The 7Twelve is a multi-asset balanced portfolio that meets the requirements of a qualified default investment alternative (QDIA) under the provisions of the Pension Protection Act of 2006.
Unlike a traditional two-asset 60/40 balanced fund, the 7Twelve balanced portfolio utilizes multiple asset classes to enhance performance and reduce risk.
The 7 of 7Twelve represents the suggested number of asset classes to include in your portfolio. The Twelve represents the 12 separate mutual funds or exchange traded products to fully represent the 7 asset classes in your 7Twelve portfolio. Our portfolio has approximately a 65/35 allocation: approximately 65% of the portfolio is invested in equity and diversifying assets and about 35% invested in bonds and cash.
Some of the asset classes, such as US stock (also referred to as "equity") require several mutual funds to adequately represent their diversity. The US equity asset in the 7Twelve portfolio requires three separate funds: one fund that invests in large US equity, one fund that invests in mid-sized US companies, and one fund that focuses on small US stocks.
The non-US equity asset requires two separate funds, one focusing on large non-US stocks and one that invests in stocks of developing or emerging non-US countries. Real estate, as an asset class, is adequately covered by one mutual fund that invests globally in real estate and real estate linked companies.
The asset class of "Resources" requires two separate funds (or sub-assets): one that invests in natural resources companies and another fund that invests in actual commodities (cattle, precious and industrial metals, wheat, corn, cotton, etc.).
Investing in US bonds requires two different funds, an aggregate bond fund and a fund that specializes in inflation-protected bonds. Adding International bonds requires a separate fund. Finally, cash is added to the portfolio by including a money market fund.
| Building a Better Balanced Fund |
Old School Balanced
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New Age Balanced
7Twelve
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For more details, please read 7Twelve: The Core of "Core and Explore" (May 2010)
and Building A Better Balanced Fund (January 2010). |
Thus, the 7Twelve portfolio includes 7 core asset classes and utilizes 12 specific mutual funds. Each mutual fund (or "sub-asset") is equally weighted, meaning that each fund represents 1/12th of the portfolio. This allocation is maintained by rebalancing the portfolio back to equal portions annually, quarterly or monthly. (The performance reported on this web site assumes monthly rebalancing, whereas performance based on annual rebalancing may also be illustrated in some of our white papers.)
The tax efficiency of the portfolio (during the accumulation period prior to retirement) can be enhanced significantly by using new cash inflows to accomplish the systematic rebalancing. Rebalancing consists of adding money to the funds that have a balance less than 1/12 of the total portfolio. (Rebalancing does not affect the tax efficiency of the 12 individual funds within the 7Twelve portfolio.)
Systematic rebalancing does NOT represent tactical portfolio management. In fact, it is just the opposite. Rebalancing is a portfolio management technique designed to protect the portfolio from emotionally charged buy-and-sell decisions – most of which usually cause more harm than good. Most portfolio "tacticians" (people who try to outsmart the markets they invest in) subtract more value than they add. Rebalancing takes emotion and second-guessing entirely out of portfolio management.
Of course, you can choose an asset allocation model and rebalancing protocol to suit your own needs. For example, a very conservative investor may choose to weight fixed income and cash higher. It has been found that a rebalanced, multi-asset, equally weighted portfolio achieves the two major objectives of a portfolio:
| 1. | Grow money. |
| 2. | Protect money by avoiding losses. |
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