Which Larry Portfolio variation would you choose?

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Which Larry Portfolio variation would you choose?

Post by Morse Code »

If you were planning to retire in 12 years and could only choose one portfolio, which would you choose?
#1
25% VG Value Index
25% VG Sm Value
25% VG Sm Int'l
25% VG Intermediate Treas.

#2
33% VG Sm Value
33% VG Sm Int'l
33% VG Intermediate Treas.

Before anyone lectures me, I know this is splitting hairs. I know these are very similar and there's no way to know which will perform better. This is a "just for fun" exercise to see what others think. I currently hold #1, but consider going to #2 from time to time. My vacillation comes from not really wanting to hold more in bonds and being a little uneasy about all my equities in small caps, yet wanting more int'l (50% of equity versus 33%) and not sure I want the large caps in the true spirit of the Larry Portfolio, all while satisfying my quirk of keeping everything really simple and neat (3n or 4n).
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Re: Which Larry Portfolio variation would you choose?

Post by NiceUnparticularMan »

Probably #1. Off hand I would expect #1 to be riskier but also have a little less tracking error (defined in relationship to US TSM or SP500). I think that balance better reflects what we (my wife and I) are likely to care about.

Personally, my first tweak to #1 would probably be to add a little more international (since I target 40% of stocks), but the difference between 33.3%, 40%, and 50% really isn't a big deal in my view.

Second, if the Large Value is really there primarily for tracking error purposes, you could swap in SP500 or TSM (I actually prefer SP500 for this purpose), but with more SV than SP500 in order to preserve a similar factor exposure. This is purely psychological, but I think directly seeing a portion of your portfolio getting SP500 returns whenever the SP500 is doing better than SV might do the best job of helping you deal with tracking error.

I have heterodox views on bonds so I would be fine with the 25% (I actually prefer to use even less non-equity, but then use things like a generous cash-balance pension, stable value fund, or the TSP G Fund, but I understand those are not necessarily available so going with a higher percentage in intermediate treasuries makes sense as an alternative).
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Re: Which Larry Portfolio variation would you choose?

Post by larryswedroe »

fwiw, TE should be irrelevant to sophisticated investor, as it's not about RELATIVE returns to anything else. You decide what risks you want to take and then don't confuse strategy and outcome.

With that said 2 is clearly my preference. Value premium much larger in small than in large, for obvious reasons. And that allows you to cut that tail risk by holding more safe bonds. Of course I would use CDs, not Treasuries, if can.

Larry
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Re: Which Larry Portfolio variation would you choose?

Post by NiceUnparticularMan »

larryswedroe wrote:fwiw, TE should be irrelevant to sophisticated investor, as it's not about RELATIVE returns to anything else. You decide what risks you want to take and then don't confuse strategy and outcome.
I agree we SHOULD ignore TE. But for some of us, in practice it is a real concern (particularly if, say, we have spouses we need to work together with).

So since I am ignoring a bit of your advice for what might fairly be called emotional reasons, my thinking is I might as well do that in the most obvious and emotionally-resonant way, which allows me to then dial back that violation to the lowest possible level.
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Re: Which Larry Portfolio variation would you choose?

Post by Morse Code »

larryswedroe wrote:fwiw, TE should be irrelevant to sophisticated investor...Of course I would use CDs, not Treasuries, if can.

Larry
Thanks for responding, Larry. TE has never been an issue with me. I guess that makes me sophisticated! :) Part of the reason I hold any LC is a portion of my portfolio (my HSA) has limited investment choices...no small cap value or int'l small. That particular account does make available the VG Small Cap Index though.

So that brings me to another question, given the choice between Large Value Index or Small Cap (blend not value) Index, which would you choose?

Also, while CDs aren't a practical option, I do have access to all of Vanguards fixed income funds. Is there a better choice than Intermediate Term Treasuries?
Last edited by Morse Code on Thu Apr 06, 2017 10:02 am, edited 1 time in total.
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Re: Which Larry Portfolio variation would you choose?

Post by Morse Code »

NiceUnparticularMan wrote:Probably #1...
Thanks for your thoughts, NiceUnparticularMan!
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Re: Which Larry Portfolio variation would you choose?

Post by zzcooper123 »

Larry,

If the SCV premium is so much higher than LCV, should someone "sophisticated" invest in Large Cap at all? If domestic growth stocks neutralize the Small Cap Value premium, should one invest in Growth at all? Should an investor avoid market beta ?
I am currently 30/70 stocks/high quality bonds with half of total assets in a taxable account. Stocks are 50% SCV, 30% intl./30% S&P500.
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Re: Which Larry Portfolio variation would you choose?

Post by aristotelian »

Isn't the Larry portfolio supposed to have 70% Treasuries? This is a pretty extreme variation.
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Re: Which Larry Portfolio variation would you choose?

Post by larryswedroe »

ZZ
First, no right answer, depends on many issues including your ability to accept the risk of that dreaded disease known as tracking error regret. But with that said, I personally used to own both LV and SV and now only basically SV, allowing me to hold less equity risk overall, or get higher expected returns.


aristotelian
The Larry portfolio, can be used in many ways, with high or low equity allocations. Me personally I am about 70% safe bonds, not treasuries, don't own any. But it depends on your need to take risk. In my firm for example we have several younger advisors who are larry type equity holdings but 100% equity.

Larry
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Re: Which Larry Portfolio variation would you choose?

Post by nisiprius »

larryswedroe wrote:...In my firm for example we have several younger advisors who are larry type equity holdings but 100% equity...

Larry
How can that be "larry type" when I thought the whole point was to replace "total market" equity holdings with a smaller allocation to small value, in order to hold risk constant? I thought the idea was to modify the right (downside) tail of the distribution without changing much of anything else. That is, I thought the idea was that risk-as-standard-deviation stays constant; return either stays the same ("risk story") or is slightly higher ("inefficient-but=it=happens value premium"); but the worst-case downside risk is reduced.

Would these younger advisors be holding, say, 140% (leveraged) equity portfolios if they weren't using "Larry type equity holdings?" Is 100% equity a reduction from what they would otherwise be holding?
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Re: Which Larry Portfolio variation would you choose?

Post by larryswedroe »

Nisiprius
By larry type I mean basically a very highly tilted portfolio for the equity portion and then for whatever the bond allocation is it's in safe bonds. So that can be applied in two ways, the tilt to get higher returns with more risk, or similar returns with lot less risk

Now I've adapted the LP to now include alternatives including AQR funds and SR funds. Taking some of the allocation from both sides in my case, but there you take it from depends on personal situation

But you are correct, the way the NYT article described the LP was high tilt and low beta

Larry
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Re: Which Larry Portfolio variation would you choose?

Post by NiceUnparticularMan »

zzcooper123 wrote:If the SCV premium is so much higher than LCV, should someone "sophisticated" invest in Large Cap at all? If domestic growth stocks neutralize the Small Cap Value premium, should one invest in Growth at all? Should an investor avoid market beta ?
If you are a purist and think of Large as really just being negative-Small, and Growth as just being negative-Value, then it probably doesn't particularly make sense to invest in both Small and Large or Value and Growth, in the same way it probably doesn't make sense to go both long and short in the same stock.

Beta, however, is an independent source of premium, so while you might want to moderate it somewhat, you wouldn't necessarily want to eliminate it.
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Re: Which Larry Portfolio variation would you choose?

Post by NiceUnparticularMan »

nisiprius wrote:
larryswedroe wrote:Would these younger advisors be holding, say, 140% (leveraged) equity portfolios if they weren't using "Larry type equity holdings?" Is 100% equity a reduction from what they would otherwise be holding?

Possibly! Maybe they also paid down mortgages or student loans . . . .
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Re: Which Larry Portfolio variation would you choose?

Post by Dominic »

If I'm 12 years from retirement, I'd take the second portfolio. With a shorter time horizon, more bonds will be better with a really risky equity side.
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Re: Which Larry Portfolio variation would you choose?

Post by Morse Code »

I was under the impression Vanguards Intermediate Term Treas (VFIUX) was the best fixed income fund option for implementing this strategy. A couple of Larry's comments on this thread have caused me to second guess this. Is there a better VG fixed income fund for this strategy?
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Re: Which Larry Portfolio variation would you choose?

Post by MikeMak27 »

I'd go with version number 1 since it raises annual returns without being even 1/2 a point more volatile in std deviation. That said, it depends on what your overall bond percentage would have been if you were just doing a normal total stock market vs total bond percentage.

I'm in the process of switching to a Larry Portfolio version of 2% large cap blend (I'm stuck with this as my only good option in my HSA), 43% Small cap value, 35% total emerging market and 20% intermediate treasuries. The reason I can be this aggressive is because I would likely be 100% stocks (60% s&p 500 & 40% total international) otherwise. The Larry portfolio allows you to be more aggressive with your stocks since you are adding a larger number of very safe bonds that you otherwise wouldn't have. In my portfolios case, I'm less volatile in my Larry version portfolio with higher returns than I would have been with 100% stocks.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
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Re: Which Larry Portfolio variation would you choose?

Post by Leif »

I would not go with either choice. I will go with higher asset class diversification. That will give me a lower expected return, but in retirement I don't want all my eggs in the SV bucket. Tilt yes, all in, no. Of course, for the LP most of assets are in bonds. Not sure how that will work over the next 10+ years. I'm planning on more like a 50/50 balance. If I had the really BIG bucks then I may go for the LP. As Larry suggested above, I have a large allocation to laddered CDs.
Last edited by Leif on Thu Apr 06, 2017 12:59 pm, edited 1 time in total.
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Re: Which Larry Portfolio variation would you choose?

Post by betablocker »

My guess is that Larry would recommend holding CDs in an IRA or munis (if in taxable) over treasuries. Additionally he might now recommend alts like P2P lending, AQR managed futures and AQR multi-style period to replace some treasuries depending on several factors. I hold most of my bonds in a 401k and don't have the CD option so I use the vanguard inter term treasury fund.
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Re: Which Larry Portfolio variation would you choose?

Post by Theoretical »

MikeMak27 wrote:I'd go with version number 1 since it raises annual returns without being even 1/2 a point more volatile in std deviation. That said, it depends on what your overall bond percentage would have been if you were just doing a normal total stock market vs total bond percentage.

I'm in the process of switching to a Larry Portfolio version of 2% large cap blend (I'm stuck with this as my only good option in my HSA), 43% Small cap value, 35% total emerging market and 20% intermediate treasuries. The reason I can be this aggressive is because I would likely be 100% stocks (60% s&p 500 & 40% total international) otherwise. The Larry portfolio allows you to be more aggressive with your stocks since you are adding a larger number of very safe bonds that you otherwise wouldn't have. In my portfolios case, I'm less volatile in my Larry version portfolio with higher returns than I would have been with 100% stocks.
At that high of risky assets (and I still think you should have some developed SCV), you should go ultra long on your treasuries. The equity risk overwhelms the extreme interest rate fluctuations. Or split it 10/10 with a 30 year TIPS and a 30 Treasury STRIP.
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Re: Which Larry Portfolio variation would you choose?

Post by Morse Code »

betablocker wrote:My guess is that Larry would recommend holding CDs in an IRA or munis (if in taxable) over treasuries. Additionally he might now recommend alts like P2P lending, AQR managed futures and AQR multi-style period to replace some treasuries depending on several factors. I hold most of my bonds in a 401k and don't have the CD option so I use the vanguard inter term treasury fund.
Thanks, betablocker. Guess ITT is it.
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Re: Which Larry Portfolio variation would you choose?

Post by larryswedroe »

Leif
FWIW, I would take exactly the opposite approach, with going more and more tilt allowing less and less equity because that cuts left tail risk which becomes more and more critical in retirement.
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Re: Which Larry Portfolio variation would you choose?

Post by Leif »

^
Thanks Larry.

I believe I fully understand the logic of your approach. I believe I also understand the logic of factor argument vs. asset class diversification. However, I guess I just feel more comfortable, especially in retirement, to keep some asset class diversification at the cost of some expected return. Plus, I don't think bonds are going to set anything on fire for the next 10+ years. As I said, if I had the BIG bucks (or perhaps better stated a lower portfolio withdrawal rate) I may well go for the full on LP. I already feel I'll be ahead of the 3 fund crowd with the same equity/bond ratio. Only time will tell.
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Re: Which Larry Portfolio variation would you choose?

Post by larryswedroe »

Leif
Glad to be of help and no right answer--just one right for you. Just remember that the less you tilt the lower your expected return which means you have to hold more equity risks to get the same expected return and that creates more tail risk, the thing you are trying to avoid.
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Re: Which Larry Portfolio variation would you choose?

Post by hoops777 »

The more I read about small cap value and it's historical returns the more impressive it is.Here is another one that is impressive but on the opposite end of the spectrum.Consumer staples have outperformed the SP500 by a good margin the last 30 years or so with a lot more downside protection for a conservative investor.For a very conservative investor a portfolio of consumer staples substituting for the small cap value has some merit.Historically the return would be less but so would the volatility.
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Re: Which Larry Portfolio variation would you choose?

Post by NiceUnparticularMan »

hoops777 wrote:Consumer staples have outperformed the SP500 by a good margin the last 30 years or so.
If there is any difference in returns by sector over the period in question, then it is pretty much mathematically guaranteed that some sectors will have outperformed the average in that period.

So the question is whether identifying the sectors that did better than average over the historic period is actually predictive of what is going to happen next. Accordingly, have you tried testing this out of sample yet? And what would be the theoretical explanation for a durable, predictable premium?
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Re: Which Larry Portfolio variation would you choose?

Post by larryswedroe »

Just to add that it's highly likely that consumer staple returns are explained by the common factors to which they have exposure to.

And we can see that looking at VCSAX, consumer staples fund. As you would expect these are defensive type stocks, and that shows up in the very high loading on quality factor .39.

You might also expect them to be value stocks and perhaps low beta.

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Re: Which Larry Portfolio variation would you choose?

Post by Longtermgrowth »

Looking on Morningstar, I've noticed that Vanguard Consumer Staples Index (VCSAX) has a Price/Book of 4.19 compared to the Vanguard S&P 500 Index at 2.73.

I'm curious if Consumer Staples have historically carried a premium similar to this? Or is part of this from yield chasing due to so many years of very low interest rates on safe investments?
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Re: Which Larry Portfolio variation would you choose?

Post by hoops777 »

Hey I am not a technical analysis guy.Just pointing out there is some value,no pun intended,in buying stocks in companies that supply day to day necessities through good times and bad,and of course they are defensive stocks which is why I said a very conservative investor,or in other words,someone without the stomach to see his stocks go down 50 pct.I am not questioning the brilliance of the Larry Portfolio and I am actually contemplating using it to some degree.
Sometimes with all the technical analysis people forget the simple concepts,like we need to eat and buy diapers for our kids.I was not surprised at all when I saw how badly consumer staples outperformed the market in the big downturn,but was a bit surprised at the overall SP 500 beating performance the last 30 years or so.Thats all.It does not take a genius to look at the returns and the volatility of small cap value since 1930.I get it.Better return means you can buy less equities and more fixed income.If you substitute consumer staples in the same allocation you would likely have a lower return with less volatility.The True Larry Portfolio is best for the vast majority of people.
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Re: Which Larry Portfolio variation would you choose?

Post by Theoretical »

hoops777 wrote:Hey I am not a technical analysis guy.Just pointing out there is some value,no pun intended,in buying stocks in companies that supply day to day necessities through good times and bad,and of course they are defensive stocks which is why I said a very conservative investor,or in other words,someone without the stomach to see his stocks go down 50 pct.I am not questioning the brilliance of the Larry Portfolio and I am actually contemplating using it to some degree.
Sometimes with all the technical analysis people forget the simple concepts,like we need to eat and buy diapers for our kids.I was not surprised at all when I saw how badly consumer staples outperformed the market in the big downturn,but was a bit surprised at the overall SP 500 beating performance the last 30 years or so.Thats all.It does not take a genius to look at the returns and the volatility of small cap value since 1930.I get it.Better return means you can buy less equities and more fixed income.If you substitute consumer staples in the same allocation you would likely have a lower return with less volatility.The True Larry Portfolio is best for the vast majority of people.
I think if I was going to do this, I'd look for a global consumer staples fund or an equal weight sector fund (mostly because there's only a small set in the large caps) and set it as a deliberately defensive stock investment.

However, you're unfortunately far from the first to notice this trait, and the current astronomical valuations will likely depress returns in the future, while still being more volatile than bonds.
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Re: Which Larry Portfolio variation would you choose?

Post by hoops777 »

Thanks Theoretical.I thought I was the first :D There is an equal weight that has outperformed the traditional.I remember talking about consumer staples instead of the total market here about 4 years ago and they were lined up with their tar and feathers for me even suggesting such a thing. :D
Anyway I apologize for getting off the threads real topic and done with it.
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Re: Which Larry Portfolio variation would you choose?

Post by ROIGuy »

Basically you are getting rid of large cap value out of your portfolio. I think you have more balance (especially in down times) then without it.
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Re: Which Larry Portfolio variation would you choose?

Post by Lieutenant.Columbo »

roughly, what Stock allocation % would a mid-2021 Larry Portfolio need so its expected return matches that of a 100% Total Stock Market portfolio?
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