How To Implement The 7Twelve Portfolio

1. The 7Twelve portfolio is a diversified portfolio of 12 different mutual funds- where each mutual fund is itself a diversified investment product.

2. The classic 60/40 balanced fund is 60% allocated to large-cap US stocks and 40% allocated to bonds.

3. The 7Twelve portfolio has seven core asset classes: US stock, non-US stock, real estate, resources, US bonds, non-US bonds and cash. This can also be thought of as the base seven asset portfolio.

Old school balanced versus new age balanced portfolio

4. The 7Twelve portfolio invests in 12 different mutual funds that span across the seven core asset classes to achieve breadth of diversity. Depth of diversity is achieved within each mutual fund because each mutual fund is a low cost passive managed index fund containing many stocks/bonds/constituents.

7twelve portfolio

5. Each of the 12 mutual funds have a weight of 8.3% in the portfolio. The asset allocation of the 7Twelve portfolio does not change based on market conditions. Such diversification has better performance with less risk. This is because the assets have low correlation with each other and therefore the portfolio has effective diversification. Low correlation in simple terms means that the portfolio has components whose performance ziga and zags at different times.

6. Once you invest, the next step is to rebalance at regular intervals. A un-rebalanced portfolio will become equity heavy otherwise.

7. Rather than use the core 7Twelve portfolio, one can also adjust it based on age. Age can be thought of as chronological age and allocation age. Start with the chronological age in bonds. The allocation age is then determined based on ability to take risk based on life situation.


Chronological age = 55. 55% in bonds
Allocation age for somebody who cannot take a lot of risk= 55+15=70. 70% in bonds
Allocation age for somebody who can take more risk=55-15=40. 40% in bonds

8. You can also use life stage portfolios which are shown below:

7 twelve life stage portfolio

7 twelve life stage portfolio weights

9. We don’t want our retirement portfolio to die before we do. A multi-asset approach is the best starting point to create a durable retirement portfolio. The 7twelve portfolio withstands very well during the withdrawing phase at 5%, 7.5% and 10% withdrawal rates for at least 25 years.

10. We can use a value tilt for the equities or can use actively manged mutual funds to replace the passive index funds.

11. The appropriate time to begin dramatically reducing portfolio risk is 5-10 years of the target date of retirement and you can shift from the core 7Twelve portfolio and adjust it based on allocation age or life stage as you come with 5-10 years of your retirement.

12. One obvious thing to remember is that the more you save and the more persistent you are with this strategy the more money you will accumulate.

13. The 7Twelve portfolio has a diversification premium and extracts the equity premium better than investing only in US Stocks.

14. An example of how to assemble your portfolio is to use Vanguard mutual funds or ETFs.

  • Large cap US Stock: Vanguard S&P 500 (VOO)
  • Mid cap US Stock: Vanguard Mid-Cap(VO)
  • Small cap US Stock: Vanguard Small-Cap(VB)
  • Developed non-US Stock: Vanguard FTSE Developed Markets(VEA)
  • Emerging non-US Stock: Vanguard FTSE Emerging Markets(VWO)
  • Real Estate Funds:  Vanguard REIT(VNQ)
  • Natural Resources Funds: Vanguard Materials(VAW)
  • Commodities: Powershares DBC(DBC), ishares S&P GSCI(GSG)
  • US Bonds: Vanguard Total Bond Market(BND)
  • TIPS: Vanguard Short-Term Inflation Protected Securities(VTIP)
  • International Bonds: Vanguard Total International Bond(BNDX)
  • Cash: Money market or Vanguard Short Term Bond(BSV)

15. The three secrets of investing are:

  • Successful investing requires patience that is measured in years, not weeks.
  • Successful investing is boring. If you want thrills, ride a bike in a big city.
  • Successful investing requires diversification depth and breadth.

16. The four principles of the 7Twelve portfolio are:

  • Don’t overmanage your investments. Check your accounts quarterly. More often than that is too often.
  • Expect ups and downs. Don’t react to either. Let rebalancing do the reacting for you.
  • Enjoy your life.  Enjoy your family. Spend time doing the things you truly value. Festering over your portfolio will only distract you from more important things.
  • Build up a reserve in the good years to prepare for the lean years. In other words, always have a “rainy day” reserve fund. When markets go against you and your portfolio has been hurt, withdraw needed funds from your reserve fund( such as a money market fund or savings account). At retirement, having a reserve fund equal to one or two years’ worth of annual income is a great goal.

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