There are several different “lazy portfolios” you can employ if you like the set-it-and-forget-it portfolio concept. One of the less common – and less understood – versions is the 7Twelve Portfolio. It is one of the more complicated lazy portfolios to set up and manage, at least if you plan to do it manually.
In theory it offers a well-diversified portfolio, and one that may perform best in the worst market conditions. Its complexity combined with poor performance over the long-term, however, calls into serious question whether the 7Twelve Portfolio is right for anybody.
What is the 7Twelve Portfolio?
The 7Twelve Portfolio concept was developed by Craig L. Israelson, author of the book 7Twelve: A Diversified Investment Portfolio with a Plan (2010).
The goal of the portfolio is to enhance performance and minimize risk. As we’ll see, however, those goals are not always accomplished. Israelson developed the concept in 2008, so the history is a bit limited.
The numbers seven and 12 figure significantly in the 7Twelve Portfolio. It involves the use of 12 different investment sectors, which loosely fit within seven different asset classes.
The seven asset classes are as follows:
1. U.S. Stocks
2. International Stocks
3. Real Estate Investment Trusts (REITs)
4. Natural Resources
5. U.S. Bonds
6. International Bonds
If you break down the asset classes between stocks and bonds/cash, you’ll get a 65/35 split favoring stocks. That is of course very close to the ever-popular 60/40 portfolio split.
The 12 investment sectors that make up the seven asset classes for the 7Twelve Portfolio are as follows (from Portfolio Visualizer):
In looking at the pie chart from the screenshot above, notice that each of the 12 investment sectors has an equal weight of 8% – or, more precisely, 8.33%. When the 12 are added together, it comprises 100% of the portfolio.
(NOTE: For the purpose of creating screenshots, I’ve used precious metals in lieu of natural resources. This is due to the fact that Portfolio Visualizer offers only standard sector descriptions, which does not specifically include the term “natural resources.” I used precious metals because it was the only option that even approximated natural resources. It may somewhat distort the results. However, it’s worth noting that precious metals, gold especially, has generally performed well since 2008 when the portfolio concept was created.)
How to Create the 7Twelve Portfolio
The easiest way to create the 7Twelve Portfolio is to match a single fund with each investment sector.
The funds used are typically index-based exchange traded funds (ETFs). That’s because these funds are specifically designed to match an index of securities within a specific sector or asset class. What’s more, they have very low expense ratios, minimizing the drag on investment returns.
And finally, use of index funds gives a portfolio sector access to a broad cross-section of securities within each sector. If one or two stocks in the group crash and burn, the impact on the fund overall will be minimal.
Example of the Funds in a 7Twelve Portfolio
We’ve put together the table below, matching a popular index fund with each of the 12 investment sectors. Most of the funds presented in the table commonly appear in portfolios managed by both robo-advisors and professional investment advisors.
|U.S. Large-Cap Stocks||Vanguard S&P 500 ETF (VOO)|
|U.S. Mid-Cap Stocks||Vanguard Mid-Cap ETF (VO)|
|U.S. Small-Cap Stocks||Vanguard Small Cap ETF (VB)|
|Ex-US Developed Stocks||Vanguard FTSE Developed Markets ETF (VEA)|
|Ex-US Emerging Markets Stocks||Vanguard FTSE Emerging Markets ETF (VWO)|
|Real Estate Investment Trusts (REITs)||Schwab US REIT ETF (SCHH)|
|Natural Resources||SPDR® S&P® Global Natural Resources ETF (GNR)|
|Commodities||Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PBDC)|
|U.S. Bonds||Vanguard Total Bond Market ETF(BND)|
|Treasury Inflation-Protected Bonds (TIPS)||Schwab U.S. TIPS ETF (SCHP)|
|International Bonds||Vanguard Total International Bond ETF (BNDX)|
|Cash||SPDR Bloomberg 1-3 Month T-Bill ETF(BIL)|
If you’re interested in creating the 7Twelve Portfolio for yourself, you can either use the funds listed in the table above or substitute comparable funds you believe will perform better.
Where to Create a 7Twelve Portfolio
You can build a 7Twelve Portfolio using any major investment broker, since now nearly every one of them offers commission-free trading of ETFs.
The two most prominent broker choices are Charles Schwab and Fidelity. Not only do they offer a wide selection of funds, but they also have 24/7 customer service, and plenty of investor tools and resources.
Since the 7Twelve Portfolio is made up of low-cost, index-based ETFs, you can also create the portfolio through a fund family. Vanguard is a primary example, since many of the funds I used as an example of a 7Twelve Portfolio are Vanguard funds.
It’s easy to see why. Not only does Vanguard have most of the funds you need to create this portfolio, but their funds are commonly used by professional portfolio managers, including robo-advisors. They represent some of the best index funds in the industry, with some of the lowest expense ratios. If you prefer to create the 7Twelve Portfolio through a fund family, Vanguard is one of the top choices.
Robo-advisors have been growing in popularity in recent years, due to the combination of completely automated investment management with very low advisory fees and minimum investment requirements. The only problem is the vast majority of robo-advisors create portfolios for you based on your risk tolerance, investment goals and time horizon. Very few will permit designing a custom portfolio, like the 7Twelve Portfolio.
But one prominent exception is M1 Finance. That’s because it’s one of the few robo-advisors that allows you to create your own portfolio. You can do that by creating mini portfolios, referred to as “pies”, and fill each with up to 100 individual stocks and ETFs. You can use a pie to create a 7Twelve Portfolio. You can then choose to create an unlimited number of additional pies within your account.
We’ve created the 7Twelve Portfolio in M1 that you can check out and use. You’ll find it here. Note that for commodities we use the iShares Commodities Select Strategy ETF (COMT) fund based on availability on the M1 platform.
M1 Finance charges no commissions for the stocks and ETFs you select for your pies. And once you create a pie, M1 Finance will provide full automated portfolio management – including periodic rebalancing – with no annual advisory fee.
Historical Returns of the 7Twelve Portfolio
Generally speaking, the success or failure of any investment strategy is determined by its historic performance. By that measure, the 7Twelve Portfolio has been a mixed bag. While it has produced positive returns in the 15-year timeframe from 2007 through 2022, it hasn’t performed as well as other, more popular portfolios.
We’ll cover that comparison in the next section. In the meantime, let’s look at the performance of the 7Twelve Portfolio by itself.
(Once again, all screenshots are courtesy of the Portfolio Visualizer.)
The performance results of the portfolio from 2007 through 2022 are as follows:
Just as has been the case with nearly every portfolio model, the one-year, year-to-date and three-month results have been negative. But the longer term results have been consistently positive, though generally unimpressive.
7Twelve Portfolio vs. 60/40 Portfolio vs. Three Fund Portfolio
Quite honestly, this is where the 7Twelve Portfolio – as brilliant as it may sound in concept – loses its luster. Comparing its performance against other popular investment portfolio models, the 7Twelve Portfolio comes up short on a consistent basis.
We’ve done a head-to-head comparison between the 7Twelve Portfolio, the traditional 60/40 portfolio, and the Three Fund Portfolio.
The 60/40 portfolio employs a simple strategy of investing 60% of your portfolio in stocks and 40% in bonds and cash. The portfolio allocation in this model looks like this:
The Three Fund Portfolio is a simpler version of the 7Twelve Portfolio. And perhaps not surprisingly, it’s had a better long-term performance – you have to love the power of simplicity!
The portfolio allocation in the Three Fund Portfolio is as follows:
Between the 7Twelve Portfolio, the 60/40 portfolio and the Three Fund Portfolio, what do the investment returns look like?
Once again, I’ve used Portfolio Visualizer to produce the screenshots. They cover the timeframe from 2007 to 2022.
The 7Twelve Portfolio has underperformed both the other portfolios over both 10 years and the full 15 years. And while it continued to underperform the 60/40 portfolio for three years and five years, it outperformed the Three Fund Portfolio over both time frames.
If you’re wondering what those percentages translate to in dollars, the results of investing $10,000 in each of the three portfolios from 2007 through the end of October, 2022, look like this:
- 7Twelve Portfolio: $18,803
- 60/40 Portfolio: $27,568
- Three Fund Portfolio: $ 21,002
And if you prefer a graphic illustration:
When the 7Twelve Portfolio Might Outperform Other Portfolios
The ray of sunshine in the performance comparison above is clearly in the year-to-date and one-year performances. Though all three portfolios have lost money in the past year, the 7Twelve Portfolio has lost a little bit less. Put another way, the 7Twelve Portfolio has outperformed the other two portfolios over the past year.
If the 7Twelve Portfolio has a virtue, it’s that a greater level of diversification provides greater risk reduction during years when the stock market is down – which is exactly what its founder claimed it would do.
It’s also worth noting that at least since 2009, large-cap stocks – as evidenced by the S&P 500 index – have outperformed nearly every other market sector. Since both the 60/40 portfolio and the Three Fund Portfolio have greater allocations in large-cap stocks, they can naturally be expected to outperform the 7Twelve Portfolio in such an environment.
But I do have to caution that the “better” – or less bad – performance of the 7Twelve Portfolio is only over the past year. And that performance is better by only about one percentage point.
That better performance during 2022 may not be enough evidence to prove the greater diversification of the 7Twelve Portfolio will produce better results in down years.
7Twelve Portfolio Pros & Cons
- The portfolio includes most of the major asset classes in the known investment universe.
- Diversification across 12 different investment sectors provides an opportunity to profit if any one sector dramatically outperforms the general market (think of the energy sector in 2022).
- There is limited evidence that the 7Twelve Portfolio may outperform other portfolio models during stock market declines.
- Equal weight distribution of the portfolio creates greater diversification and balance than typical portfolios and index funds, which commonly rely on market weight allocations.
- The 7Twelve Portfolio has underperformed simpler options like the 60/40 and the Three Fund Portfolio over the longer term.
- This is a relatively complex portfolio, requiring a minimum of 12 funds. That kind of security allocation belies the whole reason investors turn to index funds in the first place.
- The portfolio can be difficult to manage, especially if you’re doing it manually. You would need to rebalance periodically, which will be cumbersome with a dozen funds.
- The small allocation in each sector may greatly limit profit potential even if that sector seriously increases.
Who Should Consider the 7Twelve Portfolio?
I’m not sure we can say the 7Twelve Portfolio has proven to be a game-changer in the investment world. Though it does show some potential to outperform other portfolios during years of declining stock and bond markets, that outperformance is only slight. More importantly, it’s insufficient to overcome the greater level of underperformance during the long term.