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7Twelve: A Diversified Investment Portfolio with a Plan Rebecca J. Travnichek Author: Craig L. Israelsen Publisher: John Wiley & Sons, Inc. (2010) ISBN: 978-0-470-60527-1
In the Preface of the book, 7Twelve: A Diversified Investment Portfolio with a Plan, Dr. Craig Israelsen sets the stage, or maybe I should say table, for the entire book. He refers to 7TwelveTM as a recipe for an investment portfolio. "The recipe is more important than the ingredients. A poor recipe with good ingredients produces a poor end product. A great recipe with average ingredients produces an acceptable outcome. A great recipe with great ingredients is the ideal scenario..." (p. xiii). Chef Israelsen has measured this "recipe" book into 15 bite-sized chapters. He utilizes historical data to show the effectiveness of his recipe (as much as 40-year performance history); highlights key points using text boxes; and includes tables, graphs, and figures to help the reader understand the topic discussion. Dr. Israelsen is currently an Associate Professor at Brigham Young University, teaching personal and family finance to over 1,200 students every year.
Chapter 1, A Recipe for Success, enables investors to build a diversified, multi-asset portfolio. 7Twelve's ingredients are "7" core asset classes (or investment categories) by utilizing "Twelve" underlying mutual funds. One key issue here is that a 7Twelve portfolio will have both depth and breadth; diversification depth within separate mutual funds, and diversification breadth across the seven asset classes, with rebalancing on at least an annual basis.
Dr. Israelsen indicates that using a variety of mutual funds or exchange-traded funds achieves maximum diversification, but the trick is to mix the right types of mutual funds (mostly index funds) together that complement each other (behave differently) and avoid redundancy. Throughout the book he compares 7Twelve to the typical "balanced" portfolio of 60% U.S. stocks/40% bonds. In 7Twelve, all 12 different mutual funds have the same weight or allocation of 8.33%. He talks about a portfolio being similar to salsa, in that salsa made with only two ingredients would not be something most of us would eat. However, a new salsa might require us to search for unfamiliar ingredients to complete the 12 ingredient recipe, even using ingredients we would not necessarily eat on our own.
For the remainder of Chapter...