Fresh Look at the "Larry Portfolio" from Portfolio Charts

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Kevin K
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Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin K » Sun Feb 05, 2017 11:35 am

I thought I'd share this new post from Tyler over at Portfolio Charts for those who don't subscribe to his updates:

https://portfoliocharts.com/2017/02/03/ ... portfolio/

I continue to find new things to appreciate and admire about this site. The ability to look at how it would have been to "live with" an allocation under all kinds of circumstances and how the ride would have been/was from both an accumulation and retiree/withdrawal phase perspective is invaluable.

Like Tyler I greatly appeciated Mr. Swedroe's book "Reducing the Risk of Black Swans" and would probably have implemented some iteration of his recommended portfolios were it not for knowing my weak tolerance for living with that kind of tracking error for long periods of time. Still what a wonderfully simple liabilit-matching portfolio - without the need to put up with today's negative real returns from TIPS or dabble in gold or other alternative investments (a requirement for the Golden Butterfly and pretty much all the other best-performing portfolios on Portfolio Charts).

It seems to me this allocation is every bit as deserving of the "Permanent Portfolio" designation as Harry Browne's 4 x 25% original, and would probably be a better "bunker" for most risk-averse retirees who've already won the game.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by garlandwhizzer » Sun Feb 05, 2017 1:06 pm

I don't think there's any portfolio with reasonable expected returns that better prepares for black swans than Larry's. It is expected to produce a very high Sharpe ratio (return per unit of risk). Having said that, like other bond dominated portfolios it currently looks great on backtesting because we've just been through a 30+ year bond bull market where bonds produced not only safety but also outsized returns. The same bond results are not expected over the next decade or two. Backtesting does not write the future in stone.

For those of us who are both risk averse and quite wealthy, the only major financial concern going forward is avoiding the disaster of a black swan event. Larry's portfolio hits that target right in the bulls eye. It is a no-brainer for capital preservation with the opportunity for best expected gain per unit of risk. For those of us who are not so wealthy, more equity exposure (more risk exposure) may be necessary to meet long term financial goals. 70% bond allocation with an expected close to zero real return over the next decade or so takes a considerable bite out of total portfolio return even if the other 30% is invested in high risk/high reward equity. Optimal portfolio choice is a matter of fitting asset selection wisely to your own personal financial circumstances and risk tolerance.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Theoretical » Sun Feb 05, 2017 1:24 pm

I think my greatest concern with the Larry portfolio is the risk of an extended Bond bear like happened between 1941 and 1982, especially during the low inflation periods. TIPS and Broker CDs can help alleviate that but it still seems a bit vulnerable to that side of the equation.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin K » Sun Feb 05, 2017 1:26 pm

Wise thoughts sir and I agree with you completely.

Here's an interesting variant of the Larry Portfolio that dials the bonds back to a still substantial 60%, changes the equities a bit and adds a small slice of gold (sorry to bring up THAT particular four letter word here but its usefulness in modest amounts is hard to miss when looking at the most successful allocations on Portfolio Charts).

Effectively it's a "Larry 40:60" and so I suppose is more along the lines of a Wellesley or Lifestrategy Conservative fund version of the LP. Impressive construction and performance for the exceedingly risk averse.

https://www.portfoliovisualizer.com/bac ... 0&Gold1=10

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Random Walker » Sun Feb 05, 2017 1:32 pm

Garlandwhizzer,
Low interest rates make future bond returns look poor and current equity valuations make expected equity returns look modest as well. That's why it may be prudent to consider diversifying across other potential sources of return such as the alternatives Larry has mentioned recently: AQR Style Premia, AQR Manged Futures, Stone Ridge Alternative Lending, Stone Ridge Reinsurance

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by CULater » Sun Feb 05, 2017 2:30 pm

Having played with this a great deal, the unfortunate aspect of including Gold is that once you eliminate the years 1972-1975 from long term gold returns, you will find it did nothing for you. If you compare an allocation of 30% SCV, 70% ITT to any allocation that replaces some of your ITT with gold, you will see that from 1976-2016 the 30/70 allocation generated the highest compound returns with the lowest risk. Adding gold reduces your returns in proportion to the amount that is allocated. 1972-1975 were the years that the gold-dollar peg was removed and gold had huge dollar gains, which is a one-off event that will never recur. Also, U.S. citizens could not legally own gold until 1976. And, don't forget that reported gold returns until the advent of gold ETFs recently do not include the high expense of trading and storing the metal. All this means that the historical returns data for gold are highly overestimated. Unfortunately, Portfolio Charts only includes gold returns beginning in 1970 and so the returns are quite misleading, IMO.
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by antiqueman » Sun Feb 05, 2017 11:01 pm

I have difficulty understanding what all the charts mean.

What I gather from the charts in a broad sense is that the Larry Portfolio, backed tested over various years, had low St.Dev. did not run out of money at 4% percent withdrawl rate and during the worst period the portfolio recovered within 12 years.

As note, I don't totally understand all the charts and their finer points. An explanation from those more versed than I am with the charts would be appreciated.

Thanks.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Tyler9000 » Mon Feb 06, 2017 12:26 am

antiqueman wrote: As note, I don't totally understand all the charts and their finer points. An explanation from those more versed than I am with the charts would be appreciated.
The charts are certainly dense with information and can take a little while to fully process. The trick to reading them is to understand that they show the results for every start year since 1970 simultaneously. So when you see lots of lines and data points, you're actually getting an idea for the uncertainty of the portfolio returns simply based on the start date. Incidentally, this also means that the charts don't simply show the most advantageous start dates (like the early 70's for gold) but also the worst ones (such as the 90's for gold). I believe that studying the big picture is more valuable than fixating on any individual investing timeframe.

For help with a specific chart, you might try reading the calculator walkthroughs that explain each type of chart in more detail. If anything doesn't make sense, feel free to PM me and I'll be happy to help.
Last edited by Tyler9000 on Mon Feb 06, 2017 2:07 am, edited 7 times in total.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by FIREchief » Mon Feb 06, 2017 12:54 am

Does this portfolio work in a rising interest rate environment? It would seem that the large fixed income portion would consistently lose value while the relatively small, high volatility equity portions would be highly unpredictable. Where would the growth/returns come from? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Mon Feb 06, 2017 8:16 am

Re potential for bond bear, that risk, which is real, can be addressed at least by avoiding longer term bonds. If you stick with 4-5 year maturities you balance the reinvestment risk and reinvestment risk. Also the heavy value tilt will likely help if it's inflation that causes the bond bear market, as value stocks tend to be more leveraged and inflation reduces the real cost of debt. Of course TIPS also reduce the risks, and if it's real rates rising, not inflation, then you only have a temporary loss of value and really should only care about real spending power.

You can also address the risks of bond bear market risks with some of the alternatives like alternative lending and reinsurance and AQR products. Now using them will increase the tail risks somewhat, but far less than equities do, and they should generally be uncorrelated with equity risks and bond risks (with exception of alt lending when UE rises sharply). So if willing and able to take some more tail risk these are good alternatives, and I own them. Now if use as alternative to equities, they all have market like returns with FAR LESS risk and uncorrelated, improving SR further. This is especially true of alt lending and reinsurance.

Hope that is helpful
Larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Aptenodytes » Mon Feb 06, 2017 10:36 am

I'm using a Vanguard-funds-for-equities version of the Larry Portfolio and have chosen to mitigate the bond risk on the bond side only. My treasuries are 6 years or less duration. I have a large position in a stable value fund. And I've got a modest set of 10-year TIPS that will be held to maturity.

I'm at 30% equities, half international, and would rather leave the equities as is because I think my bond risk is rather low over the long term. Stable value has a guaranteed floor. I don't care if treasuries drop in value for a few years.

I've relied more on custom portfolio simulations than backtesting. I prefer to use lower real returns on the bond side than show up in backtesting.

For full disclosure i also hold high yield corporate bonds which is a no-no in Larry's view.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Mon Feb 06, 2017 5:43 pm

BTW- I've shown that the strategy would have worked very well even using one year Treasuries showing it's not dependent on bull market in bonds. Would have worked even better obviously with say 5 year maturities
Larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by CULater » Mon Feb 06, 2017 5:52 pm

larryswedroe wrote:BTW- I've shown that the strategy would have worked very well even using one year Treasuries showing it's not dependent on bull market in bonds. Would have worked even better obviously with say 5 year maturities
Larry
Isn't this just one version of Taleb's "Black Swan" portfolio strategy?
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin M » Mon Feb 06, 2017 6:18 pm

Kevin K wrote:Still what a wonderfully simple liabilit-matching portfolio - without the need to put up with today's negative real returns from TIPS <snip>
There may be a lot of good things to be said for a Larry-style portfolio, but calling it a liability-matching portfolio is not one of them. Perhaps the bond portion of the portfolio could by your LMP, especially if you use a TIPS ladder, but the stocks would be part of your risk portfolio (RP), whether you use small-value, total market, or some other flavor.

The risks of the assets in an LMP must match the risks of your liabilities. The biggest risk to your liabilities is inflation, which is why a TIPS ladder is the most common recommendation for an LMP. I personally think direct CDs with rich yield premiums and small early withdrawal penalties are a better bet in the current environment, but that's another conversation.

Minor correction: TIPS yields are not negative for maturities beyond five years: Daily Treasury Real Yield Curve Rates. But in a nutshell, the low real yields of TIPS and rich yield premiums of good direct CDs, coupled with good early withdrawal terms which provide an additional hedge against unexpected inflation, is why I prefer good direct CDs to TIPS now for the LMP-like portion of my portfolio.

Just because something looks good in a backtest does not mean it's going to work well in the future, so beware of placing too much reliance on nice looking charts of historical results.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Tue Feb 07, 2017 8:09 am

Culater
Yes the concepts of the "barbell" strategy are the (same. The risk assets you own should be the riskiest (highest expected returns) and the bonds should be the safest. That allows one to hold much less systemic market risk and then you have the correlations tending to work favorably. While the correlation of safe bonds to stocks is on average ZERO, when systemic risks show up the correlation tends to turn HIGHLY NEGATIVE.

Larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Lieutenant.Columbo » Tue Feb 07, 2017 11:12 am

larryswedroe wrote:...While the correlation of safe bonds to stocks is on average ZERO, when systemic risks show up the correlation tends to turn HIGHLY NEGATIVE...
Larry,
I assume Highly Negative means bonds actually improve (rather than staying the same) when equities go down.
What does this mean in practical terms for the investor who holds AA and AAA bond funds who don't need to cash out "when systemic risks show up"? Do bond funds pay out more income? Do bond fund share prices go up? Other?
Thank you.
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Morse Code » Tue Feb 07, 2017 1:47 pm

This portfolio concept appeals to me. Is there any reason I have to wait until I've "won the game" to implement? Assuming I understand the tracking error risk, would this work with a higher equity allocation too. For example, would it be crazy to do 33% ITT, 33% Small Value, 33% Int'l Small when I'm still 8-10 years from retirement and then do a glide path increasing the bonds over time?
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin M » Tue Feb 07, 2017 2:23 pm

Lieutenant.Columbo wrote:
larryswedroe wrote:...While the correlation of safe bonds to stocks is on average ZERO, when systemic risks show up the correlation tends to turn HIGHLY NEGATIVE...
Larry,
I assume Highly Negative means bonds actually improve (rather than staying the same) when equities go down.
Not Larry, but yes, this is what it means. Look at any Treasury fund in late 2008--they all went up in value, with the longer-term funds going up the most.
What does this mean in practical terms for the investor who holds AA and AAA bond funds who don't need to cash out "when systemic risks show up"? Do bond funds pay out more income? Do bond fund share prices go up? Other?
Thank you.
Again, look at 2008 to see what happened to different types of bond funds. Corporate bonds generally went down in value, with high-yield going down the most, while Treasury bonds went up in value. So credit risk was penalized but pure term risk was rewarded. The lower the quality of the bond, the more it went down in value.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin M » Tue Feb 07, 2017 2:29 pm

Morse Code wrote:This portfolio concept appeals to me. Is there any reason I have to wait until I've "won the game" to implement? Assuming I understand the tracking error risk, would this work with a higher equity allocation too. For example, would it be crazy to do 33% ITT, 33% Small Value, 33% Int'l Small when I'm still 8-10 years from retirement and then do a glide path increasing the bonds over time?
I never saw the Larry Portfolio as only for those who have won the game. It's for anyone who believes that the historical data is a good indicator of future risk and returns, and who can tolerate significant tracking error relative to a more traditional, total market approach.

The historical results for an LP-like portfolio show higher returns with same risk or same returns with less risk, with risk measured both as standard deviation of returns and max drawdowns (left tail risk).

You can choose any stock allocation you want. Larry just used 30% in examples he's presented, but there's no reason you need to go with that. The main idea is that you achieved higher risk-adjusted returns historically by using less small-cap value stocks and more safe bonds compared to a portfolio using total market stocks. So you can select whatever combination of risk and expected return you want based on the stock/bond ratio, remembering that this is for historical returns, and we don't know that future returns will be similar.

Kevin
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Random Walker » Tue Feb 07, 2017 2:34 pm

Morse Code,
I think the Larry Portfolio concept applies at any stage of one's investing lifetime. I think in its broadest terms the Larry concept is simply to use the highest expected returns asset classes for the equity component. The big doses of size and value tilt lead to excellent diversification across the market, size, value factors. I believe some young advisors at Larry's firm are 100% equity all in SV, ISV, EMV. As one titrates to his personal risk taste, he just adds high quality bonds to the same equity components.
Basically, for any given expected return, one can choose a combination of TSM equities and bonds. With the Larry heavy tilt one can achieve same expected return with bigger allocation to bonds and likely smaller dispersion of returns.

Dave

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Portfolio7 » Tue Feb 07, 2017 3:14 pm

Random, I agree. I derived something very similar to this and have been using it. You can scale it up or down easily enough, but I believe (and maybe someone thinks different, but this is what I think I'm seeing) that the 'fat tails' protection tends to disappear as you reduce bonds, and your equities gain more control of the risk profile. There is still some benefit to the high risk equity classes, but I don't think it's as great as when bonds dominate your portfolio.
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by betablocker » Tue Feb 07, 2017 3:32 pm

As much as I love Larry, I do think the name doesn't capture what portfolio is trying to do. It's really an attempt to achieve improved factor balance. This reduces the concentration of risk in market beta, increases risk diversification, reduces fat tail risks and all while getting similar returns to traditional beta heavy portfolios. Problem: Tracking error

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Tue Feb 07, 2017 4:08 pm

yes the Larry Portfolio could be used for any stage investor, but particularly valuable to those who have won the game --note it was called the LP by the NY Times in article about me, and my strategy for low equity but high tilt given MY SITUATION. But used the way I did it's more equal weighting of factor exposures. As noted some advisors in my firm are 100% equity and same equity holdings as me
Larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by pascalwager » Tue Feb 07, 2017 9:14 pm

CULater wrote:
larryswedroe wrote:BTW- I've shown that the strategy would have worked very well even using one year Treasuries showing it's not dependent on bull market in bonds. Would have worked even better obviously with say 5 year maturities
Larry
Isn't this just one version of Taleb's "Black Swan" portfolio strategy?
Taleb concept called for 90% Treasuries and 10% very high risk.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by betablocker » Wed Feb 08, 2017 3:41 pm

larryswedroe wrote:yes the Larry Portfolio could be used for any stage investor, but particularly valuable to those who have won the game --note it was called the LP by the NY Times in article about me, and my strategy for low equity but high tilt given MY SITUATION. But used the way I did it's more equal weighting of factor exposures. As noted some advisors in my firm are 100% equity and same equity holdings as me
Larry
Larry any thoughts on the most efficient way to increase momentum exposure with the Larry Portfolio beyond choosing funds that screen for it? Is it managed futures or adding equity momentum funds?

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by betablocker » Wed Feb 08, 2017 3:41 pm

larryswedroe wrote:yes the Larry Portfolio could be used for any stage investor, but particularly valuable to those who have won the game --note it was called the LP by the NY Times in article about me, and my strategy for low equity but high tilt given MY SITUATION. But used the way I did it's more equal weighting of factor exposures. As noted some advisors in my firm are 100% equity and same equity holdings as me
Larry
Larry or any thoughts on the most efficient way to increase momentum exposure with the Larry Portfolio beyond choosing funds that screen for it? Is it managed futures or adding equity momentum funds?

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Wed Feb 08, 2017 5:07 pm

groovy9 and I have devised a portfolio (the GWP :)) we think is comparable to the LP. It's 60% ITT, 25% staples, and 15% SCV.

From 2005, the inception year of VCSAX, to current, it's CAGR is .99% higher than the LP, it's worst year was 2009 with a 1.09% loss as opposed to the LP's loss of 1.74%, and it's maximum drawdown was .80% lower (11.42% instead of LP's 12.22%). In short, it has better returns with lower volatility. Surprisingly, the GWP was only behind the S&P 500 by .91% over this same period, but with a fraction of the latter's volatility.

An obvious shortcoming of this analysis is the relatively brief time frame (13 years) of the analysis. Further, a weakness of the GWP is its relative lack of international exposure. Over the long-term, this could swing the LP in front of the GWP. But at a minimum, I think that we may have found a worthwhile portfolio comparable to the LP.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Wed Feb 08, 2017 7:08 pm

betablocker
First I would at least consider the funds that do screen out negative momentum

Second, could consider the AQR Managed Futures which targets Times Series Momentum, which does have tail hedging properties, and provides exposure across four asset classes.

Can also use the style premium fund but it targets four factors across four asset classes, including MOM, though it's cross-section momentum.

larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by columbia » Thu Feb 09, 2017 8:00 pm

Suppose someone substituted a global cap weight fund (VT) for SCV and International Small....at what percentage of equities would it be a reasonable substitute for the Larry Portfolio?

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Aptenodytes » Fri Feb 10, 2017 9:49 am

columbia wrote:Suppose someone substituted a global cap weight fund (VT) for SCV and International Small....at what percentage of equities would it be a reasonable substitute for the Larry Portfolio?
As the old joke goes, "you can't get there from here." There's no percentage of a total market fund that does what the LP does -- trimming tail risks while preserving expected returns. The LP replaces total-market investing with small-value and international-small -- you can't undo that and call the results a reasonable substitute. If your cake recipe calls for baking soda and sugar, you can't say "how much extra baking soda should I use if I don't have any sugar."

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by columbia » Fri Feb 10, 2017 10:31 am

Aptenodytes wrote:
columbia wrote:Suppose someone substituted a global cap weight fund (VT) for SCV and International Small....at what percentage of equities would it be a reasonable substitute for the Larry Portfolio?
As the old joke goes, "you can't get there from here." There's no percentage of a total market fund that does what the LP does -- trimming tail risks while preserving expected returns. The LP replaces total-market investing with small-value and international-small -- you can't undo that and call the results a reasonable substitute. If your cake recipe calls for baking soda and sugar, you can't say "how much extra baking soda should I use if I don't have any sugar."

To sort of answer my own question (and doing some back testing), it looks like one would need well over 80% of VT to get close to equaling the total return....I'd love to see some more official analysis on that.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Fri Feb 10, 2017 10:56 am

Note that there are other alternatives to use to create a "Larry Portfolio", meaning same expected returns but less tail risk (both good and bad). For example for those with room in tax advantaged accounts adding LENDX and SRRIX, the two Stone Ridge products I'm currently invested in, would do the trick. They both have equity like expected returns, both have low correlation to equities (SRRIX has none) and both have much lower SDs than market beta risk. Thus you cut tails. That allows one to hold even less equities than just the SV tilt does when used in combination.

Hope that helps
larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Lieutenant.Columbo » Fri Feb 10, 2017 12:12 pm

larryswedroe wrote:...LENDX and SRRIX, the two Stone Ridge products I'm currently invested in, would do the trick. They both have equity like expected returns, both have low correlation to equities (SRRIX has none) and both have much lower SDs than market beta risk. Thus you cut tails...
Larry,
If their returns stays similar to equities, and if their volatility stays at 1/4 (LENDX) and 1/2 (SRRIX) of equities', do you think LENDX + SRRIX will one day become mainstream (and, thus, not be considered Alternatives any longer) when/if their Expense Ratio/Fund Management Fee/Expenses go down?

Thanks.
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Fri Feb 10, 2017 3:50 pm

LT
I'm highly confident that alternative lending will become mainstream as capacity is huge, and the banks will be disintermediated as result and borrowers and investors alike will benefit from that disintermediation and as side benefit is systemic risk or banking system will come WAY down as instead of a few massive institutions holding all the risks, you have thousands of investors holding small amounts of risks. On reinsurance, the market size is much smaller so don't think will become "mainstream" due to more limited capacity
Larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by hilink73 » Fri Feb 10, 2017 3:53 pm

larryswedroe wrote:Note that there are other alternatives to use to create a "Larry Portfolio", meaning same expected returns but less tail risk (both good and bad). For example for those with room in tax advantaged accounts adding LENDX and SRRIX, the two Stone Ridge products I'm currently invested in, would do the trick. They both have equity like expected returns, both have low correlation to equities (SRRIX has none) and both have much lower SDs than market beta risk. Thus you cut tails. That allows one to hold even less equities than just the SV tilt does when used in combination.

Hope that helps
larry
Hi Larry

I've read LENDX/SRRIX a couple of times on here now. Their website says they're only available through advisors/to US residents.
What would be more readily available options for this kind of alternative investments (if any do exist)?

Thanks

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by larryswedroe » Fri Feb 10, 2017 6:01 pm

hilink
there are at least alternatives in the lending product, just don't know if they are available directly or only to HNW investors. One is River North and the other is I think Colchis. None on reinsurance --mainly a hedge fund product with those type fees. Not likely to go mainstream due to limited capacity
Larry

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Fri Feb 10, 2017 6:09 pm

larryswedroe wrote:LT
I'm highly confident that alternative lending will become mainstream as capacity is huge, and the banks will be disintermediated as result and borrowers and investors alike will benefit from that disintermediation and as side benefit is systemic risk or banking system will come WAY down as instead of a few massive institutions holding all the risks, you have thousands of investors holding small amounts of risks. On reinsurance, the market size is much smaller so don't think will become "mainstream" due to more limited capacity
Larry
Lending Club has certainly been an effective investment for me. I've been an investor for nearly four years, and my net average return is almost 10%. People talk about these loans be very risky, but I haven't found that to be the case at all. Certainly you're going to lose some money along the way, but that should be factored in when you made the investment. Considering that they are not nearly as volatile as most other investments that can produce that kind of return, I think that they're quite solid.

Some are concerned that another 2008-2009 crisis would decimate this field, but that's highly unlikely. Default rates on P2P notes are very similar to those on credit cards, and banks were still in the black throughout their period with credit card accounts.

The biggest drawback I would offer is that it is not yet very liquid, but most seem to have had good success selling their notes on secondary platforms. I've made a couple of purchases on the secondary platforms personally, and it went very smoothly.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by siamond » Fri Feb 10, 2017 10:05 pm

Well, first off, one cannot really plan for black swans - or if you do, you really should read Taleb's book again and pay a bit more attention... :shock:

Next, the best way to hedge your bets is to... well, hedge your bets, hence diversify. A portfolio solely focused on Small-Cap Value (SCV) and Int'l Small (IS) as the engine of growth is a heck of a bet on tenuous patterns which proved elusive in the past. Tilting towards SCV while adding to a Total-Market allocation is a reasonable bet, knowing that if nothing materializes for decades if not ever, the TSM backbone should keep you on a decent growth path. Betting on SCV while ignoring TSM is plainly asking for troubles. Same thing for Int'l Small (where the evidence is actually extremely thin, with nothing solid available before 1982 - some UK and Japan numbers, that's it afaik-, and then only some dubious DFA numbers until an MSCI Index finally appeared in 1995).

Then we're left with 70% IT bonds, which is just about the riskiest portfolio ever in terms of deep risk (mid/long-term). That is a severe case of recency bias, ignoring the lessons of World-War I and II in numerous countries (yeah, maybe TIPS will save the day, but that remains to be more firmly established). Without even speaking of the consequences of decades of low or slowly rising interest rates - a definite possibility which would slowly sink any retirement portfolio - one needs real returns to pay for day-to-day expenses, believe it or not. Or severely stunt growth during accumulation, with the magic of compounding playing *against* you.

I am fond of backtesting, because those are the only hard facts we have to make judgment calls, but it needs to be taken with a lot of careful thought, always remembering that human beings are a little too good at finding patterns in sheer noise, and that fat tails are notoriously unpredictable and never of the same shape. Concentrated bets on elusive evidence is certainly not the way to plan for the unexpected.

Disclaimer: I do tilt towards SCV and IS in my own AA, but I would never bet the farm on those to the exclusion of anything else.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Fri Feb 10, 2017 10:58 pm

siamond wrote:Well, first off, one cannot really plan for black swans - or if you do, you really should read Taleb's book again and pay a bit more attention... :shock:

Next, the best way to hedge your bets is to... well, hedge your bets, hence diversify. A portfolio solely focused on Small-Cap Value (SCV) and Int'l Small (IS) as the engine of growth is a heck of a bet on tenuous patterns which proved elusive in the past.
I'm not quite sure what you mean by elusive. SCV has beaten the S&P 500 in every 20 year period except one. That sounds like real consistency to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by siamond » Fri Feb 10, 2017 11:17 pm

willthrill81 wrote:I'm not quite sure what you mean by elusive. SCV has beaten the S&P 500 in every 20 year period except one. That sounds like real consistency to me.
Well, anything longer than 10 years is a mighty long time in real life. Notably when things don't go the way you expect. And there are not that many independent 20 years periods in the past 90 years of (fairly reliable data). This discussion re-opens every few months on this forum, and the best way to think about it is to draw what Jack Bogle calls a telltale chart. This is essentially a growth chart, but where cumulative returns are divided by a reference (e.g. cumulative growth of total-market, TSM). Then you see very clearly the periods of time where something like SCV outperforms or underperforms TSM, or doesn't make a difference. Here is a recently updated chart along those lines. Look at it real hard.

Image

The overall trajectory looks good. But for decades (a loooong time), things didn't go so well. Look at 1946 to 1966. Look at the roller-coaster between 1986 and 2000. And then the four times where SCV went up a good deal all look quite different. That is a good example of the human eye possibly deceiving us because we're so eager to find patterns. The evidence MAY be there, or maybe not, it is clearly elusive, and also mighty hard with your nerves. Personally, I made the bet that the evidence is there (as other countries displayed similar growth spurts for SCV), but I am NOT betting the farm on the fact that it will reliably re-appear in the coming couple of decades. And I should be able to stay the course only because I am NOT making a huge bet on it... Do you see my point?

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Fri Feb 10, 2017 11:33 pm

siamond wrote:
willthrill81 wrote:I'm not quite sure what you mean by elusive. SCV has beaten the S&P 500 in every 20 year period except one. That sounds like real consistency to me.
Well, anything longer than 10 years is a mighty long time in real life. Notably when things don't go the way you expect. And there are not that many independent 20 years periods in the past 90 years of (fairly reliable data). This discussion re-opens every few months on this forum, and the best way to think about it is to draw what Jack Bogle calls a telltale chart. This is essentially a growth chart, but where cumulative returns are divided by a reference (e.g. cumulative growth of total-market, TSM). Then you see very clearly the periods of time where something like SCV outperforms or underperforms TSM, or doesn't make a difference. Here is a recently updated chart along those lines. Look at it real hard.

The overall trajectory looks good. But for decades (a loooong time), things didn't go so well. Look at 1946 to 1966. Look at the roller-coaster between 1986 and 2000. And then the four times where SCV went up a good deal all look quite different. That is a good example of the human eye possibly deceiving us because we're so eager to find patterns. The evidence MAY be there, or maybe not, it is clearly elusive, and also mighty hard with your nerves. Personally, I made the bet that the evidence is there (as other countries displayed similar growth spurts for SCV), but I am NOT betting the farm on the fact that it will reliably re-appear in the coming couple of decades. And I should be able to stay the course only because I am NOT making a huge bet on it... Do you see my point?
I see your point, but ten years in equities is not a long time IMHO.

And given everything we know about small caps, apart from the whole value angle, strongly suggests that the premium in returns is unlikely to vanish over the long-term.

I'm not betting on their returns being what they've been in the past because they never are. But as Mark Twain said, "History doesn't repeat itself, but it does rhyme."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by OutInThirteen » Sat Feb 11, 2017 8:59 am

Is the Larry Portfolio even implementable if the vast majority of one's bond portfolio (low- to mid-6 figures) is in the Thift Savings Plan G Fund? All retirement expenses, including discretionary, are covered by 3 pensions (2 are COLA'd, mostly with 100% survivor benefit) and 2 SSs, so the portfolio is mainly there to cover medical and LTC expenses later in life. Any remaining will go to our children. Current equity portfolio is 66% total international (FTIPX), 17% REIT (VGSNX), and 17% total US (FSTVX and equivalent). The REIT is there mainly to take advantage of the volatility for rebalancing opportunities, which has been successful in the past. I know that international is overweight (my target is 50/50 US/international), so I will be addressing that as 2017 progresses. I've been eyeing the Larry Portfolio but don't know 1) how applicable it would be in our situation, 2) if it is implementable given the G Fund, and 3) if it is applicable/implementable, how to adjust the equity portion of the portfolio.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin M » Sat Feb 11, 2017 10:40 am

OutInThirteen wrote:Is the Larry Portfolio even implementable if the vast majority of one's bond portfolio (low- to mid-6 figures) is in the Thift Savings Plan G Fund?
I would say yes. The main idea is that a big percentage of your portfolio is in a relatively safe asset class, while the risky portion is in higher expected-return / higher-risk asset classes, like small-cap value stocks. The G fund is an excellent candidate for the relatively safe asset class.

You're not going to get an increase in price of the safe asset class when stocks tank or interest rates decrease, but you're also not going to get a price decrease in the safe asset class when interest rates increase. You definitely reduce left-tail risk by having a large portion of your portfolio in the G fund. With your safe asset class you get the yield of intermediate-term Treasuries with the risk of short-term Treasuries.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Sat Feb 11, 2017 10:45 am

Kevin M wrote:You're not going to get an increase in price of the safe asset class when stocks tank
You very well might. The highest annual returns for ITT between 2006-2015 were in 2008, with a return of 13.32% for VFITX.
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Kevin M » Sat Feb 11, 2017 11:08 am

willthrill81 wrote:
Kevin M wrote:You're not going to get an increase in price of the safe asset class when stocks tank
You very well might. The highest annual returns for ITT between 2006-2015 were in 2008, with a return of 13.32% for VFITX.
You missed the context: the statement you quoted is for the G fund, and you're simply illustrating half of the point I was making. You may get an increase in price from intermediate-term Treasuries when stocks tank, but you won't with the G fund.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by OutInThirteen » Sat Feb 11, 2017 11:26 am

Kevin M wrote:
OutInThirteen wrote:Is the Larry Portfolio even implementable if the vast majority of one's bond portfolio (low- to mid-6 figures) is in the Thift Savings Plan G Fund?
I would say yes. The main idea is that a big percentage of your portfolio is in a relatively safe asset class, while the risky portion is in higher expected-return / higher-risk asset classes, like small-cap value stocks. The G fund is an excellent candidate for the relatively safe asset class.

You're not going to get an increase in price of the safe asset class when stocks tank or interest rates decrease, but you're also not going to get a price decrease in the safe asset class when interest rates increase. You definitely reduce left-tail risk by having a large portion of your portfolio in the G fund. With your safe asset class you get the yield of intermediate-term Treasuries with the risk of short-term Treasuries.

Kevin
Thanks for the insight. I think I'll do some more research on the appropriate funds available to me through Fidelity, Vanguard, and/or others. I've still got seven years until RMDs from the TSP, and can always roll more into the TSP from my 403(b) and TIRA, all of which can't be converted to Roth by then anyway while staying in the 15% bracket. That way I have a lot of location flexibility and can easily manage the G Fund % of my portfolio.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by siamond » Sat Feb 11, 2017 12:21 pm

willthrill81 wrote:I see your point, but ten years in equities is not a long time IMHO.

And given everything we know about small caps, apart from the whole value angle, strongly suggests that the premium in returns is unlikely to vanish over the long-term.
Well, it's more than 10 years (which is already a long time)... Look again at the graph... Could you stick to a narrow strategy that doesn't deliver its promise for 20 years? And who is to say that it will not be 25 years next time (it was a heck of a climb for SCV in the 2000s)? It is really easy to look at past events in hindsight, it is much harder to stick to it when it doesn't unfold as expected. Notably when you have no backup plan whatsoever.

As to small-caps (blend), actually the evidence for a premium is VERY flimsy. In the US (check the SCB line on my graph), it is all concentrated in a few years (late 70s). Internationally, from what I've read and studied, the evidence is dubious at best (and we just have a few decades of data). In Japan, I recently ran the numbers, no small-cap premium whatsoever in the past 35 years. There was an SCV premium in Japan though.

I am ready to believe there is a (highly irregular) recurring SCV premium and I'm ok with a cautious bet on Int'l Small, mind you. But making those two the sole growth cornerstones of one's portfolio... That is a message which doesn't seem terribly consistent with the general Bogleheads principles.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by hilink73 » Sat Feb 11, 2017 12:35 pm

willthrill81 wrote:
larryswedroe wrote:LT
I'm highly confident that alternative lending will become mainstream as capacity is huge, and the banks will be disintermediated as result and borrowers and investors alike will benefit from that disintermediation and as side benefit is systemic risk or banking system will come WAY down as instead of a few massive institutions holding all the risks, you have thousands of investors holding small amounts of risks. On reinsurance, the market size is much smaller so don't think will become "mainstream" due to more limited capacity
Larry
Lending Club has certainly been an effective investment for me. I've been an investor for nearly four years, and my net average return is almost 10%. People talk about these loans be very risky, but I haven't found that to be the case at all. Certainly you're going to lose some money along the way, but that should be factored in when you made the investment. Considering that they are not nearly as volatile as most other investments that can produce that kind of return, I think that they're quite solid.

Some are concerned that another 2008-2009 crisis would decimate this field, but that's highly unlikely. Default rates on P2P notes are very similar to those on credit cards, and banks were still in the black throughout their period with credit card accounts.

The biggest drawback I would offer is that it is not yet very liquid, but most seem to have had good success selling their notes on secondary platforms. I've made a couple of purchases on the secondary platforms personally, and it went very smoothly.
This is some interesting input, thanks.
I have looked up some international (read: European) options for p2p lending (see: http://www.p2p-banking.com/p2p-lending- ... investors/) for everyone interested.

As LENDX should be uncorrelated to equities/bonds, I'm wondering how any consumer p2p lending service would cope with a 2008 event with massive job loss, preventing people from paying back their loans. This would make it somehow correlated to equities, right?

Also, picking some quality loans for investing seems to be quite tedious (at least from what I gathered from some desk research today).
Any more experience with this? What are those secondary platforms you mentioned?

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by hilink73 » Sat Feb 11, 2017 12:57 pm

larryswedroe wrote:hilink
there are at least alternatives in the lending product, just don't know if they are available directly or only to HNW investors. One is River North and the other is I think Colchis. None on reinsurance --mainly a hedge fund product with those type fees. Not likely to go mainstream due to limited capacity
Larry
Larry, thanks!

I just figured out that non resident aliens cannot invest in US mutual funds at all, even US expats seem to have problems with that, stemming from Fatca regulations (see: https://thunfinancial.com/us-brokerage- ... osed-2015/).
And the mutual funds page at Interactive Brokers reads: "US Mutual Funds are only available to customers who are U.S. legal residents and have a U.S. address." So, I guess, also no AQR, etc. for me. :-( (Should have looked at the fine print earlier.)

I'll have a look at their products anyway, because it's interesting stuff.

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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by siamond » Sat Feb 11, 2017 1:34 pm

Let me try to be fair to Larry, and illustrate what I believe is his main story. From what I understand of the book, this portfolio was backtested since 1989 (which is quite a short time to try to assess a repeatable pattern). Using the Simba spreadsheet, we can easily extend to 1982. The Int'l Small part of the equation may not inspire a lot of trust in the 80s (this is based on rosy DFA numbers), but ok, let's make a leap of faith. I used 70% IT Treasuries, 15% Small-Cap Value, 15% Int'l Small, as Tyler did.

Here is a growth chart in REAL terms, using a logarithmic scale, comparing the individual asset classes (except for IT Treasuries), and the portfolio as a whole. It is indeed striking to see the low std-deviation of Larry's portfolio, and its regular growth. Remember this is a logarithmic scale though, small differences on the chart mean a lot in reality. Returns on the first display are nominal, by the way. So yes, in this time period, this portfolio is quite remarkable.

Image

Let me show the same chart with a regular scale, as the time period is short enough to make it palatable, and this allows to easily translate in portfolio sizes. Again, this is REAL growth (inflation-adjusted). I don't know, personally, I prefer the TSM trajectory, but that's just me, and I can see the case for Larry's portfolio.

Image

Ok, let's go out of sample now. Can't do much about Int'l Small, so let's take US Small-Cap-Blend as a proxy for Int'l Small (in-sample, 1982 till now, this actually works quite well as a proxy). And let's go back in time, say 1940 till 2000. Again, a growth chart in REAL terms, using a logarithmic scale. Whoah... This is not fun anymore, is it? The growth is just anemic. We can even see two decades where there was no growth at all (in real terms), starting with significant hiccups. What happened? Well, see my first post and second post on the matter.

Image

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