Craig Israelsen’s investment advice, which is steeped in years of academic research, provides financial professionals a core-portfolio at the lowest cost possible. For CFPs, CFAs, CIMAs, CPWAs, and CPAs, the business model offers a fulfilling route to professional success.
Israelsen’s quarterly presentations on A4A are always excellent, but the bigger picture is that Israelsen’s 7Twelve methodology allows advisors to earn about 75 bps annually by providing clients with financial planning advice, or by adding value for advice beyond the core portfolio — all the while paying just 24 bps for the core. Israelsen provides model portfolios and the research to back them up and you outsource the commoditized part of your practice and focus on where you earn your fees.
In this webinar, Israelsen, an expert in low-cost investing, explains the durability of various retirement portfolio designs tested over 55 rolling 35-year periods. In a presentation of epochal proportion, Israelsen shows the performance of various portfolios in achieving retirement over the past 89 years in conjunction with a variety of retirement savings rates.
In the Q&A below, Israelsen responds to a tough but fair question from a skeptical A4A member.
Asset Allocation Risk and Return Spectrum 17 Year 2015
How is it relevant to talk about the history/past performance (over an 80+ year period) of portfolios made up of only four asset classes when the pitch is for why investors/advisors should use the 7Twelve portfolio design?
We need to review the longest time frame we can to understand how a diversified portfolio of stocks and fixed income assets compare against less diversified approaches. The 89-year analysis established the virtue of diversification as a legitimate approach in portfolio design. Only four asset classes can be studied and analyzed for the full 89-year period (large US stock, small US stock, bonds, cash). Having established the value and legitimacy of a diversified approach, we can then discuss a modern version of diversification—such as the 7Twelve portfolio. The long-term data establishes the approach which we then utilize with modern investment products. The 7Twelve
model can only be analyzed and tested for 17 years (back to 1998) because TIPS were not available before then. A seven-asset model (US large stock, US small stock, non-US stock, commodities, real estate, bonds, and cash) can be tested back to 1970 based on available performance histories. In short, we can test a four-asset model back to 1926 (which I reviewed in the A4A presentation), a seven-asset model back to 1970, and a 12-asset model back to 1998 In each case, diversification is shown to be a prudent approach to portfolio design—for the accumulation phase and the distribution phase.
45 Year Asset Allocation Risk and Return Spectrum 2015
Advisors using your core portfolio can keep investment expenses to 23 bps, so they can charge clients less than 1% a year and get paid for financial planning services, where advisors often add the greatest value and often enjoy fulfilling client relationships.
Hundreds of advisors do that now as they build 7Twelve portfolios for clients. The passive 7Twelve model that uses ETFs costs 24 bps to build. An advisor that adds 75 bps to that underlying cost can be under 1% to the client. The research
reports that I sell to advisors guide them in the selection of funds that best fit into the 7Twelve model, and you get the performance history, correlation statistics, rolling returns, etc. updated continually. And Andy Gluck at Advisor Products is providing client content
supporting these concepts in email newsletters, tweets and videos advisors give clients.
How about if an advisor wants to offer more exotic alternatives? Is there evidence of how 7Twelve might perform when alternative asset classes are added?
The value of “alternative” asset classes such as managed futures, convertible arbitrage, global infrastructure, MLPs, etc. is how they perform when the 7Twelve “core” asset classes are doing poorly. 2008 is one example. One managed futures fund had an 18%+ return in 2008, but has been mediocre since then. The value of “alts” is often seen during those years when the core asset classes do poorly. But it’s important to remember that the core equity asset classes have positive returns about 70% of the time and fixed income asset classes about 90% of the time. So, the “window of opportunity” in which “alts” can shine is not that large. The standard 7Twelve model utilizes 12 asset classes. Just as a recipe can be added to, alts can certainly be added around the 7Twelve “core”. The key is that anything being added needs to have a sufficiently large allocation (at least 3%) so that its inclusion will make a meaningful difference in performance. All that said, expanding overall diversification by adding “alts” as satellite allocations around the 7Twelve “core” can be a sound approach.
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