The 7Twelve TM 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 TM 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. 42-year history ( ) ► Part Two introduces the 7Twelve Portfolio, a multi-asset, low correlation balanced portfolio. 10-year history ( ).

Part One

42-Year Historical Asset Returns 42-Year Period from Annualized Return (%) Std Dev of Annual Returns Growth of $10,000 Real Estate ,187 US Small Stock ,816 US Large Stock ,362 Commodities ,889 International Stock ,563 Bonds (Aggregate) ,975 Cash ,609 Inflation (CPI) ,038

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.

42-year Historical Upside and Downside 42-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

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

42-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

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

The following slides demonstrate portfolio performance as diversity (or breadth) increases.

Annual Performance Individual Assets vs. Multi-Asset Portfolio

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)0.27

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

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 42-Year Average Annualized % Return Year Standard Deviation of Annual Returns Growth of $10, ,362693,816355,563281,975103,609923,187488,889605,768 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) 32

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Comparison of Portfolios During Accumulation Phase Typical 60/40 Balanced Fund vs. Multi-Asset Portfolio

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

42-Year Analysis of Retirement Distribution Portfolios ( ) $250,000 starting balance, 5% initial withdrawal, 3% annual increase in withdrawal Total amount withdrawn over each 25-year period = $455,741

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, ,921986,426745,506 Average Ending Balance860,9301,989,2142,197,984 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 = $455,741 39

Part Two

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

7Twelve A Multi-Asset Balanced Investment Strategy 42 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

“…the more simple any thing is, the less liable it is to be disordered…”. “Common Sense” by Thomas Paine, February

Correlation of 7Twelve Ingredients 10-year Aggregate Correlation = 0.38 Using monthly returns from Mid US Small US Non-US Developed Non-US Emerging Global Real Estate Natural Resources Commodities US Aggregate Bonds Inflation Protected Bonds Non-US Bonds Cash Large US (0.11) (0.09) Mid US (0.13) (0.11) Small US (0.10) (0.12) Non-US Developed (0.03) Non-US Emerging (0.03) Global Real Estate (0.12) Natural Resources 0.75(0.10) (0.01) Commodities (0.06) US Aggregate Bonds Inflation Protected Bonds 0.61(0.06) Non-US Bonds (0.02) 45

Old vs. New 7Twelve A Multi-Asset Balanced Strategy 46

Total % Return (Assuming annual rebalancing) Active 7Twelve Portfolio Passive 7Twelve Portfolio Vanguard Balanced Index Vanguard 500 Index (0.78)(9.52)(22.15) (28.22)(24.61)(22.21)(37.02) (6.30)(1.18) Year Ave Annualized % Return ( ) Year Ave Annualized % Return ( ) (0.32) 10-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)??? 2002 (0.78) (9.52) (24.61)(19.46)(14.32)(9.17) (22.21) (1.18) Year Annualized Return ( ) Twelve Age-Based Models

Distribution 7Twelve Portfolio $250,000 Initial Account Value on Jan 1, 2002, 5% Initial Withdrawal, 3% Annual Increase in Annual Withdrawal 50

Importance of Rebalancing Rebalancing the 7Twelve Portfolio as of December 31, bps benefit

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

Calendar Year Performance of Passive 7Twelve (annual rebalancing) 7Twelve Core Model 12 Equally Weighted Funds 7Twelve Without Cash 11 Equally Weighted Funds (no cash fund) 2002 (0.78) (1.00) (24.61) (27.10) (1.18) 10 Year Annualized Return (%) Year Standard Deviation of Annual Returns (%) Twelve Without Cash Component

1) As a balanced fund, 7Twelve is a “QDIA” (Qualified Default Investment Alternative) under the 2006 Pension Protection Act. 2) Portfolio logistics are straight-forward: – Equally-weighted, rebalanced periodically. – Using cash flows to accomplish rebalance increases tax efficiency. 3) No reliance upon tactical skill or timing. 4) Represents the core “module” of any portfolio: pre or post-retirement. Satellite assets tailored to the client can be layered around 7Twelve “core”. 5)Can be built using actively managed funds, passively managed index funds, ETFs, ETNs, or CTFs (collective trust funds). 7Twelve Portfolio: Summary 54

Available at Amazon.com

For more information about the 7Twelve portfolio please visit 56

Craig L. Israelsen, Ph.D. Brigham Young University Web: The 7Twelve TM Portfolio 57

Technical notes: Raw data utilized in this research report were obtained from Morningstar Principia and other sources. The returns reported in this presentation and on the 7Twelve website may differ slightly from the returns of the 7Twelve portfolio published in my book “7Twelve: A Diversified Investment Portfolio with a Plan” (John Wiley & Sons, 2010). The slight differences are due to two issues: (1) different rebalancing assumptions, and (2) corrected historical returns. From time to time, Morningstar will modify and correct historical performance data. Occasionally such corrections affect the historical performance of the underlying funds and ETFs utilized in the various 7Twelve portfolios. In every case, the resulting changes in the historical returns of the 7Twelve portfolio are so small as to be immaterial.