657,117328,868 21

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23 Building a Multiple-Asset Low Correlation Portfolio The 7Twelve Portfolio ► 7 Core Asset Classes with ► 12 Underlying Funds

24 The Portfolio A Multiple-Asset Global Portfolio The 7Twelve Portfolio A Multiple-Asset Global Portfolio Approximately 60-65% of the Portfolio Allocation in Equity and Diversifying Assets Approximately 35-40% of the Portfolio Allocation in Bonds and Cash US Equity Non-US Equity Real Estate Resources US Bonds Non-US Bonds Cash Large Companies Developed Markets Global Real Estate Natural Resources US Aggregate Bonds International Bonds US Money Market Medium-sized Companies Emerging Markets Commodities Inflation Protected Bonds Small Companies

25 Accumulation 7Twelve Portfolio

26 Distribution 7Twelve Portfolio $1,000,000 Initial Account Value, 5% Initial Withdrawal, 3% Annual Increase in Withdrawal

As of December 31, Active 7Twelve TM Portfolios One-Year Total % Return as of December 31, Year Annualized % Return as of December 31, % 7Twelve(28.22) % 7Twelve, 10% TIPS, 10% Cash(22.58) % 7Twelve, 20% TIPS, 20% Cash(16.95) % 7Twelve, 30% TIPS, 30% Cash(11.31)6.77 Comparison Funds American Funds Capital Income Builder (CAIBX) (30.06)5.02 Fidelity Global Balanced (FGBLX) (23.27)4.77 Vanguard Balanced (VBINX) (22.21)2.07 Vanguard 500 Index (VFINX) (37.02)(1.46)

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7Twelve Portfolio as the Core Data as of December 31, 2008 Balanced 60/40 Models  2008 Performance(20.19)(20.20)(12.83) 10-Yr Average Annualized Return 1.90%2.42%6.62% 10-Yr Std Dev of Return 11.55%11.96%8.22% 10-Year Growth of $10,000 $12,070$12,695$18,985 29

30 Craig L. Israelsen, Ph.D To purchase the 50-page 7Twelve Portfolio Research Report (with complete portfolio holdings and tickers and back-tested performance) For a free one-page client handout me at: