Larry Portfolio Equities: What % Each Market?

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Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sat Apr 22, 2017 11:01 pm

Brief INTROD to the Larry Portfolio (LP) for those not familiar with it. The LP is:
1. Equities: USA Small Value + Developed Markets Small Value + Emergent Markets Value
2. Fixed Income: highly rated bonds and or CDs
The LP-investor taylors the Equities:Fixed Income ratio to their ability/need/willingness to take risk.

Regarding geographically diversification of the Small-Vallue equities in the LP, earlier this year
I asked how come the World market cap applies when holding only Small Value, since all the Small Value cap in each market (USA/Devel/EM) may turn out to be any percentage of the World's Small Value cap. Via PM
larryswedroe wrote:geography is independent of tilting
I'd like to know what the BHs think:

what metric/rationale would you use when determining the USA/Developed/Emergent markets ratio for the LP, whose equities...
...are ALL a very small subset of the total world market cap?
and
...might not necessarily adhere to the same US/Dev/Emerg ratio that the whole stock market equities do?


Thank you for your input. Finally I was asked to rely to the BHs that
larryswedroe wrote:...I continue to be happy to answer questions as always have done,which shows how wrong many are
Last edited by Lieutenant.Columbo on Sun Apr 23, 2017 5:58 am, edited 3 times in total.
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Re: Larry Portfolio Equities: What % Each Market?

Post by aj76er » Sun Apr 23, 2017 1:09 am

I'm curious, can you please post the funds that you plan to use?
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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sun Apr 23, 2017 5:27 am

aj76er wrote:...please post the funds that you plan to use
Equities: US: IJS.......Devel+Emerg: DWUSX
Bonds: DFXIX (tax-deferred)+DFMPX (taxable)
Last edited by Lieutenant.Columbo on Sun Apr 23, 2017 7:26 am, edited 1 time in total.
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Re: Larry Portfolio Equities: What % Each Market?

Post by nisiprius » Sun Apr 23, 2017 6:40 am

I don't own Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns With Less Volatility, by Larry Swedroe and Kevin Grogan, ISBN 0615992978, but that's the book about the "Larry Portfolio" and if I were seriously going to adopt that kind of strategy, I would certainly pay $9.99 for a copy. Unfortunately I can't find relevant sample pages at no cost online, so I can't tell for sure if he discusses your specific issue, or whether he offers sample portfolios, but I'd be surprised if he didn't. But in your situation I'd start by buying the darn book. Or have you already? If so, what does it say?

In The Only Guide to a Winning Investment Strategy You Will Ever Need, 1998, he definitely does presents model portfolios, and since it's the "only guide we will ever need" I assume they are still valid. Looking only at a) Percentage of stocks which are international, b) Percentage of U.S. stocks which are small-cap, and c) Percentage of international stocks which are small-cap, I calculate these numbers from his. I am going to make the assumption that his "international value" and "emerging markets" stocks are large-cap, i.e. that everything not small-cap is large-cap; thus the percentage of small-cap within international is "small-cap (%)" divided by the total for "international stocks (%)."

Defensive: 50% international; U.S. 50% small-cap; international (3/10) 30% small-cap.
Conservative: 50% international; U.S. 50% small-cap; international (6/20) 30% small-cap.
Moderate: 42% international; U.S. 33% small-cap; international (10/25) 40% small-cap.
Aggressive: 37.5% international; U.S. 33% small-cap; international (8/30) 27% small-cap.

As to the explanation behind these numbers, I think you must ask Larry. If they were the result of some kind of numerical optimization process (Black-Litterman or what have you), I think you'd see a smoother pattern. My honest personal belief is that even if the theory behind these strategies has something do it, it's not science and you can't calculate numbers to two-place accuracy... and that people produce sample portfolios like these are through experience and intuition, loosely guided by theory. The willingness to use internal relations like "50/50" and "2/3" suggests that he doesn't see any need for precision.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sun Apr 23, 2017 7:43 am

thank you, nisiprius
nisiprius wrote:...Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns With Less Volatility, [...] what does it say?
I've read it and I cannot find where it addresses the OP question.
nisiprius wrote:As to the explanation behind these numbers, I think you must ask Larry...
I did and that's when
larryswedroe wrote: geography is independent of tilting
hence, this Topic, seeking for the input of the BHs'.
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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 7:56 am

Personally, I see the U.S. versus international allocation question to require balancing out the currency risk problem with the country-specific risk problem. I don't think this is easy to do with any sort of justifiable precision, because the country-specific risk problem is not the sort of thing back-testing can really quantify. Cap weighting is a way of punting on the problem, but in my view not really an answer. I do think it is important to pick a plan and stick with it, so if cap weighting makes it easy for you to do that, go ahead.

EM versus developed I see primarily as an issue of trying to reduce overlap/correlation with U.S., including in light of country-specific risk and possible contagion effects. I think tilting developed to SV is already a way of addressing overlap/contagion, but I do think EM is likely a bit better still. So personally, I would (and do) overweight EM for this reason.

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Re: Larry Portfolio Equities: What % Each Market?

Post by pezblanco » Sun Apr 23, 2017 8:36 am

Isn't the EM already chosen for you if you use DWUSX?

Just curious ... if you have access to DFA funds why use IJS?

I don't think the percentages matter an awful lot. The basic rule is 50% USA SV ... then divide developed to EM with some sort of philosophy. I think many LP practitioners like myself then go with juicing the EM a little more than market weight given that the "true market weight" is very difficult to determine anyway.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Ketawa » Sun Apr 23, 2017 8:46 am

Lieutenant.Columbo wrote:Regarding geographically diversification of the Small-Vallue equities in the LP, earlier this year
I asked how come the World market cap applies when holding only Small Value, since all the Small Value cap in each market (USA/Devel/EM) may turn out to be any percentage of the World's Small Value cap. Via PM
larryswedroe wrote:geography is independent of tilting
I'd like to know what the BHs think:

what metric/rationale would you use when determining the USA/Developed/Emergent markets ratio for the LP, whose equities...
...are ALL a very small subset of the total world market cap?
and
...might not necessarily adhere to the same US/Dev/Emerg ratio that the whole stock market equities do?
I am not aware of any metrics or easy way to breakdown the "world small value cap" into different regions. This wouldn't be helpful for your proposed portfolio anyway; you mentioned emerging market large value.

Personally, I have some domestic mid cap (TSP S Fund), domestic small value/multifactor (QSMLX), developed markets large cap (TSP I Fund), developed markets large value/multifactor (QICLX), and emerging markets large value/multifactor (QEELX). There isn't any way to reconcile different calculations of these region splits, so I use a method that is convenient and easy for me. There were a number of methods described in this thread: Those that hold international equities at market-cap weight: what is your method?

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Re: Larry Portfolio Equities: What % Each Market?

Post by stlutz » Sun Apr 23, 2017 9:01 am

Just to restate the question, what you're wanting to do is not to own 3% each of US, developed, and emerging (in which case you'd do what Larry suggests). Instead, you're looking to own 3% of the total world market cap. If there happened to be no emerging markets smallcap companies, you don't want to own any of them. Have I got that right?

What I'd do is download the holdings of a total world ETF like VT and see where the holdings of the bottom 10% by holding value are located.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Theoretical » Sun Apr 23, 2017 10:39 am

From Looking at the FTSE Global Small Cap, counting Taiwan and South Korea as Emerging, you get 11.92% Emerging markets in this category. http://www.ftse.com/Analytics/FactSheet ... ame=GEISSC

The current US/Developed/Emerging split is 53.24/34.84/11.92. All of those are well within 5/25% rebalancing bands for a 50/37/13 split. The main difference is that two of the BRICS (Russia and South Africa) have virtually no market cap in the small space relative to their overall market weights.

The Russell RAFI Global Small Cap Index, which weights on sales-leverage, dividends+buybacks and cash flows, also shows a 26% Emerging Markets weight, though diverges significantly by positing a 30.12% US weight. Link: http://www.ftse.com/Analytics/FactSheet ... nual=False.

Moral of the story: I think 50/37/13 is a reasonable outlay for a Larry portfolio.

20/80: 10 US/7.5 Developed/2.5% EM (I like this for a medium-term house fund)
30/70: 15% US/11.25% Developed/3.75% EM (or 15/11/4 for integers)
40/60: 20% US/15 Developed/5% EM
50/50: 25% US/18.75% Developed/6.25% EM (or 25/19/6 or 25/18/7 for integers)
60/40: 30% US/22.5% Developed/7.5% EM
70/30: 35% US/26.25% Developed/8.75% EM (or 35/26/9)
80/20: 40% US/30% Developed/10% EM
90/10: 45% US/33.75 Developed/11.25 EM (45/34/11 for integers)
100/0: 50% US/37.5 Developed/12.5 EM

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Post by Taylor Larimore » Sun Apr 23, 2017 12:00 pm

Lieutenant.Columbo wrote:Brief INTROD to the Larry Portfolio (LP) for those not familiar with it. The LP is:
1. Equities: USA Small Value + Developed Markets Small Value + Emergent Markets Value. -- I'd like to know what the BHs think:
I think it is a mistake to exclude the largest and most successful stocks from a portfolio.

The Three-Fund Portfolio

Best wishes.
Taylor
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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sun Apr 23, 2017 1:36 pm

NiceUnparticularMan wrote:I think tilting developed to SV is already a way of addressing overlap/contagion, but I do think EM is likely a bit better still. So personally, I would (and do) overweight EM for this reason.
so, what US-to-Devel-to-EM ratio would you use with a LP?
pezblanco wrote:Isn't the EM already chosen for you if you use DWUSX?
yes, using DWUSX one accepts a 4:1 Devel:Emergent ratio; but I'll consider rearranging my US/Devel/EM ratio if convinced I should
pezblanco wrote:if you have access to DFA funds why use IJS?
all my USA-SmallValue is Taxable and I thought IJS was a better choice than DFSVX
pezblanco wrote:The basic rule is 50% USA SV ... then divide developed to EM with some sort of philosophy
I was only trying to find out the reason why US being 50% of the world market cap implies US Small Value should be 50% as well
pezblanco wrote:I think many LP practitioners like myself then go with juicing the EM a little more than market weight given that the "true market weight" is very difficult to determine anyway.
so, if you do US Small Value 50%, how do you allocate Developed and EM?
Ketawa wrote:a number of methods described in this thread: Those that hold international equities at market-cap weight: what is your method?
I saw those, I just did not know if any of them is applicable to the LP
stlutz wrote:Just to restate the question, what you're wanting to do is not to own 3% each of US, developed, and emerging (in which case you'd do what Larry suggests). Instead, you're looking to own 3% of the total world market cap. If there happened to be no emerging markets smallcap companies, you don't want to own any of them. Have I got that right?
what I am trying to do is to NOT assume that just because Small Value is X% of the World Market that it is also X% of EACH of the individual markets (grouped as USA, Devel and EM for convenience)
stlutz wrote:What I'd do is download the holdings of a total world ETF like VT and see where the holdings of the bottom 10% by holding value are located.
I think this is a great suggestion
Theoretical wrote:...Moral of the story: I think 50/37/13 is a reasonable outlay for a Larry portfolio...
thank you for your input, I find it very helpful
Taylor Larimore wrote:I think it is a mistake to exclude the largest and most successful stocks from a portfolio
fortunately for us dissenters there are many roads to Dublin... :wink:
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Post by Taylor Larimore » Sun Apr 23, 2017 2:05 pm

Taylor Larimore wrote:
I think it is a mistake to exclude the largest and most successful stocks from a portfolio.
Lieutenant.Columbo wrote:
Fortunately for us dissenters there are many roads to Dublin... :wink:
Some roads are rougher than others.

Best wishes.
Taylor
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Re: Larry Portfolio Equities: What % Each Market?

Post by betablocker » Sun Apr 23, 2017 2:16 pm

Aren't the small value indices simply the bottom percentage of stocks in a market minus the ones DFA or others might screen for? If so then small value stocks would have roughly the same percentage in each market. I guess you could have markets where more stocks get screened out but seems like it would be a minor issue

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Re: Roads to Dublin

Post by betablocker » Sun Apr 23, 2017 2:22 pm

Taylor Larimore wrote:Taylor Larimore wrote:
I think it is a mistake to exclude the largest and most successful stocks from a portfolio.
Lieutenant.Columbo wrote:
Fortunately for us dissenters there are many roads to Dublin... :wink:
Some roads are rougher than others.

Best wishes.
Taylor
By saying the road is rougher you could be implying two things. Either there will be more volatility because of the higher SD of small value stocks or you are referring to tracking error. The volatility is mostly answered by the high bond allocation. An LP portfolio is much less volatile overall for the same expected return. So I'd argue your road will be rougher in this respect. As for tracking error, that is the issue. It does take fortitude to stay on track in the face of s&p gains as it does when the s&p goes down 50%. All road are bumpy.

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Re: Larry Portfolio Equities: What % Each Market?

Post by 209south » Sun Apr 23, 2017 2:25 pm

Theoretical wrote:From Looking at the FTSE Global Small Cap, counting Taiwan and South Korea as Emerging, you get 11.92% Emerging markets in this category. http://www.ftse.com/Analytics/FactSheet ... ame=GEISSC

The current US/Developed/Emerging split is 53.24/34.84/11.92. All of those are well within 5/25% rebalancing bands for a 50/37/13 split. The main difference is that two of the BRICS (Russia and South Africa) have virtually no market cap in the small space relative to their overall market weights.

The Russell RAFI Global Small Cap Index, which weights on sales-leverage, dividends+buybacks and cash flows, also shows a 26% Emerging Markets weight, though diverges significantly by positing a 30.12% US weight. Link: http://www.ftse.com/Analytics/FactSheet ... nual=False.

Moral of the story: I think 50/37/13 is a reasonable outlay for a Larry portfolio.

20/80: 10 US/7.5 Developed/2.5% EM (I like this for a medium-term house fund)
30/70: 15% US/11.25% Developed/3.75% EM (or 15/11/4 for integers)
40/60: 20% US/15 Developed/5% EM
50/50: 25% US/18.75% Developed/6.25% EM (or 25/19/6 or 25/18/7 for integers)
60/40: 30% US/22.5% Developed/7.5% EM
70/30: 35% US/26.25% Developed/8.75% EM (or 35/26/9)
80/20: 40% US/30% Developed/10% EM
90/10: 45% US/33.75 Developed/11.25 EM (45/34/11 for integers)
100/0: 50% US/37.5 Developed/12.5 EM
There are two issues:
1. How to divide the equity portion of the portfolio? If using Vanguard mutual funds you'd be roughly 50% VBR, 37.5% VSS and 12.5% VWO - it's not perfect but close enough.
2. How much of your portfolio should be in equities? In my understanding the above chart does NOT apply to the Larry Portfolio - the LP is a portfolio to manage tail risk, and the equity portion is always 30%...maybe give or take. A 90% equity allocation is NOT a 'Larry Portfolio' - the whole point of the LP is that you get the same returns with less tail risk by emphasizing small cap equities in tandem with a larger weighting to investment grade fixed income.
Last edited by 209south on Sun Apr 23, 2017 2:26 pm, edited 1 time in total.

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Re: Larry Portfolio Equities: What % Each Market?

Post by qwertyjazz » Sun Apr 23, 2017 2:25 pm

Why does it matter if different countries have a higher or lower percentage of small value companies? Just pick something you can stick with. You believe in factors enough and backtesting to build a 'less risky' portfolio with 'higher expected returns' than the total market. If that is the case, then trying to balance according to the world market does not make complete logical consistency IMO.
Tilt and throw in some percentage international. Or go to Portfolio Charts or its ilk and build a safe portfolio with international weights. You are trying to gaurentee though for future that is unkown with precision that is unwarranted IMO.
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Re: Larry Portfolio Equities: What % Each Market?

Post by Longtermgrowth » Sun Apr 23, 2017 2:46 pm

209south wrote: There are two issues:
1. How to divide the equity portion of the portfolio? If using Vanguard mutual funds you'd be roughly 50% VBR, 37.5% VSS and 12.5% VWO - it's not perfect but close enough.
Are you accounting for VSS already having Emerging Market Small Caps at market cap weighting? I've been thinking the simplest thing for anyone wanting to hold Developed Small and Emerging Small is to hold VSS; if happy with letting it adjust to whatever the market cap may be in the future between Developed and Emerging...

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Re: Larry Portfolio Equities: What % Each Market?

Post by 209south » Sun Apr 23, 2017 2:57 pm

Longtermgrowth wrote:
209south wrote: There are two issues:
1. How to divide the equity portion of the portfolio? If using Vanguard mutual funds you'd be roughly 50% VBR, 37.5% VSS and 12.5% VWO - it's not perfect but close enough.
Are you accounting for VSS already having Emerging Market Small Caps at market cap weighting? I've been thinking the simplest thing for anyone wanting to hold Developed Small and Emerging Small is to hold VSS; if happy with letting it adjust to whatever the market cap may be in the future between Developed and Emerging...
My bad - I did not know VSS included EM small caps! I go half way on the LP and have roughly 1/2 VTI and 1/2 VBR for domestic equities, and 1/2 VXUS + 1/4 each VSS and VWO for international.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Dirghatamas » Sun Apr 23, 2017 3:03 pm

The OP asked me in a PM before starting this thread, given that I have been investing consistently in World Stocks (market weighted) for a very long time. I replied to him/her expressing my strong skepticism and caution of the idea: take world stocks by cap weight but then only invest in small value for 100% of one's equity portfolio.

Leaving aside that I wouldn't touch this type of investing with a 10 foot pole... given that the OP does want to do it, here (at more length) are my concerns to the OP I gave in PM in case there may be others who are thinking of investing globally but only on a very narrow segment (small value).

The global market weight portfolio is a unique portfolio in that it is the market consensus, diversifies you globally and doesn't need rebalancing. It will never give great returns (but hopefully adequate ones). It can be objectively constructed and the allocation to each country is an outcome, not an input to the index. You hold equal % of every public company in the world.

So, if you want to do the same thing but only chose small/value, the logical way would be to go to the world stock index and then apply the screens for small and value across the whole index. I think something like 3% of market cap of US stock index is considered "small Value" by some measures so perhaps use that for world. As far as I know there is no fund that invests this way.

If you then decide to invest this way but using country specific funds (US< ex US etc.) then all bets are off. There are no consistent definitions of "small", "value" "emerging" across markets and across index providers.

There isn't an actual market cap that is "small" but just a relative one. So a company listed in US might be called small but same market cap could be considered mid cap or even large cap in another market..if a company is considered "valueey" by some measures in US with its very high present PE, that same company with exactly same indicators and industry might be considered not value in another market..

If you apply some consistent measures, you may end up with perhaps 0% invested in US right now if you apply value measures. There is obviously no consistent definition of what is "emerging" and if the argument is not correlated to US, guess look at two of the top countries in the emerging index: South Korea and Taiwan. Both are mostly export driven and are definitely tied to world/US trade so I don't see how they are not correlated.

My own view is that by the time you have come to such a massively tilted portfolio (100% stocks in small value or basically ignoring 97% of the world's stocks and by definition all successful companies), all bets are off. You can pretty much chose any number from 0% to 50% to 100% and some arbitrary number in emerging markets. It is like throwing darts..it might turn out great or not. There is no reason to overthink it and make it numerical/objective/scientific with such a portfolio.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Theoretical » Sun Apr 23, 2017 4:28 pm

The specific Larry Portfolio is in Chapter 3 of Reducing Black Swans, and there it's a 28/72 split.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 5:01 pm

Lieutenant.Columbo wrote:so, what US-to-Devel-to-EM ratio would you use with a LP?
Last I looked, EM was usually around 16% or so of a typical total international portfolio, so what I am doing is targeting around 25-30% as a mild EM tilting (which I am getting through a target of 20% in EM (VWO) directly and another 40% in VSS contributing the rest, as the last 40% is in EFV--note these are aspirational targets for me as I am off target due to 401K constraints). If I was not trying to do S&V investing with the developed portion of the portfolio, I'd probably want that to be a bit higher. I would think you could comfortably justify up to about 50% in an untilted portfolio, although I am not sure I would see that as necessary.

As you know, that happens to be in the same range as DWUSX, which I don't take as gospel but it doesn't hurt to see them thinking along the same lines.

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Re: Larry Portfolio Equities: What % Each Market?

Post by triceratop » Sun Apr 23, 2017 5:32 pm

Lieutenant.Columbo wrote:
aj76er wrote:...please post the funds that you plan to use
Equities: US: IJS.......Devel+Emerg: DWUSX
Bonds: DFXIX (tax-deferred)+DFMPX (taxable)
What is the effective expense of using these funds to you, divided by asset base? That is, including not just expense ratio but advisor fees. What are your expectations of the relevant premia going forward, and what are your factor loads. Does it exceed the expense you know you are spending?
all my USA-SmallValue is Taxable and I thought IJS was a better choice than DFSVX
Why do you think that? Is it because of the higher fees for DFSVX, as above? Certainly by value characteristics, DFSVX is better constructed. And the funds seem comparable on Size.
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Re: Larry Portfolio Equities: What % Each Market?

Post by Theoretical » Sun Apr 23, 2017 6:14 pm

Running the factor loadings, IJS (since 1/1/06 when the index was switched to its current multifactor) has a factor loading of .5 (AQR - with F/F it's .37 and .47) and DFSVX is 2-3 times more expensive in terms of tax cost ratio. DFSVX is a bit smaller but the negative alpha is comparable to worse.

My suspicion about this is the fact that the S&P 600 itself has a value tilt (even the growth index is more like a multifactor quality/value/momentum fund with a .11 value load). From that and the construction rules, taking the cheap half of the index probably is probably pretty close to a 1/3 value design of DFSVX.

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Last edited by Theoretical on Sun Apr 23, 2017 6:31 pm, edited 1 time in total.

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Re: Larry Portfolio Equities: What % Each Market?

Post by selftalk » Sun Apr 23, 2017 6:29 pm

I guess I`m a real boglehead. Hasn`t anyone here read J. Bogle`s book Common Sense On Mutual funds especially pages 231 - 236. It really says it all in my opinion to the questioners of slice and dice to try to increase your returns. But no, people just cannot deal with and have faith in simplicity. And so they try to get the returns up and thus increase their risk. Maybe they`ll do well and beat the broad index and maybe not. Why reach for the stars when you can compound your money investing in the U.S.Total Market to hit your goals financially. Buffett and Bogle really know what they are doing in my opinion. Why not follow their writings and just be PATIENT.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 7:06 pm

selftalk wrote:And so they try to get the returns up and thus increase their risk.
Most people who follow this approach think relying just on U.S. TSM is actually riskier in notable ways.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sun Apr 23, 2017 7:34 pm

betablocker wrote:Aren't the small value indices simply the bottom percentage of stocks in a market minus the ones DFA or others might screen for? If so then small value stocks would have roughly the same percentage in each market.../quote]I do not know the answer to your question. See my reply to Dirghatamas for more on this
209south wrote:the LP is a portfolio to manage tail risk, and the equity portion is always 30%...maybe give or take. A 90% equity allocation is NOT a 'Larry Portfolio' - the whole point of the LP is that you get the same returns with less tail risk by emphasizing small cap equities in tandem with a larger weighting to investment grade fixed income.
I believe your statement is not correct; Larry himself may be doing a LP with ~30% in equities, but he's said before that the Equities:FI in the LP should be picked by the investor according to their risk-taking willingness, ability and need; furthermore, he has even said his younger coworkers have a LP with 0% in Fixed Income
qwertyjazz wrote:Why does it matter if different countries have a higher or lower percentage of small value companies? Just pick something you can stick with.,,
although my portfolio is tilted, I agree with those who diversify across the Globe market cap, in order to diversify risk, so even if I'm not using the entire market, I'd still like for my LP to be geographically diversified according to the World's Small-Value cap
Dirghatamas wrote:...if you want to do the same thing but only chose small/value, the logical way would be to go to the world stock index and then apply the screens for small and value across the whole index. I think something like 3% of market cap of US stock index is considered "small Value" by some measures so perhaps use that for world. As far as I know there is no fund that invests this way.
when I go to the World Stock Index, I am puzzled because 3% of Vanguard Total World Stock is 232 holdings, but two of the funds Larry says may be used for the LP show 1077 holdings (DFSVX) and 3727 holdings (DWUSX). Is Total World is leaving out some of the market?
triceratop wrote:
Lieutenant.Columbo wrote:Equities[/b]: US: IJS.......Devel+Emerg: DWUSX
Bonds: DFXIX (tax-deferred)+DFMPX (taxable)
What is the effective expense of using these funds to you, divided by asset base? That is, including not just expense ratio but advisor fees. What are your expectations of the relevant premia going forward, and what are your factor loads. Does it exceed the expense you know you are spending?
I honestly do not know how to exactly to calculate what you are asking me. I know I am using funds that are more expensive than Vanguard's, but I believe a have a deeper factor load that I believe justifies the higher ER
triceratop wrote:
Lieutenant.Columbo wrote:all my USA-SmallValue is Taxable and I thought IJS was a better choice than DFSVX
Why do you think that? Is it because of the higher fees for DFSVX, as above? Certainly by value characteristics, DFSVX is better constructed. And the funds seem comparable on Size.
in the 39.6% Income Tax rate and I believe IJS will be better on an after-tax basis than DFSVX. If you disagree, please, let me know how else I should look at it
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Re: Larry Portfolio Equities: What % Each Market?

Post by selftalk » Sun Apr 23, 2017 7:36 pm

NiceUpaticularMan what percentage of these folks read the pages I numbered above in Common Sense On mutual Funds. J. Bogle really researched that information going way back in time which influenced how he invests. W. Buffett came up with the same conclusion for us individual investors who are non-professionals and recommended the S&P 500. Oh well, the beat goes on.

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Re: Larry Portfolio Equities: What % Each Market?

Post by triceratop » Sun Apr 23, 2017 7:40 pm

Lieutenant.Columbo wrote:
triceratop wrote:
Lieutenant.Columbo wrote:Equities[/b]: US: IJS.......Devel+Emerg: DWUSX
Bonds: DFXIX (tax-deferred)+DFMPX (taxable)
What is the effective expense of using these funds to you, divided by asset base? That is, including not just expense ratio but advisor fees. What are your expectations of the relevant premia going forward, and what are your factor loads. Does it exceed the expense you know you are spending?
I honestly do not know how to exactly to calculate what you are asking me. I know I am using funds that are more expensive than Vanguard's, but I believe a have a deeper factor load that I believe justifies the higher ER
But if you cannot calculate what I am asking how did you conclude that DFA funds were better suited for you? You need to consider added cost per unit of <insert factor here> exposure. Larry himself says as much when discussing fund selection. I do not see how your reasoning process is coherent unless you have computed this or a similar quantity in some manner. In short, you need more than a belief that a deeper factor load justifies the higher ER. What if the factor load was only an additional 0.01 exposure; is that worth 1% more in expense (numbers chosen only to make the point, not as representative) ? You can see why this question is important, right?
triceratop wrote:
Lieutenant.Columbo wrote:all my USA-SmallValue is Taxable and I thought IJS was a better choice than DFSVX
Why do you think that? Is it because of the higher fees for DFSVX, as above? Certainly by value characteristics, DFSVX is better constructed. And the funds seem comparable on Size.
in the 39.6% Income Tax rate and I believe IJS will be better on an after-tax basis than DFSVX. If you disagree, please, let me know how else I should look at it
No, for a taxable account your reasoning makes perfect sense.
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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 7:57 pm

selftalk wrote:NiceUpaticularMan what percentage of these folks read the pages I numbered above in Common Sense On mutual Funds.
I have no idea. But I do know the argument expressed there is ably represented here by several people.

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Re: Larry Portfolio Equities: What % Each Market?

Post by selftalk » Sun Apr 23, 2017 8:11 pm

NiceUnparticularMan, Hope seems to spring eternal even when history says something else. I know people will argue either way and you can`t change their thinking so why try. Different strokes for different folks and we all have our prejudices . That makes a market I suppose. I think it wise to really learn from what I consider very knowledgeable and honest people in the business of investing one`s monies and I select W. Buffett , J. Bogle and our own T. Larimore with his hard fought lessons as my choices.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 8:25 pm

selftalk wrote:NiceUnparticularMan, Hope seems to spring eternal even when history says something else. I know people will argue either way and you can`t change their thinking so why try. Different strokes for different folks and we all have our prejudices . That makes a market I suppose. I think it wise to really learn from what I consider very knowledgeable and honest people in the business of investing one`s monies and I select W. Buffett , J. Bogle and our own T. Larimore with his hard fought lessons as my choices.
I'll admit that personally, I just don't have any interest in following a guru. I'll listen to good arguments from anyone, and I think Bogle has made several good arguments over time. But that doesn't mean every one of his arguments is a good one.

But that said, if one is going to pick a guru, I would agree Bogle is a relatively good choice. Then again, so is Larry.

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Re: Larry Portfolio Equities: What % Each Market?

Post by betablocker » Sun Apr 23, 2017 8:34 pm

selftalk wrote:NiceUnparticularMan, Hope seems to spring eternal even when history says something else. I know people will argue either way and you can`t change their thinking so why try. Different strokes for different folks and we all have our prejudices . That makes a market I suppose. I think it wise to really learn from what I consider very knowledgeable and honest people in the business of investing one`s monies and I select W. Buffett , J. Bogle and our own T. Larimore with his hard fought lessons as my choices.
I've read the book and Bogle has done many great things but he has also made some assertions that are wrong. It's been clearly stated on this board many times that the data Bogle used was based on actively managed funds. These tend to style drift when value is out of favor so they end up looking like non value funds. He didn't use the Fama French data or actual returns from passive funds like DFA. You can disagree with tilting for many reasons but this is just bad data.

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Re: Larry Portfolio Equities: What % Each Market?

Post by betablocker » Sun Apr 23, 2017 8:39 pm

NiceUnparticularMan wrote:
selftalk wrote:NiceUnparticularMan, Hope seems to spring eternal even when history says something else. I know people will argue either way and you can`t change their thinking so why try. Different strokes for different folks and we all have our prejudices . That makes a market I suppose. I think it wise to really learn from what I consider very knowledgeable and honest people in the business of investing one`s monies and I select W. Buffett , J. Bogle and our own T. Larimore with his hard fought lessons as my choices.
I'll admit that personally, I just don't have any interest in following a guru. I'll listen to good arguments from anyone, and I think Bogle has made several good arguments over time. But that doesn't mean every one of his arguments is a good one.

But that said, if one is going to pick a guru, I would agree Bogle is a relatively good choice. Then again, so is Larry.
I like the sentiment of your statement but I'd add that Larry was about the facts not about creating an ideology. While Bogle did great things, he has been more ideologically driven than evidence driven about international and tilting. After losing Larry this board needs more evidence based commenters.

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Re: Larry Portfolio Equities: What % Each Market?

Post by selftalk » Sun Apr 23, 2017 8:40 pm

NiceUnparticularMan,Nobody is perfect but I really side with the 3 people mentioned above when I add that to my experience in the market since 1966. I`ve read so many investment books over the years, viewed various newsletters, watched Louis Rukeyser on Wall Street Week, listened to investment advice via the radio, had a few stockbrokers long ago etc. but all to no avail. Holding long term and not trading has seemed to work for the people I have known who have done well over the years and that`s what the 3 people recommended above advocate. After all the index has risen pretty well over the years. I`ll stick with that. It makes sense to me.

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Re: Larry Portfolio Equities: What % Each Market?

Post by avalpert » Sun Apr 23, 2017 9:09 pm

Lieutenant.Columbo wrote:
Dirghatamas wrote:...if you want to do the same thing but only chose small/value, the logical way would be to go to the world stock index and then apply the screens for small and value across the whole index. I think something like 3% of market cap of US stock index is considered "small Value" by some measures so perhaps use that for world. As far as I know there is no fund that invests this way.
when I go to the World Stock Index, I am puzzled because 3% of Vanguard Total World Stock is 232 holdings, but two of the funds Larry says may be used for the LP show 1077 holdings (DFSVX) and 3727 holdings (DWUSX). Is Total World is leaving out some of the market?
You need to look at the bottom 3% of market cap - not number of holdings. The smallest 232 holdings are going to be very small stocks.

triceratop wrote:
Lieutenant.Columbo wrote:Equities[/b]: US: IJS.......Devel+Emerg: DWUSX
Bonds: DFXIX (tax-deferred)+DFMPX (taxable)
What is the effective expense of using these funds to you, divided by asset base? That is, including not just expense ratio but advisor fees. What are your expectations of the relevant premia going forward, and what are your factor loads. Does it exceed the expense you know you are spending?
I honestly do not know how to exactly to calculate what you are asking me. I know I am using funds that are more expensive than Vanguard's, but I believe a have a deeper factor load that I believe justifies the higher ER[/quote]
If you can't calculate what the additional cost is how do you know the deeper factor load increases expected return enough to cover it? Are you just taking that on faith? What is your target factor load? Have you looked at any of Robert T's threads to see examples of attaining deep loads without DFA funds?
although my portfolio is tilted, I agree with those who diversify across the Globe market cap, in order to diversify risk, so even if I'm not using the entire market, I'd still like for my LP to be geographically diversified according to the World's Small-Value cap
What risks specifically are you trying to diversify here? Do you really need precision to accomplish that - do those particular risk have any relation at all to relative overall market cap?

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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sun Apr 23, 2017 9:19 pm

avalpert wrote:Have you looked at any of Robert T's threads to see examples of attaining deep loads without DFA funds?
I have read several of Robert T's posts. He shows how to attain his desired target loads with no DFA funds, but I remember him saying the highest tilt (the one the LP is after) cannot be attained without DFA funds.
avalpert wrote:What risks specifically are you trying to diversify here? Do you really need precision to accomplish that - do those particular risk have any relation at all to relative overall market cap?
I am trying to diversify the same risks that someone who diversifies the whole market cap globally is; does this sound reasonable?
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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 9:43 pm

betablocker wrote:I like the sentiment of your statement but I'd add that Larry was about the facts not about creating an ideology. While Bogle did great things, he has been more ideologically driven than evidence driven about international and tilting. After losing Larry this board needs more evidence based commenters.
No argument here.

I do think it would be interesting if Bogle actually posted here. I have a sneaking suspicion he might be a little more open minded, at least if he was able to express himself freely.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Sun Apr 23, 2017 9:46 pm

selftalk wrote:Holding long term and not trading has seemed to work for the people I have known who have done well over the years and that`s what the 3 people recommended above advocate. After all the index has risen pretty well over the years. I`ll stick with that. It makes sense to me.
Seems reasonable to me. But people who factor invest don't necessarily disagree with any of that.

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Re: Larry Portfolio Equities: What % Each Market?

Post by lack_ey » Sun Apr 23, 2017 9:52 pm

Lieutenant.Columbo wrote:
Dirghatamas wrote:...if you want to do the same thing but only chose small/value, the logical way would be to go to the world stock index and then apply the screens for small and value across the whole index. I think something like 3% of market cap of US stock index is considered "small Value" by some measures so perhaps use that for world. As far as I know there is no fund that invests this way.
when I go to the World Stock Index, I am puzzled because 3% of Vanguard Total World Stock is 232 holdings, but two of the funds Larry says may be used for the LP show 1077 holdings (DFSVX) and 3727 holdings (DWUSX). Is Total World is leaving out some of the market?
Setting aside some potential issues of minor double counting (ADR and local shares, perhaps, or multiple share classes of same stock, etc.), you know what you're missing here? Temporary brain lapse? A 3% portion of total world can be anything between three companies and thousands, depending on how you slice it. Apple alone is over 1%. Most companies have many zeros out in front.

Lieutenant.Columbo wrote:what metric/rationale would you use when determining the USA/Developed/Emergent markets ratio for the LP, whose equities...
...are ALL a very small subset of the total world market cap?
and
...might not necessarily adhere to the same US/Dev/Emerg ratio that the whole stock market equities do?
What do you see as the purposes behind (1) tilting here (small value, value; not other factors in equities) and (2) owning stocks in different countries?

The generally given rationales behind LP-style tilting have to do with concentrating in (probably) higher returning equities with higher risk in order to build more efficient portfolios possibly with better risk/return characteristics. It's kind of like using leverage but without the costs and issues of leverage, which allows for using less equity to achieve a given level of potential return, meaning more money in fixed income (and perhaps other sources of return not tied to the equity markets) to balance things. Historically small value has been even better than leveraging the market in a number of ways, and potentially is further justified if you believe in non-market factor persistence via unique and undiversifiable non-market risk that has been priced in (higher discount rate) or somewhat persistent mispricing, so all the backtests look pretty good.

Usually the rationale behind investing across multiple equity markets is to mitigate single-country risk, which can be manifested as market misbehavior (e.g. a bubble in one country from extreme overvaluation), economic and currency effects tied to a given market, political and policy changes within a country that may be unfavorable to public equity, and so on. While crises in the large economies and zones tend to spill out and affect the whole world, a number of other effects can impact stocks of a single country for a longer period of time, and performance of different markets may significantly diverge from the global market.

Did you have anything else in mind? There can be other rationales. Any allocation that largely achieves your objectives should be fine. There are always going to be tradeoffs, and you won't end up with exactly what you want.

If you want to overthink this, I would weigh the following considerations:
  • International investing is more expensive, having higher fund expenses, higher transaction costs borne internally by the fund, higher dividends, less qualified dividends, and tax withholding that the fund already has to pay to the other countries (which is accounted for in foreign tax credit if held in taxable account, where you get the other downsides). Additionally, there is the foreign exchange rate issue, which adds a probably-around-zero-return-in-the-long-term overlay that adds volatility from your perspective. All else equal this is worse than investing locally.
  • If your equity opportunity set is the global equity markets, the small cap portion of that would be different from the combination of {US SCV + ex-US developed SCV + EM SCV}. It's not obvious how you would account for size differences across markets, perhaps the way earnings are measured, etc. But suffice to say that given the US market is relatively expensive now, you may find stocks in US SCV that are larger and less of a value (given your preferred metrics, whatever they are) than perhaps what might be a small cap core stock in a more depressed market. By some reasonable definitions, I would imagine—without having looked at the data—that a global SCV portfolio would be less than 50% invested in US stocks, even though US is above 50% in overall global (free float) market cap. A value investor might say that fewer US stocks are good values.
  • Do different markets have equivalent expected return? If not, what do you believe the returns of different markets might be? Should riskier markets like in EM have higher return? There are a number of thoughts here. Some turn to valuation ratios. Others caution about directly comparing valuations across countries for a number of reasons, including accounting, sector weightings, etc. You might look at a country's valuations relative to its own historical valuations, comparing across history instead of between markets. Presumably if you expect much higher returns from some countries, you might consider higher weightings there. In theory that sounds in line with LP concepts of concentrating risk while reducing equity percentage. But there may be a point of going too far.
  • Is your belief in non-market factors equivalently strong in each market? There is more data for the US but many characteristics, particularly if related to risk (if that is what you believe), should probably translate between markets to a significant level. It's also possible that if some excess performance is from mispricing and this is getting (colloquially) arbitraged out in the US, you could see more benefit from tilting elsewhere.

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Re: Larry Portfolio Equities: What % Each Market?

Post by avalpert » Sun Apr 23, 2017 9:54 pm

Lieutenant.Columbo wrote:
avalpert wrote:Have you looked at any of Robert T's threads to see examples of attaining deep loads without DFA funds?
I have read several of Robert T's posts. He shows how to attain his desired target loads with no DFA funds, but I remember him saying the highest tilt (the one the LP is after) cannot be attained without DFA funds.
The tilt the LP is after is the one that attains your expected return and desired risk exposure - just as you adjust the equity component to meet your needs you can adjust the factor exposure as well. What is your desired factor exposure - do you have one?
avalpert wrote:What risks specifically are you trying to diversify here? Do you really need precision to accomplish that - do those particular risk have any relation at all to relative overall market cap?
I am trying to diversify the same risks that someone who diversifies the whole market cap globally is; does this sound reasonable?
Not really. You aren't looking to diversify the same risks as they are - if you were you wouldn't be concentrating on the small and value components of the market. They choose their global diversification to mitigate factor risks you are explicitly looking to get exposure to - why would you think that their resulting distribution across countries would be right for you?

So what specific risks are you trying to diversify?

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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Sun Apr 23, 2017 10:59 pm

avalpert wrote:
Lieutenant.Columbo wrote:when I go to the World Stock Index, I am puzzled because 3% of Vanguard Total World Stock is 232 holdings, but two of the funds Larry says may be used for the LP show 1077 holdings (DFSVX) and 3727 holdings (DWUSX). Is Total World is leaving out some of the market?
You need to look at the bottom 3% of market cap - not number of holdings. The smallest 232 holdings are going to be very small stocks.
lack_ey wrote:...you know what you're missing here? Temporary brain lapse? A 3% portion of total world can be anything between three companies and thousands, depending on how you slice it. Apple alone is over 1%. Most companies have many zeros out in front.
:shock: :oops: I am embarrased
avalpert wrote:What is your desired factor exposure - do you have one?
I admit I do not have a set target exposure, only as high exposure as reasonably attained, so that I can afford a low ratio of equities
lack_ey wrote:What do you see as the purposes behind (1) tilting here (small value, value; not other factors in equities) and (2) owning stocks in different countries?
avalpert wrote:
Lieutenant.Columbo wrote:I am trying to diversify the same risks that someone who diversifies the whole market cap globally is; does this sound reasonable?
Not really. You aren't looking to diversify the same risks as they are - if you were you wouldn't be concentrating on the small and value components of the market. They choose their global diversification to mitigate factor risks you are explicitly looking to get exposure to - why would you think that their resulting distribution across countries would be right for you?

So what specific risks are you trying to diversify?
My ultimate purpose in tilting is reducing beta exposure in order to shorten the left tail, so that I can sleep well.
My purpose in owning stocks in different countries is two-fold (maybe actually two ways of saying the same thing):
1. to reduce the impact of market dips in any one area or country
2. something Larry said
larryswedroe wrote:...the biggest benefits of international diversification are logically in small as the larger companies are more likely to be multinational and more subject to global conditions while smaller companies more likely to be more impacted by local conditions.
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Re: Larry Portfolio Equities: What % Each Market?

Post by Ketawa » Sun Apr 23, 2017 11:08 pm

Lieutenant.Columbo wrote:Brief INTROD to the Larry Portfolio (LP) for those not familiar with it. The LP is:
1. Equities: USA Small Value + Developed Markets Small Value + Emergent Markets Value
Lieutenant.Columbo wrote:although my portfolio is tilted, I agree with those who diversify across the Globe market cap, in order to diversify risk, so even if I'm not using the entire market, I'd still like for my LP to be geographically diversified according to the World's Small-Value cap
Just think about this for a second. Why do you want your portfolio to be diversified according to the capitalization of small value companies? The Larry Portfolio itself is not. Otherwise it would be dominated by emerging markets, since Larry's own model portfolio is using emerging market large cap.

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Re: Larry Portfolio Equities: What % Each Market?

Post by stlutz » Sun Apr 23, 2017 11:39 pm

My ultimate purpose in tilting is reducing beta exposure in order to shorten the left tail, so that I can sleep well.
Suppose the small/value premium over the course of your retirement is zero or negative. What does that do to your plan?

I think it's good to keep in mind that for somebody in what I presume to be Larry's financial situation, he has no need to get any return from the equity portion of his portfolio to live very well in retirement--his fixed income holdings will take care of that just fine. If that is your situation, then you might as well focus your relatively small equity holdings on the stocks you think will perform the best.

If you're depending on equity returns to make your retirement work out, then depending on one corner of the market to outperform is adding a lot of risk rather than reducing it. I know Swedroe has guru status among many on the board, but one should keep in mind that the view that one corner of the market can be counted on to reliably outpeform over time is definitely a minority view among professionals in general.

As this thread is also getting at, there is a lot of randomness that will affect your outcomes. Just the differences in return in IJS vs other alternatives could be substantial over time, either good or bad. Again, when you are focusing on 3% of the market, things that you thought might be insignificant can have a significant impact on returns.

I have no idea about your own personal situation so I don't know much about what risks you need to take. As such, I'm not looking to argue you into or out of a particular approach. I'm simply suggesting to be very aware of the risks you are taking by following the LP strategy.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Mon Apr 24, 2017 5:50 am

stlutz wrote:Suppose the small/value premium over the course of your retirement is zero or negative. What does that do to your plan?
To a Larry-type factor investor, that is equivalent to asking what if the Beta premium over the course of retirement is zero or negative. For all those people only exposed to Beta, that could be a serious problem as that means the return on their stocks would be zero or negative. But if you are exposed to all of Beta, small, and value, you could still have positive returns in such a scenario.

With that framework in mind, a factor investor would point out if they are exposed to all of Beta, small, and value, then if the returns to both small and value are zero or negative, they still have exposure to Beta. If the return to Beta is also zero or negative--well, then no one should have invested in stocks at all, but they did their best.
If you're depending on equity returns to make your retirement work out, then depending on one corner of the market to outperform is adding a lot of risk rather than reducing it.
Again to a Larry-type factor investor, it is the people who are counting only on Beta exposure who are taking the higher risk of failure, because if the return to Beta is poor, they have no Plan B.

Part of what is going on here is the belief that just this "one corner of the market" is in fact sufficient to give the investor exposure to Beta. That's a pretty well-grounded belief, independent from whatever you might think of other factors. Of course the factor investor may have dialed down their Beta exposure in general, but they certainly haven't eliminated it.

So holding aside the other factor exposures, we're just talking here about someone who might have had less Beta exposure than they otherwise might have chosen. This is equivalent to a discussion about, say, a person who went 30/70 rather than 50/50. If the only returns are to Beta, the 30/70 person will likely have lower returns as a result, but it won't necessarily be a disaster--indeed, in withdrawal portfolios in particular, there is a lot less at stake within the broad middle range than some people seem to think.

So the Larry-style factor investor has done that with respect to Beta (dialed it down to a relatively conservative amount of exposure), but hasn't eliminated Beta exposure entirely. And I don't normally see people giving dire warnings to those who do choose a relative conservative Beta exposure in withdrawal.

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Re: Larry Portfolio Equities: What % Each Market?

Post by Lieutenant.Columbo » Mon Apr 24, 2017 7:44 pm

NiceUnparticularMan wrote:[...]a factor investor would point out if they are exposed to all of Beta, small, and value, then if the returns to both small and value are zero or negative, they still have exposure to Beta. If the return to Beta is also zero or negative--well, then no one should have invested in stocks at all, but they did their best.

Again to a Larry-type factor investor, it is the people who are counting only on Beta exposure who are taking the higher risk of failure, because if the return to Beta is poor, they have no Plan B.

Part of what is going on here is the belief that just this "one corner of the market" is in fact sufficient to give the investor exposure to Beta. That's a pretty well-grounded belief, independent from whatever you might think of other factors [...]
NiceUnparticularMan,
The understanding of these basic explanations above is all it took for me to decide to go the LP route. Of course you yourself understand this too, so when will you get you a LP? :wink:
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Re: Larry Portfolio Equities: What % Each Market?

Post by stlutz » Mon Apr 24, 2017 10:58 pm

To a Larry-type factor investor, that is equivalent to asking what if the Beta premium over the course of retirement is zero or negative. For all those people only exposed to Beta, that could be a serious problem as that means the return on their stocks would be zero or negative. But if you are exposed to all of Beta, small, and value, you could still have positive returns in such a scenario.
Let me try to explain my post again. I wasn't really arguing whether Larry's theory is right or wrong. Rather, the point was that we should all acknowledge that our views about how markets have worked/will work may be significantly off. Me being confident in my views doesn't make them any more true.

If the risk premium/risk factor approach to small value is true, then the argument that you have a 95% chance over 15 years of beating the market by concentrating in small/value is likely pretty much on target. I concede that point. However, many smart people argue that the whole concept of risk premiums is off and many other smart people reject that concept that any particular risk factors should be expected to beat the market long term.

People who advocate these varying views all look at the same data. However, they each decide that some historical data is more relevant than others and they all construct different "stories" to explain that data. On BH this discussion often leads down the path of arguing who is an idiot (viewtopic.php?t=96441), but the reality is that most of these smart people who are offering differing conclusions about the same set of data aren't idiots.

So, we should all face the fact that our own views of the market may not be in line with how it actually works. So, what do we do with that? There are a couple of common approaches take on BH:

a) "Tilting." Many people (myself included) think that value stocks are likely to beat the market. However, they don't make a whole-hog commitment to their theory being true. They hedge their bets by starting with the total market and then adding in a small/value position as well. Very common here is to have a 4 fund portfolio of VTI, VXUS, BND, and VBR.

b) Factor diversification. This is a controversial term here mainly because it is frequently misused. The concept behind factor diversification is to make bets on more than just one type of stock. Betting only on small/value is not factor diversified. Having holdings in value stocks, momentum stocks, and low volatility stocks--now you're practicing factor diversification (there are other options as well). All three of these approaches offer attractive historical Sharpe ratios and decent explanations as to why they will persist. Wouldn't you rather have 3 chances of something working out than just one?

Some people claim that "risk" in the reason why small/value has a 95% chance of beating the market over the long haul. I"m not talking about that type of risk. The risk I'm discussing is that the theory behind historical and future SV outperformance may just be wrong.

If you have a 10M dollar portfolio and 70% of that is in fixed income, the actual risk to you of being wrong on SV is actually very low. If you have a much smaller portfolio and you need you withdrawals to keep pace with inflation while not running out of money, then being wrong in your market prognostications is a risk that needs to be taken into account.

And so, I wasn't really addressing the question of what returns you should expect from SV in the future. I'm trying to point out that there are actual limitations to our knowledge of markets and we should take that fact into account when moving from our own views of what is right to the practical task of constructing a portfolio.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Tue Apr 25, 2017 4:38 am

Lieutenant.Columbo wrote:Of course you yourself understand this too, so when will you get you a LP? :wink:
Quite a while ago now, I set my target allocations at what you might consider to be a mild Larry-type portfolio. Stock-wise, that meant 60/40 US/International, with the US 60% SV, 25% LV, 15% LB, and the International 40% S, 40% developed value, and 20% EM. Without getting into the details, there is also a REIT allocation, and then a fixed allocation which is kept very basic and low-risk.

Then our biggest account (a 401K), changed its options, forcing me off target (I ended up with more just plain small/mid in U.S. than small value, and my international was mostly just total international). Slowly with contributions to other accounts I am moving back.

However, obviously that target allocation is not the full LP. In a nutshell, that is because I am investing for two people, and I am concerned enough about tracking error to think it was worth deviating from the full LP in the ways that I did (Larry has strong sentiments against worrying about tracking error, but in my case at least, I did not share those sentiments). I'd also note that I have specific concerns about the risks associated with the small and value premiums being very real risks, and that also led me to think I should not necessarily go all-in on a LP.

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Re: Larry Portfolio Equities: What % Each Market?

Post by NiceUnparticularMan » Tue Apr 25, 2017 5:04 am

stlutz wrote:Betting only on small/value is not factor diversified.
This is a crucial premise in your argument, and I think it is critical to understand why a typical factor investor is not actually doing that, even if they put 100% of their stock allocation into a SV fund.

So if with that statement you meant to refer to a portfolio that had only small and value exposure and no Beta exposure, then sure--such a portfolio would be less diversified than it could be due to the lack of Beta exposure. And if, hypothetically, there was no return to small and value and only a return to Beta, such a portfolio would then get no return.

But holding 100% of your stocks in, say, a SV fund is not going to result in such a portfolio. For example, according to Portfolio Visualizer, DFA's small value fund has a Small loading of 0.79, Value of 0.65, AND a Beta loading of 1.02. IJS, a popular alternative for those without access to DFA, has a Small of 0.80, Value of 0.49, AND Beta of 0.95. VBR, the Vanguard SV option, is 0.57 Small, 0.38 Value, AND 1.03 Beta.

You might note the Beta exposure was always close to 1--that is because it would be very difficult to put together a large, diversified index of stocks that did NOT have a Beta close to 1. So if you just select for characteristics like small and value, odds are you will in fact end up with a Beta close to 1 as well.

Indeed, that's a large part of why Fama-French defined their small and value factors in terms of combined long-short portfolios. That's basically the only practical way of defining portfolios where you isolate small or value from Beta, with the shorts serving to cancel out the Beta of the longs.

So people who invest only long in U.S. SV very much have not given up on betting on Beta too. To actually get rid of that Beta, they'd have to go short in U.S. LG with half their U.S. stock portfolio . . . and I am not aware of anyone doing that.

OK, so understanding that, imagine you have 100% in one of those small value funds, and it ends up there are no returns to small and value but there is a return to Beta. Do you have no returns? Nope. You only have Beta returns, but you do in fact still have those. And in fact you probably have right around as much of them as a TSM investor (except to the extent you held more fixed and therefore lowered your overall stock percentage).

That's why someone with 100% long positions in a SV fund is still factor-diversified. Again, to actually eliminate that Beta exposure, they'd have to also short LG stocks, and who does that?

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Re: Larry Portfolio Equities: What % Each Market?

Post by Morse Code » Tue Apr 25, 2017 7:26 am

NiceUnparticularMan wrote:
stlutz wrote:Betting only on small/value is not factor diversified.
This is a crucial premise in your argument, and...
Nice explanation.
Livin' the dream

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