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First Objective: Grow Money
As shown in the table below, over the 10-year period from 2000 to 2009, a $10,000 lump sum investment in the Active 7Twelve portfolio (which utilizes actively managed mutual funds) grew to $24,812 (ignoring taxes and inflation). This assumes monthly rebalancing among the 12 funds. The Passive 7Twelve portfolio (using passively managed exchange traded funds) turned $10,000 into $20,655 (assuming monthly rebalancing). Both 7Twelve portfolios can be rebalanced at any interval. In fact, annual rebalancing tends to produce slightly better results in most years.
The Vanguard Balanced Index (a less diversified fund that invests only in US stock and US bonds) turned $10,000 into $12,978. Finally, a $10,000 investment in the Vanguard 500 Index declined to $9,019 over the 10-year period from 2000 to 2009. It has the least diversified portfolio in this group of comparison funds because it invests only in US stock.
Second Objective: Protect Money by Avoiding Losses
The best way to grow and protect money is to avoid or minimize the frequency of losses. The year 2008 represented a year in which nearly all funds and portfolios experienced heavy losses. The well known S&P 500 Index had a return of –37.0% in 2008, which represents the second worst year on record (since 1926).
The Active 7Twelve portfolio had not experienced a negative calendar year return since 1998 (the first year of the performance history for the 7Twelve portfolio). The Passive 7Twelve had two small annual losses in 2001 and 2002. In 2008, the Active 7Twelve portfolio had a return of –29.84% while the Passive 7Twelve portfolio had a return of –25.70%. Both 7Twelve portfolios rebounded nicely in 2009.
Vanguard Balanced had a return of –22.21%, and the Vanguard 500 Index Fund had a return of –37.02% in 2008. Prior to the horrific year of 2008, each of the two comparison funds had experienced three negative calendar year returns since 2000.
Over the 10-year period from 2000 to 2009, the Active and Passive 7Twelve portfolios produced significantly higher returns than the two prominent funds in this comparison. The level of volatility in the 7Twelve portfolios were comparable or lower than the comparison funds.
There is no guarantee that a broadly diversified portfolio, such as the 7Twelve, will avoid annual losses in the future. Nevertheless, building a broadly diversified portfolio is the only sensible defense against portfolio losses, particularly in the fragile retirement years.
Active and Passive 7TwelveTM Portfolio Performance*
2000-2009
Compared to Two Prominent Mutual Funds
Numbers in red indicate negative returns
Calendar Year Total Return (%)**
(Assuming monthly rebalancing) |
Active 7Twelve Portfolio
(Using Actively
Managed Funds) |
Passive 7Twelve Portfolio
(Using Index-Based
ETFs) |
Vanguard Balanced Fund
(VBINX) |
Vanguard 500 Index
(VFINX) |
| 2000 |
10.91 |
6.35 |
–2.04 |
–9.06 |
| 2001 |
3.21 |
–1.37 |
–3.02 |
–12.02 |
| 2002 |
2.21 |
–1.06 |
–9.52 |
–22.15 |
| 2003 |
28.28 |
26.70 |
19.87 |
28.50 |
| 2004 |
19.72 |
17.76 |
9.33 |
10.74 |
| 2005 |
12.93 |
12.13 |
4.65 |
4.77 |
| 2006 |
16.37 |
15.40 |
11.02 |
15.64 |
| 2007 |
13.33 |
10.80 |
6.16 |
5.39 |
| 2008 |
–29.84 |
–25.70 |
–22.21 |
–37.02 |
| 2009 |
32.13 |
25.24 |
20.06 |
26.50 |
| Average Annualized Return** (2000-2009) |
| 10-Year Annualized Return |
9.51 |
7.52 |
2.64 |
–1.03 |
| 10-Year Standard Deviation of Monthly Returns (%) |
| 10-Year Standard Deviation of Return |
11.96 |
11.83 |
10.01 |
16.13 |
| 10-Year Growth of $10,000 |
10-Year Growth of $10,000 |
$24,812 |
$20,655 |
$12,978 |
$9,019 |
| Annual Expense Ratio (%) |
| Annual Expense Ratio (%) |
0.74 |
0.30 |
0.25 |
0.18 |
| * |
Performance assumes equally weighting each sub-asset and monthly rebalancing. Taxes and inflation were not taken into account. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE. |
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Raw data utilized in this research report were obtained from Morningstar Principia and other sources. |
| ** |
Average annualized return is a geometric mean, not an arithmetic mean. |
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Performance udpates available |
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