The 7Twelve ® Portfolio Craig L. Israelsen, Ph.D

This document is a research report presenting portfolio research and analysis. This document is neither investment advice nor an investment solicitation. 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 The term 7Twelve ® is a registered trademark belonging to Craig L. Israelsen Copyright © Craig L. Israelsen All rights reserved

Overview ► Part One provides a historical context of the benefits of a multi-asset, low correlation portfolio. 43-year history ( ) ► Part Two introduces the 7Twelve Portfolio, a multi-asset, low correlation balanced portfolio. 15-year history ( )

Part One: 43-year Asset Class Review

43-Year Historical Asset Returns 43-Year Period from Annualized Return (%) Std Dev of Annual Returns Growth of $10,000 Real Estate ,081,237 US Small Stock ,255 US Large Stock ,540 Commodities ,280 International Stock ,147 Bonds (Aggregate) ,874 Cash ,692 Inflation (CPI) ,980

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 starting in Non-US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from and the Dow Jones US Select REIT Index starting in 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. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from and the Barclays Capital Aggregate Bond index starting in Cash represented by 3-month Treasury Bills.

43-year Historical Upside and Downside 43-Year Period from Largest One-Year Gain (%) Worst One-Year Loss (%) Worst 3-Year Cumulative Return (%) Bonds 32.6(2.9)6.15 Cash REIT 49.0(39.2)*(35.6) US Large Stock 37.6(37.0)*(37.6) Commodities 74.9(46.5)*(39.7) US Small Stock 57.4(33.8)*(42.2) International Stock 69.4(43.4)*(43.3) * Worst One-Year Loss Occurred in

9 Ideal Risk & Return “Zone”

To be diversified, a portfolio must combine multiple ingredients that have low correlation with each other.

43-Year Correlations 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 Cash REIT Commodities Aggregate (Average) Correlation in Equal-Weighted 7-Asset Portfolio =

Rolling 10-Year Correlations Using S&P 500 as comparison baseline index

Large and Small US Stock

US Stock and Non-US Stock

US Stock and REITs

US Stock and Commodities

US Stock and US Bonds

US Stock and Cash

Meaningful portfolio diversification requires Depth and Breadth Mutual Funds/ETFs = Depth Wide variety of funds = Breadth

The following slide demonstrates portfolio performance as diversity (or breadth) increases.

When built correctly, a multi-asset portfolio achieves equity-like returns with bond-like risk

Year Large US Equity Small US Equity Non-US Equity Aggregate 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(5.35) (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(3.35)

Year Large US Equity Small US Equity Non-US Equity Aggregate US Bonds CashReal EstateCommodities Equally Weighted Multi- Asset Portfolio (6.13) (12.17) (12.33) (1.82)7.78(2.92) (14.07) (2.55) (17.01)(35.75) (0.82)4.87(2.58) (9.10)(3.02)(14.17) (11.89)2.49(21.44) (31.93)(5.47) 2002 (22.10)(20.48)(15.94) (1.56) (15.09) (1.57) (17.56) (37.00)(33.79)(43.38) (39.20)(46.49)(27.59) (4.18)(12.14) (1.18)

Single Assets vs. Multi-Asset Portfolio Large US Equity Small US Equity Non-US Equity US Bonds Cash Real Estate Commodities Equally Weighted 7-Asset Portfolio 43-Year Average Annualized % Return Year Standard Deviation of Annual Returns Growth of $10, ,540807,255417,147293,874103,6921,081,237489,280667,357 Number of Years with Negative Returns Worst One-Year % Return (37.00)(33.79)(43.38)(2.92)0.06(39.20)(46.49)(27.59) Worst Three-Year Cumulative % Return (37.61)(42.24)(43.32) (35.61)(39.72)(13.30) 25

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RISK: Investors incorrectly benchmark a multi-asset portfolio against the S&P 500 Index

S&P 500 Index outperformed multi-asset portfolio 53% of the time (23 years out of 43 years)

Key to Long-Term Success Reducing the frequency and magnitude of losses

The Math of Losses Needed % Gain = [1 / (1 – % Loss)] – 1 Percentage Loss in Portfolio Portfolios Needed Percentage Gain to Restore Portfolio -5%5.3% -10%11.1% -15%17.6% -20%25.0% -27%Multi-Asset Portfolio37.0% -30%42.9% -35%53.8% -37%S&P 500 Index58.7% -40%66.7% -45%81.8% -50% 141 equity funds lost 50% or more in 2008 (funds with at least 60% equity) 100.0% -55%122.2% -60%150.0% -65%185.7% -70%233.3% -75%300.0%

Performance of Multi-Asset Portfolio During Post-Retirement Distribution Phase

Starting Year Ending Year 100% Bond Portfolio 60% US Stock/ 40% Bond Portfolio Multi-Asset Portfolio ,1911,090,1072,112, ,7981,311,0102,746, ,3401,293,1372,727, ,7581,312,6802,482, ,5572,283,4242,715, ,5783,911,5193,810, ,6962,816,2663,402, ,0242,073,6212,588, ,1822,242,4232,332, ,046,4072,719,9642,475, ,179,3142,661,9492,170, ,273,1432,187,6611,816, ,305,0252,691,1372,205, ,3362,111,1231,926, ,1831,397,7201,079, ,7591,531,8511,225, ,5231,183,829999, ,921986,426745, ,5161,121,184794,669 Average Ending Balance 840,6971,943,5282,124,126 Retirement Distribution Portfolio Ending Account Balances ( ) $250,000 starting balance, 5% initial withdrawal, 3% annual increase in withdrawal Total amount withdrawn over each 25-year period = $455, $180,598 higher average

Part Two: 7Twelve Portfolio model

Building a Multi-Asset Low Correlation Portfolio The 7Twelve ® Portfolio 7 Core Asset Classes utilizing 12 Underlying Funds

7Twelve ® A Multi-Asset Balanced Investment Strategy 38 Eight Equity and Diversifying Funds 65% of Overall Portfolio Allocation Four Fixed Income Funds 35% of Overall Portfolio Allocation US Stock Non-US Stock Real Estate Resources US Bonds Non-US Bonds Cash

7Twelve All 12 funds are equally weighted in the “core” model

Old vs. New 7Twelve A Multi-Asset Balanced Strategy 40

Total % Return (Assuming annual rebalancing) Active 7Twelve Portfolio Passive 7Twelve Portfolio Vanguard Balanced Index Vanguard 500 Index (28.22)(24.62)(22.21)(37.02) (6.30)(1.01) Year Ave Annualized % Return ( ) Year Ave Annualized % Return ( ) Year Ave Annualized % Return ( ) Year Standard Deviation of Monthly Returns ( ) Annual % Expense Ratio Twelve Annual Returns

7Twelve 10-year Growth of $10,

Calendar Year Performance of Passive 7Twelve Core Model 12 Equally Weighted Funds 7Twelve Age-Based % 7Twelve 10% TIPS 10% Cash 7Twelve Age-Based % 7Twelve 20% TIPS 20% Cash 7Twelve Age-Based 70 Plus 40% 7Twelve 30% TIPS 30% Cash Vanguard Balanced Index 60% US Stock 40% US Bonds Investor Profile  (Under age 50)(Age 50-60)(Age 60-70)(Over age 70)??? (24.62)(19.47)(14.32)(9.18) (22.21) (1.01) Year Annualized Return ( ) Twelve Age-Based Models

15-Year Distribution Analysis: $250,000 Initial Account Value on Jan 1, 1998, 5% Initial Withdrawal, 3% Annual Increase in Annual Withdrawal 44

New “Age-Based” Allocations as of July Twelve Core Model 7Twelve Age-Based Twelve Age-Based Twelve Age-Based 70Plus Asset Class7Twelve Age-Based Portfolio Allocation Large US Stock 8.33%6.67%5.00%3.33% Mid Cap US Stock 8.33%6.67%5.00%3.33% Small US Stock 8.33%6.67%5.00%3.33% Non-US Stock 8.33%6.67%5.00%3.33% Emerging Markets 8.33%6.67%5.00%3.33% Real Estate 8.33%6.67%5.00%3.33% Natural Resources 8.33%6.67%5.00%3.33% Commodities 8.33%6.67%5.00%3.33% US Bonds 8.33%6.67%5.00%3.33% Inflation Protected Bonds 8.33%6.67%5.00%3.33% International Bonds 8.33%6.67%5.00%3.33% Cash 8.33%26.67%45.00%63.33%

Old & New “Age-Based” Allocations 15-Year Performance Comparison ( ) 7Twelve Twelve Twelve 70+ Old Model (Cash & TIPS overweighted) 7.48%6.94%6.34% New Model (Only Cash overweighted) 7.04%6.06%5.01%

Rebalancing the 7Twelve Portfolio as of December 31,

7Twelve Rebalancing Comparison 10-Year Annualized % Returns as of December 31,

15 Calendar Year Total Returns Active 7Twelve Passive 7Twelve Vanguard 7Twelve T. Rowe Price 7Twelve Fidelity 7Twelve Tax Efficient 7Twelve DFA 7Twelve (5.50) (1.66)0.56(2.41)0.57(2.74) (0.78)0.16(1.57)(0.02)(1.05)(0.41) (28.22)(24.62)(27.97)(27.87)(30.63)(25.94)(24.90) (6.30)(1.01)(2.80)(1.16)(3.37)(0.42)(2.07) Year Annualized Return Year Annualized Return Year Annualized Return Year Annualized Return

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Fixed Income: What to Do Going Forward?

Historical Performance of US Bonds

Bond Performance in a Portfolio Context Portfolio Period of Rising Interest Rates 34-Year Period from 1948 to 1981 Period of Declining Interest Rates 31-Year Period from 1982 to Asset Portfolio 100% US Bonds 3.83% Annualized Return 4.32% Standard Deviation 8.82% Annualized Return 6.99% Standard Deviation 2-Asset Portfolio 60% Large US Stock 40% Bonds 4-Asset Portfolio 40% Large US stock 20% Small US Stock 30% Bonds 10% Cash

Bond Performance in a Portfolio Context Portfolio Period of Rising Interest Rates 34-Year Period from 1948 to 1981 Period of Declining Interest Rates 31-Year Period from 1982 to Asset Portfolio 100% US Bonds 3.83% Annualized Return 4.32% Standard Deviation 8.82% Annualized Return 6.99% Standard Deviation 2-Asset Portfolio 60% Large US Stock 40% Bonds 8.52% Annualized Return 10.49% Standard Deviation 10.56% Annualized Return 11.33% Standard Deviation 4-Asset Portfolio 40% Large US stock 20% Small US Stock 30% Bonds 10% Cash

Bond Performance in a Portfolio Context Portfolio Period of Rising Interest Rates 34-Year Period from 1948 to 1981 Period of Declining Interest Rates 31-Year Period from 1982 to Asset Portfolio 100% US Bonds 3.83% Annualized Return 4.32% Standard Deviation 8.82% Annualized Return 6.99% Standard Deviation 2-Asset Portfolio 60% Large US Stock 40% Bonds 8.52% Annualized Return 10.49% Standard Deviation 10.56% Annualized Return 11.33% Standard Deviation 4-Asset Portfolio 40% Large US stock 20% Small US Stock 30% Bonds 10% Cash 9.52% Annualized Return 11.80% Standard Deviation 9.99% Annualized Return 10.98% Standard Deviation

Bond Performance in 7Twelve Portfolio Time Period Description of US Bond Performance 10-Year Annualized % Return of US Bonds 10-Year Annualized % Return of 12-Asset Portfolio Growth of $10,000 in a Diversified Portfolio Actual Performance , (US bond returns from ) Worst-case Performance , (US bond returns from ) Best-case Performance ,099 Difference between Worst-case and Best-case Bond Performance 1,275 bps104 bps2,445