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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. 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. In general terms, the Active 7Twelve portfolio consists of roughly 65% stocks and diversifying assets and approximately 35% fixed income/Cash. The overall cash allocation in the Active 7Twelve portfolio will tend to be higher than the expected 8.33% (based on each fund being 1/12th of the portfolio). This is because actively managed equity funds tend to have some percentage of their portfolio in cash. The passive 7Twelve portfolio uses exchanged traded products which are asset-class pure. As a result, it will have a smaller overall allocation to cash. With a 65% equity/35% fixed income allocation, the 7Twelve portfolio qualifies as a balanced fund and thus meets the requirements as a qualified default investment alternative (QDIA) under the provisions of the 2006 Pension Protection Act (PPA). Unlike a traditional two-asset 60/40 balanced fund, the 7Twelve balanced portfolio utilizes multiple asset classes to enhance performance and reduce risk.
7Twelve
7 Core Asset Groups
US Equity
TM
US Equity
Non-US Equity
Real Estate
Global Real Estate
Resources
US Bonds
Non-US Bonds
Cash
US Money Market
Emerging Markets
Commodities
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 inflationprotected bonds. Adding International bonds requires a separate fund. Finally, cash is added to the portfolio by including a money market fund.
Performance Based on Three Different Rebalancing Frequencies Active 7Twelve Passive 7Twelve
Monthly Rebalancing Quarterly Rebalancing Annual Rebalancing Monthly Rebalancing* Quarterly Rebalancing Annual Rebalancing 3-Year Annualized % Return (2008-2010) 2.14 2.61 2.88 2.15 2.61 2.48 5-Year Annualized % Return (2006-2010) 7.04 7.35 7.59 6.37 6.64 6.65 10-Year Annualized % Return (2001-2010) 9.91 10.17 10.26 8.28 8.53 8.49
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 10-Year Average Annualized % Return* (2001-2010) 10-Year Standard Deviation of Return 10-Year Growth of $10,000 Annual % Expense Ratio
3.13 2.26 28.84 19.86 13.16 16.36 13.79 28.22 32.45 14.52
1.66 0.72 26.99 17.74 12.21 15.19 11.28 24.65 24.99 14.28
Vanguard Balanced Fund (VBINX) 3.02 9.52 19.87 9.33 4.65 11.02 6.16 22.21 20.06 13.12
Vanguard 500 Index (VFINX) 12.02 22.15 28.50 10.74 4.77 15.64 5.39 37.02 26.49 14.91