1. 1 After the Fall: Asset Allocation and Rebalancing Craig L. Israelsen, Ph.D. Brigham Young University April 2009 www.7TwelvePortfolio.com

2. 2 This document is a research report presenting portfolio research and analysis. This document is neither investment advice nor an investment solicitation. 7Twelve Implementation of the 7Twelve portfolio is no guarantee of performance. --------------------------------------------------------------------------------------------- This is a copyrighted document, copying for redistribution is prohibited unless written permission is obtained from Craig L. Israelsen. Copyright © 2009 Craig L. Israelsen All rights reserved

3. Asset Allocation Accumulation Phase 3

4. 4 Historical Asset Returns 39-Year Period from 1970-2008 Annualized Return (%) Std Dev of Annual Returns Growth of $10,000 REIT 10.6220.09512,834 US Small Stock 10.2522.72449,357 Commodities 9.9225.56399,818 US Large Stock 9.4818.20341,485 International Stock 8.9723.08284,977 Bonds (Intermediate) 8.135.36210,633 Cash 6.173.13103,237 Inflation (CPI) 4.523.1155,979

5. 5 Data ► Large-cap US equity represented by the S&P 500 Index. ► Small-cap US equity represented by the Ibbotson Small Companies Index from 1970-1978, and the Russell 2000 Index from 1979-2008. ► Non-US equity represented by the MSCI EAFE Index. ► Real estate represented by the NAREIT Index from 1970-1977 and the Dow Jones Wilshire REIT Index from 1978-2008. ► Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became the S&P GSCI Commodity Index. ► U.S. intermediate term bonds represented by the Ibbotson Intermediate Term Bond Index from 1970-72 and the Lehman Brothers Intermediate Term Government Bond index from 1973-2008 (a Barclays Capital index as of late 2008). ► Cash represented by 3-month Treasury Bills.

6. 6 Historical Upside and Downside 1970-2008 Largest One-Year Gain (%) Worst One-Year Loss (%) Worst 3-Year Cum Loss (%) Bonds 25.42(1.75)6.43 Cash 15.581.054.22 REIT 48.99(39.20)*(31.85) US Large Stock 37.58(37.00)*(37.61) Commodities 74.96(46.49)*(39.72) US Small Stock 57.40(33.79)*(42.24) International Stock 69.44(43.38)*(43.32) * Worst One-Year Loss Occurred in 2008

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8. 8 Correlation of Major Asset Classes (1970-2008) Large US Equity Small US Equity Non-US Equity US Bonds CashREIT Small US Equity 0.78 Non-US Equity 0.660.54 US Bonds 0.160.02(0.12) Cash 0.150.09(0.01)0.39 REIT 0.500.750.37(0.03)0.15 Commodities (0.07)(0.15)0.03(0.21)0.09(0.04) Aggregate (Average) Correlation in Equal-Weighted 7-Asset Portfolio = 0.19

9. 9 Year Large US Equity Small US Equity Non-US Equity Intermediate Term US Bonds CashReal EstateCommodities Equally Weighted Multi- Asset Portfolio 19703.92(17.43)(11.66)16.866.80(4.00)15.171.38 197114.3016.5029.598.724.5315.5221.0815.75 197219.004.4336.355.164.248.0142.4317.09 1973 (14.69)(30.90)(14.92)3.367.46(15.52)74.961.39 1974 (26.47)(19.95)(23.16)7.038.35(21.40)39.51(5.16) 197537.2352.8235.398.336.0819.30(17.22)20.28 197623.9357.382.5411.745.2347.59(11.92)19.50 1977(7.16)25.3818.063.005.5222.4210.3711.08 19786.5723.4632.622.237.6710.9831.6116.45 197918.6143.074.756.5910.8648.9933.8123.81 198032.5038.6022.586.6512.7133.1211.0822.46 1981(4.92)2.03(2.28)10.7915.5817.88(23.01)2.30 198221.5524.95(1.86)25.4211.6620.9111.5616.31 198322.5629.1323.698.229.2432.1716.2620.18 19846.27(7.30)7.3814.2910.3321.891.057.70 198531.7331.0556.1618.007.976.5010.0123.06 198618.675.6869.4413.066.2919.752.0519.28 19875.25(8.80)24.633.616.13(6.59)23.776.86 198816.6125.0228.276.407.0617.4827.9418.40 198931.6916.2610.5412.688.672.7238.2817.26 1990(3.10)(19.48)(23.45)9.567.99(23.44)29.08(3.26)

10. 10 Year Large US Equity Small US Equity Non-US Equity Intermediate Term US Govt Bonds CashReal EstateCommodities Equally Weighted Multi- Asset Portfolio 199130.4746.0412.1314.115.6823.84(6.13)18.02 19927.6218.41(12.17)6.933.5915.134.426.28 199310.0818.8832.568.173.1215.14(12.33)10.80 19941.32(1.82)7.78(1.75)4.452.665.292.56 199537.5828.4511.2114.415.7912.2420.3318.57 199622.9616.496.054.065.2637.0533.9217.97 199733.3622.361.787.725.3119.66(14.07)10.87 199828.58(2.55)20.008.495.02(17.01)(35.75)0.97 199921.0421.2626.970.494.87(2.58)40.9216.14 2000 (9.10)(3.02)(14.17)10.476.3231.0449.7410.18 2001 (11.89)2.49(21.44)8.423.6712.35(31.93)(5.48) 2002 (22.10)(20.48)(15.94)9.641.683.5832.07(1.65) 200328.6947.2538.592.291.0536.1820.7224.97 200410.8818.3320.252.331.4333.1617.2814.81 20054.914.5513.541.683.3413.8225.559.63 200615.7918.3726.343.845.0735.97(15.09)12.90 20075.49(1.57)11.178.474.77(17.56)32.676.21 2008 (37.00)(33.79)(43.38)10.431.51(39.20)(46.49)(26.85)

11. 11 Multi-Asset Portfolio vs. Single Assets 1970-2008 Large US Equity Small US Equity Non-US Equity US Bonds Cash Real Estate Commodities Equally Weighted 7-Asset Portfolio 39-Year Average Annualized % Return 9.4810.258.978.136.1710.629.9210.21 39-Year Standard Deviation of Annual Returns 18.2022.7223.085.363.1320.0925.5610.50 Growth of $10,000 341,485448,827285,009210,633103,237513,069399,818442,671 Number of Years with Negative Returns 91211109105 Worst One-Year % Return (37.00)(33.79)(43.38)(1.75)1.05(39.20)(46.49)(26.85) Worst Three-Year Cumulative % Return (37.61)(42.24)(43.32)6.434.22(31.85)(39.72)(12.28)

12. What Was Different in 2008? Commodities and real estate did not help out as in prior equity downturns. Prior to 2008, the worst one-year return for the Multi-Asset Portfolio was (5.48) 12 Year Large US Equity Small US Equity Non-US Equity Intermediate US Govt Bonds Cash Real Estate Commodities Equally Weighted Multi-Asset Portfolio 1973 (14.69)(30.90)(14.92)3.367.46(15.52)74.961.39 1974 (26.47)(19.95)(23.16)7.038.35(21.40)39.51(5.16) 2000 (9.10)(3.02)(14.17)10.476.3231.0449.7410.18 2001 (11.89)2.49(21.44)8.423.6712.35(31.93)(5.48) 2002 (22.10)(20.48)(15.94)9.641.683.5832.07(1.65) 2008 (37.00)(33.79)(43.38)10.431.51(39.20)(46.49)(26.85)

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14. 14 Portfolio Mix (Equity/Fixed Income) Large US StockBonds 60/4060%40% 40/6040%60% Typical “Balanced” Portfolios

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16. Asset Allocation Distribution Phase 16

17. 17 Retirement Distribution Portfolio $1,000,000 starting balance, 5% initial withdrawal, 3% annual increase in dollar amount of withdrawal Equally-Weighted 7-Asset Portfolio60/40 Portfolio *40/60 Portfolio ** 39-Year Period Annual End-of-Year Cash Withdrawal Annual Portfolio Return End-of-Year Account Balance ($) Annual Portfolio Return End-of-Year Account Balance ($) Annual Portfolio Return End-of-Year Account Balance ($) 197050,0001.38%963,8009.10%1,040,96011.68%1,066,840 197151,50015.75%1,064,08512.07%1,115,08310.95%1,132,180 197253,04517.09%1,192,87713.46%1,212,17310.70%1,200,233 197354,6361.39%1,154,855(7.47%)1,066,987(3.86%)1,099,268 197456,275(5.16%)1,039,039(13.07%)871,257(6.37%)972,969 197557,96420.28%1,191,74825.67%1,036,94419.89%1,108,529 197659,70319.50%1,364,41919.05%1,174,82116.62%1,233,020 197761,49411.08%1,454,161(3.10%)1,076,955(1.06%)1,158,407 197863,33916.45%1,630,0114.83%1,065,6763.97%1,141,010 197965,23923.81%1,952,90213.80%1,147,52211.40%1,205,824 198067,19622.46%2,324,38422.16%1,334,61816.99%1,343,498 198169,2122.30%2,308,5331.36%1,283,6104.51%1,334,824 198271,28816.31%2,613,83323.10%1,508,81023.87%1,582,185 198373,42720.18%3,067,91516.82%1,689,22613.96%1,729,569 198475,6297.70%3,228,5599.48%1,773,70111.08%1,845,610 198577,89823.06%3,895,16626.24%2,161,18723.49%2,201,282 198680,23519.28%4,565,80716.43%2,435,94815.30%2,457,931 198782,6426.86%4,796,2494.59%2,465,2134.27%2,480,144 198885,12218.40%5,593,50012.53%2,688,88410.48%2,655,041 198987,67517.26%6,471,42324.09%3,248,85320.28%3,105,914 199090,306(3.26%)6,169,9641.96%3,222,3554.50%3,155,250 199193,01518.02%7,188,77623.93%3,900,32120.65%3,713,921 199295,8056.28%7,544,1187.34%4,090,9557.21%3,885,741 199398,67910.80%8,260,4199.32%4,373,3898.93%4,134,213 1994101,6402.56%8,370,3640.09%4,275,773(0.52%)4,010,993 1995104,68918.57%9,820,29128.31%5,381,64123.68%4,856,027 1996107,83017.97%11,477,16815.40%6,102,58411.62%5,312,468 1997111,06410.87%12,614,16423.10%7,401,46117.98%6,156,373 1998114,3960.97%12,621,94420.54%8,807,62116.53%7,059,378 1999117,82816.14%14,541,11812.82%9,818,9298.71%7,556,422 2000121,36310.18%15,900,456(1.27%)9,572,6692.64%7,634,699 2001125,004(5.48%)14,904,788(3.77%)9,087,1590.30%7,532,294 2002128,754(1.65%)14,530,105(9.40%)8,103,848(3.06%)7,173,353 2003132,61724.97%18,025,24018.13%9,440,45912.85%7,962,512 2004136,59514.81%20,557,9267.46%10,008,1225.75%8,283,761 2005140,6939.63%22,396,3733.62%10,229,5232.97%8,389,262 2006144,91412.90%25,140,27211.01%11,210,8798.62%8,967,502 2007149,2616.21%26,551,1446.68%11,810,7297.28%9,470,896 2008153,739(26.85%) 19,269,561 (18.03%) 9,527,751 (8.54%) 8,508,152 Total Withdrawal 3,457,972 7-Asset Portfolio = 14.3% each in US large stock, US small stock, non-US stock, bonds, cash, REITs, commodities * 60/40 Portfolio = 60% S&P 500, 40% Lehman Brothers Intermediate Bond Index (now Barclays Capital) ** 40/60 Portfolio = 40% S&P 500, 60% Lehman Brothers Intermediate Bond Index (now Barclays Capital)

18. $1,000,000 starting balance, 5% initial withdrawal, 3% annual increase in dollar amount of withdrawal Retirement Distribution Portfolio End-of-Year Account Balance: 1970-2008 $1,000,000 starting balance, 5% initial withdrawal, 3% annual increase in dollar amount of withdrawal 18

19. Rebalancing 19

20. 7-Asset Model 20

21. Growth of $10,000 1970-2008 $10,000 / 7 = $1,428 $1,428 starting balance in each of the 7 assets Large US Equity Small US Equity Non-US Equity US Bonds CashREITCommodities Total Portfolio Value (Growth of $10,000) Annually Rebalanced (balances at the end of 2008 before final rebalance) 54,46157,23648,94695,46287,75152,55946,257442,671 Buy-and-Hold 48,78464,11840,71630,09014,74873,29657,117328,868 21

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23. 23 Building a Multiple-Asset Low Correlation Portfolio The 7Twelve Portfolio ► 7 Core Asset Classes with ► 12 Underlying Funds

24. 24 The Portfolio A Multiple-Asset Global Portfolio The 7Twelve Portfolio A Multiple-Asset Global Portfolio Approximately 60-65% of the Portfolio Allocation in Equity and Diversifying Assets Approximately 35-40% of the Portfolio Allocation in Bonds and Cash US Equity Non-US Equity Real Estate Resources US Bonds Non-US Bonds Cash Large Companies Developed Markets Global Real Estate Natural Resources US Aggregate Bonds International Bonds US Money Market Medium-sized Companies Emerging Markets Commodities Inflation Protected Bonds Small Companies

25. 25 Accumulation 7Twelve Portfolio

26. 26 Distribution 7Twelve Portfolio $1,000,000 Initial Account Value, 5% Initial Withdrawal, 3% Annual Increase in Withdrawal

27. As of December 31, 2008 27 Active 7Twelve TM Portfolios One-Year Total % Return as of December 31, 2008 10-Year Annualized % Return as of December 31, 2008 100% 7Twelve(28.22)8.65 80% 7Twelve, 10% TIPS, 10% Cash(22.58)8.11 60% 7Twelve, 20% TIPS, 20% Cash(16.95)7.49 40% 7Twelve, 30% TIPS, 30% Cash(11.31)6.77 Comparison Funds American Funds Capital Income Builder (CAIBX) (30.06)5.02 Fidelity Global Balanced (FGBLX) (23.27)4.77 Vanguard Balanced (VBINX) (22.21)2.07 Vanguard 500 Index (VFINX) (37.02)(1.46)

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29. 7Twelve Portfolio as the Core Data as of December 31, 2008 Balanced 60/40 Models  2008 Performance(20.19)(20.20)(12.83) 10-Yr Average Annualized Return 1.90%2.42%6.62% 10-Yr Std Dev of Return 11.55%11.96%8.22% 10-Year Growth of $10,000 $12,070$12,695$18,985 29

30. 30 Craig L. Israelsen, Ph.D. www.7TwelvePortfolio.com 801-422-4537 www.7TwelvePortfolio.com To purchase the 50-page 7Twelve Portfolio Research Report (with complete portfolio holdings and tickers and back-tested performance) http://www.7twelveportfolio.com/Downloads/Web7TwelveReport.pdf For a free one-page client handout email me at: craig@7TwelvePortfolio.com