What ever happened to the Larry portfolio?

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nedsaid
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Re: What ever happened to the Larry portfolio?

Post by nedsaid » Tue Dec 26, 2017 1:11 pm

Help is on its way, Larry will devote a chapter in his new book on the "Larry Portfolio." The chapter will explore if the "Larry Portfolio" is well diversified.

I am not sharing a big secret here, but Larry will respond to e-mails and personal messages if you have questions. I had an e-mail exchange with him a few months ago and he was fairly prompt with his responses. So you can go right to the source if you would like.
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Kevin M
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Re: What ever happened to the Larry portfolio?

Post by Kevin M » Tue Dec 26, 2017 1:37 pm

Doc wrote:
Mon Dec 25, 2017 12:45 pm
Kevin M wrote:
Sun Dec 24, 2017 6:10 pm
The main reason is the higher returns of small-cap value stocks during the periods he uses in his analyses.
I don't think that you are interpreting the "Black Swans" idea correctly.
You quoted me out of context. This part of my reply was simply disagreeing with the point that higher term risk in the bond portion of the portfolio was why it had done so well. Larry has never been a proponent of taking a lot of term risk in nominal bonds. The higher allocation to bonds allowed a lower allocation to stocks with higher expected returns (and higher risks), while maintaining or even decreasing the overall portfolio risk, and reducing the left-tail risk.
Doc wrote:
Mon Dec 25, 2017 12:45 pm
The basic idea is that small value has higher returns but at the cost of higher risk. By increasing your SV allocation allocation you get more return and then you increase your FI allocation to maintain the original risk. You wind up with the same risk/reward but without the fat tails.
Sure, which is basically what I said in the earlier part of my reply which you did not quote:
Kevin M wrote:
Sun Dec 24, 2017 6:10 pm
With the LP, you determine the stock/bond ratio based on your ability, willingness and need to take risk, just like with any other portfolio. The main difference is that he uses mostly small-cap value stocks for the stock portion, which he believes have a higher expected return than total market stocks, and this enables a smaller allocation to stocks for the same expected portfolio return. He also believes that the left-tail risk is lower due to the lower stock allocation.
Kevin
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vesalius
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Re: What ever happened to the Larry portfolio?

Post by vesalius » Tue Dec 26, 2017 1:49 pm

stlutz wrote:
Tue Dec 26, 2017 12:02 pm
A cheaper iShares ETF version could be:
1. iShares Edge MSCI Multifactor USA Small-Cap ETF SMLF
2. iShares Edge MSCI Multifactor Intl Small-Cap ETF ISCF
3. iShares Edge MSCI Multifactor Emerging Markets ETF EMGF

A cheaper Scwhab version could be:
1. Schwab Fundamental U.S. Small Company Index ETF FNDA
2. Schwab Fundamental International Small Company Index ETF FNDC
3. Schwab Fundamental Emerging Markets Large Company Index ETF FNDE
Just for clarification--were theses Swedroe's recommendations or possibilities that you are suggesting?
Sorry, I did not mean to put words in Larry's mouth. The last 2 posiibilities were mine. Larry has shied away from specific individual fund/etf recommendations outside of those already publicly known to be vetted and suggested by the firm he works for, such as DWUSX and BOSVX.

Theoretical
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Re: What ever happened to the Larry portfolio?

Post by Theoretical » Tue Dec 26, 2017 3:33 pm

FNDA and FNDE are on Larry's list of funds BAM uses in his book The Only Guide You Need to Factor Investing. Based on the criteria for inclusion in the book, FNDC should also qualify now, or come very close - average trading value is about $4.9 million per day and it has $1.6 billion AUM.
Thus, the recommendation is that the ETFs you are considering should have in excess of $ 100 million in assets and an average trading volume in excess of $ 5 million.

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Doc
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Re: What ever happened to the Larry portfolio?

Post by Doc » Tue Dec 26, 2017 4:17 pm

Kevin M wrote:
Tue Dec 26, 2017 1:37 pm
You quoted me out of context.
My bad. I misunderstood your intent.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Top99%
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Re: What ever happened to the Larry portfolio?

Post by Top99% » Wed Dec 27, 2017 9:13 am

This http://www.retireearlyhomepage.com/reallife16.html has some interesting data on many portfolios discussed on this forum. The data is over a year old but it is still interesting. One thing not mentioned in this thread yet is the Larry Portfolio also reduces right tail upside so it isn't a free lunch or pitched as such in Larry's book.
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longinvest
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Re: What ever happened to the Larry portfolio?

Post by longinvest » Wed Dec 27, 2017 10:12 am

On December 23, 2011, Ron Lieber made the Larry Portfolio known to the wide public with his "Taking a Chance on the Larry Portfolio" article in The New York Times.

Here's an illustration that the article gave of one version of this portfolio along with a benchmark:
For illustration purposes, [Larry Swedroe] points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.
For the fun of it, I just ran a new comparison of this 32% small-cap value / 68% short-term treasuries versus its S&P 500 benchmark in Portfolio Visualizer, but for the period starting in January 2012 (just a few days after the article was published) and ending in November 2017 (the end of last month, as I'm writing this on December 27, 2017).

Here's the comparative growth of $10,000:

Source: Portfolio Visualizer
Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Benchmark (blue): Vanguard 500 Index Investor (VFINX) - 100%

Image

Some readers were possibly thinking that the Larry Portfolio would provide as much returns as the S&P 500 but with less volatility, as it did on paper in the past (in backtests). It didn't in real life after being published in The New York Times.

This reminds me of Rekenthaler’s Rule that William Bernstein is found of telling us about in his writings: "If the bozos know about it, it doesn’t work anymore."
Last edited by longinvest on Thu Apr 12, 2018 6:46 am, edited 3 times in total.
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CULater
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Re: What ever happened to the Larry portfolio?

Post by CULater » Wed Dec 27, 2017 10:16 am

Top99% wrote:
Wed Dec 27, 2017 9:13 am
This http://www.retireearlyhomepage.com/reallife16.html has some interesting data on many portfolios discussed on this forum. The data is over a year old but it is still interesting. One thing not mentioned in this thread yet is the Larry Portfolio also reduces right tail upside so it isn't a free lunch or pitched as such in Larry's book.
Interesting. It looks like the Larry Portfolio held up well in retirement with lower volatility. BTW, the use of 1-year Treasuries for the fixed-income portion didn't do as well as using 5-year Treasuries because it cuts term risk, which has paid off over the periods analyzed. Don't think Larry ever specifically recommended 1-year.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

longinvest
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Re: What ever happened to the Larry portfolio?

Post by longinvest » Wed Dec 27, 2017 10:52 am

CULater,
CULater wrote:
Wed Dec 27, 2017 10:16 am
Don't think Larry ever specifically recommended 1-year.
What about the citation from The New York Times I provided in the post just above yours?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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triceratop
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Re: What ever happened to the Larry portfolio?

Post by triceratop » Wed Dec 27, 2017 11:03 am

larry swedroe wrote:...all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed...
longinvest wrote:Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Hmmm. I wonder if Larry would agree with that choice of fund being representative.

Anyway, I don't think Larry said the portfolio would perform the same over any arbitrary timeline. That's an error you've committed in misinterpreting him, not his error in portfolio construction.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

longinvest
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Re: What ever happened to the Larry portfolio?

Post by longinvest » Wed Dec 27, 2017 11:09 am

Triceratop,
triceratop wrote:
Wed Dec 27, 2017 11:03 am
larry swedroe wrote:...all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed...
longinvest wrote:Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Hmmm. I wonder if Larry would agree with that choice of fund being representative.

Anyway, I don't think Larry said the portfolio would perform the same over any arbitrary timeline. That's an error you've committed in misinterpreting him, not his error in portfolio construction.
Does this mean that I can't just use a small-cap value index fund; that I must pick the "right" actively-managed one and pay an advisor fee (not accounted for in the reported backtested pre-2012 returns)?
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triceratop
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Re: What ever happened to the Larry portfolio?

Post by triceratop » Wed Dec 27, 2017 11:28 am

longinvest wrote:
Wed Dec 27, 2017 11:09 am
Triceratop,
triceratop wrote:
Wed Dec 27, 2017 11:03 am
larry swedroe wrote:...all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed...
longinvest wrote:Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Hmmm. I wonder if Larry would agree with that choice of fund being representative.

Anyway, I don't think Larry said the portfolio would perform the same over any arbitrary timeline. That's an error you've committed in misinterpreting him, not his error in portfolio construction.
Does this mean that I can't just use a small-cap value index fund; that I must pick the "right" actively-managed one and pay an advisor fee (not accounted for in the reported backtested pre-2012 returns)?
It definitely does not mean that.

It means I personally will not take seriously your critique if it isn't at all consistent with what Larry recommended, even if you think it is consistent with what he recommended (not to mention using a 5 year period to "prove" a point). It also doesn't discount the possibility that there is a passively-managed index fund that Larry would approve of.

I didn't say anything about an actively-managed fund nor about an advisor fee. I only use index funds.

edit: by the way, note that Larry's statement was about how well SCV would have performed, not a statement that they would perform similarly in the future. In fact if you read his writings you'll see he expects a haircut to historical premiums for small and value, so my expectation is that he wouldn't make such a forward-looking statement.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Random Walker
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Re: What ever happened to the Larry portfolio?

Post by Random Walker » Wed Dec 27, 2017 11:45 am

As Top99% pointed out, the high tilt, lower exposure to market beta, increased exposure to safe bonds advocated by Larry is no free lunch. One lessens both the left and the right tails, although I believe the left tail is affected most. One is generating a more efficient portfolio: similar expected return, smaller SD, reduced tails on both sides.

Dave

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Re: What ever happened to the Larry portfolio?

Post by jmk » Wed Dec 27, 2017 11:55 am

Random Walker wrote:
Sun Dec 24, 2017 6:36 pm
I agree that there is big value to diversifying across factors. Ironically, the importance of this diversification perhaps increases as the time horizon SHORTENS. Over a short time period, we don’t know how any factor will perform, so best to diversify.
A point worth noting. And of course it's true of diversification in general, not just across factors. This is a reason I prefer the Lifestrategy funds for my short-term monies: long term they're costly and restricting; but short-term they provide nice diversification across geography (including emerging markets) including on the bond side with total liquidity. One can add in some factor-focused funds for added diversification.

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Re: What ever happened to the Larry portfolio?

Post by Random Walker » Wed Dec 27, 2017 12:01 pm

Above Longinvest is showing the results for a 5 year time span. As we (and I’m sure Longinvest too) know, 5 years is too short a time frame to derive any meaningful result. But it brings up a point of Larry’s that I’ve emphasized before. Since all factors can underperform for extended periods, diversification across factors is likely most important over shorter time periods. This is why diversification across factors is so important for those nearing or in early retirement, where sequence of returns risk is so great.
Larry’s book on factor investing is worth its price just for two charts near the end of the book in Chapter 9. One chart in particular shows the frequency of any factor underperforming over given time periods. At the bottom of the chart we see the frequency of 1/n portfolios diversified across factors underperforming over the same time periods. Diversification across the factors lessens the odds of underperformance dramatically.
Even if readers don’t want to read the whole book, I would personally recommend looking at the Chapter 9 charts.

Dave

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Re: What ever happened to the Larry portfolio?

Post by garlandwhizzer » Wed Dec 27, 2017 12:19 pm

Any bond dominated portfolio is unlikely to perform as well post 2012 as it did on long term backtesting before that which included 3+ decades during which inflation and yields consistently declined by more than 10% each. Long term backtesting is not an adequate tool to define future returns in the bond market. We have recently reached all time low yields in the bond market and they are still quite low historically. Starting from there returns face a headwind whereas in the long term historical past there was a tailwind. In addition there is a future concern about the results of unwinding QE, what effect that will have on the bond market. In short, regardless of how attractive the risk/return situation for bonds on long term backtesting (high returns/low risk) I believe it to be a mistake to assume that will continue into the future. Bonds clearly decrease the risk of equity better than anything else but their are unlikely to produce robust real returns in the foreseeable future in contrast to how they performed prior to 2012. Even though 20/80 looked attractive on long term backtesting (good returns/very low risk) it may not look that way going forward.

For example, the Vanguard Intermediate Term Bond Fund has produced negative real inflation adjusted returns over the last five years. If 80% of your portfolio is in ITT, losing purchasing power, and the other 20% is in SCV which has underperformed the market for a about a decade that portfolio has not done well over that time frame. The expectation is that long term it will outperform on a risk adjusted basis, but clearly expectation and reality has not agreed over the last 5 years. Altering the underlying percentage of equity to bonds does not change the fact that tracking error has been a problem over that time frame relative to a comparable TSM/TBM percentages.

IMO long term academic backtesting and the models it derives are not always to be trusted fully. I don't believe it should not be relied upon to be a totally reliable determinant of the market's future over a given time frame. Considerable patience and faith are necessary for those who follow the LP or any approach that seeks to improve upon the market's basic risk/return relationship.
It is not as clear to me as it is to many academics who will come out on top in the end.

Garland Whizzer

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Re: What ever happened to the Larry portfolio?

Post by CULater » Wed Dec 27, 2017 3:19 pm

garlandwhizzer wrote:
Wed Dec 27, 2017 12:19 pm
Any bond dominated portfolio is unlikely to perform as well post 2012 as it did on long term backtesting before that which included 3+ decades during which inflation and yields consistently declined by more than 10% each. Long term backtesting is not an adequate tool to define future returns in the bond market. We have recently reached all time low yields in the bond market and they are still quite low historically. Starting from there returns face a headwind whereas in the long term historical past there was a tailwind. In addition there is a future concern about the results of unwinding QE, what effect that will have on the bond market. In short, regardless of how attractive the risk/return situation for bonds on long term backtesting (high returns/low risk) I believe it to be a mistake to assume that will continue into the future. Bonds clearly decrease the risk of equity better than anything else but their are unlikely to produce robust real returns in the foreseeable future in contrast to how they performed prior to 2012. Even though 20/80 looked attractive on long term backtesting (good returns/very low risk) it may not look that way going forward.

For example, the Vanguard Intermediate Term Bond Fund has produced negative real inflation adjusted returns over the last five years. If 80% of your portfolio is in ITT, losing purchasing power, and the other 20% is in SCV which has underperformed the market for a about a decade that portfolio has not done well over that time frame. The expectation is that long term it will outperform on a risk adjusted basis, but clearly expectation and reality has not agreed over the last 5 years. Altering the underlying percentage of equity to bonds does not change the fact that tracking error has been a problem over that time frame relative to a comparable TSM/TBM percentages.

IMO long term academic backtesting and the models it derives are not always to be trusted fully. I don't believe it should not be relied upon to be a totally reliable determinant of the market's future over a given time frame. Considerable patience and faith are necessary for those who follow the LP or any approach that seeks to improve upon the market's basic risk/return relationship.
It is not as clear to me as it is to many academics who will come out on top in the end.

Garland Whizzer
Generally, the concerns about the LP seem to be that (1) the high bond allocation will be a drawback in the future because rates are low and likely to go up, and (2) the 30% allocation to SCV represents data-mining and won't continue to work in the future either. Both of these concerns are legitimate and worrisome. I've thought about them, and here's my 2-cents:

With regard to #1, I guess the solution would be to have a low bond allocation. But where is that money going to be invested? In stocks? Why should I think that having a higher equity allocation is going to work out going forward, given the nosebleed valuations? Secondly, nobody really knows where interest rates are going, do they? Basing investment decisions on crystal ball forecasts is not a sound strategy.

With regard to #2, I believe Larry's rationale for SCV is based on the finding that this equity asset class is actually more diversified across beta, value, and small factors than is TSM. TSM represents a bet on beta; whereas, SCV represents a bet on beta, value, and small. SCV was not merely ginned up from backtesting.

With regard to recent performance of the 30/70 LP (not 80/20), it has returned about 40% since 2012, far less than the 76% return of the 60/40 allocation. But, there have hardly been any significant drawdowns in U.S. equities over that period of time. There was never any claim that the LP, with only 30% in stocks, would outperform a higher stock allocation during such periods. It's claim to fame is that it significantly limits portfolio drawdowns when things get rough. Over a complete bull-bear market cycle, it has matched the returns of the 60/40 portfolio with far less damage during the "bear" part of the cycle. I guess if we never again have any equity bear markets again, the LP would be a fool's errand. I'm not willing to bet my sleep on that outcome, however. If stocks do tank by 50% or more, as happened in 2008, I'd rather take a 15% equity loss with the LP than a 30% loss with 60/40.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: What ever happened to the Larry portfolio?

Post by Top99% » Thu Dec 28, 2017 8:53 am

CULater wrote:
Wed Dec 27, 2017 3:19 pm
Generally, the concerns about the LP seem to be that (1) the high bond allocation will be a drawback in the future because rates are low and likely to go up, and (2) the 30% allocation to SCV represents data-mining and won't continue to work in the future either. Both of these concerns are legitimate and worrisome. I've thought about them, and here's my 2-cents:

With regard to #1, I guess the solution would be to have a low bond allocation. But where is that money going to be invested? In stocks? Why should I think that having a higher equity allocation is going to work out going forward, given the nosebleed valuations? Secondly, nobody really knows where interest rates are going, do they? Basing investment decisions on crystal ball forecasts is not a sound strategy.
Your concerns mirror my concerns and are why I only went partially in on a LP. We have some TSM and Alts in place of some of the bond and stock allocation. I will admit that in the 2010 time frame I was pretty sure interest rates would head back to the "normal" rates of the 1990s. But, looking back at history there have been multi-decade long periods of flat rates so I have no idea what "normal" interest rates are and where interest rates are headed beyond a couple of predictable rate increases telegraphed by the Fed and no doubt priced in already.
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Re: What ever happened to the Larry portfolio?

Post by Random Walker » Thu Dec 28, 2017 9:49 am

Top99 and CU Later,
It was my thoughts about low interest rates and current stock market valuations that contributed to my decision to replace a portion of my muni bonds with alternatives. Although the alts are tax inefficient, their expected after tax return still greater than bonds. Added lots of diversification, added some risk, increased portfolio expected return, should improve portfolio edificiency substantially. Increases costs too :-)

Dave

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Re: What ever happened to the Larry portfolio?

Post by CULater » Thu Dec 28, 2017 10:17 am

Random Walker wrote:
Thu Dec 28, 2017 9:49 am
Top99 and CU Later,
It was my thoughts about low interest rates and current stock market valuations that contributed to my decision to replace a portion of my muni bonds with alternatives. Although the alts are tax inefficient, their expected after tax return still greater than bonds. Added lots of diversification, added some risk, increased portfolio expected return, should improve portfolio edificiency substantially. Increases costs too :-)

Dave
What are "alts" and why should I own them?
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: What ever happened to the Larry portfolio?

Post by CULater » Thu Dec 28, 2017 11:08 am

longinvest wrote:
Wed Dec 27, 2017 10:12 am
On December 23, 2011, Ron Lieber made the Larry Portfolio known to the wide public with his "Taking a Chance on the Larry Portfolio" article in The New York Times.

Here's an illustration that the article gave of one version of this portfolio along with a benchmark:
For illustration purposes, [Larry Swedroe] points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.
For the fun of it, I just ran a new comparison of this 32% small-cap value / 68% short-term treasuries versus its S&P 500 benchmark in Portfolio Visualizer, but for the period starting in January 2012 (just a few days after the article was published) and ending in November 2017 (the end of last month, as I'm writing this on December 27, 2017).

Here's the comparative growth of $10,000:

Source: Portfolio Visualizer
Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Benchmark (blue): Vanguard 500 Index Investor (VFINX) - 100%

Image

Some readers were possibly thinking that the Larry Portfolio would provide as much returns as the S&P 500 but with less volatility, as it did on paper in the past (in backtests). It didn't in real life after being published in The New York Times.

This reminds me of Rekenthaler’s Rule that William Bernstein is found of telling us about in his writings: "If the bozos know about it, it doesn’t work anymore."
Well the NY Times article got one thing right. The LP with short treasuries did return about 10% a year over the 1970-2010 time period. But as far as I know Larry has suggested that the LP, with 30% SCV, has generally matched the returns of a portfolio of 60% LC + bonds -- NOT a portfolio of 100% stocks. That would be downright foolish.

There are two periods in particular that the LP fell noticeably behind the 60/40. The first was the period from 1997-2000 when U.S. large cap stocks had their big runup to the bust. During that period to the peak in August 2000, the 60/40 returned about 74% while the LP returned 32%. The second has been the period from 2012 to the present when U.S. large cap stocks have enjoyed another big runup. During that period, the 60/40 has returned 73% while the LP returned 35%. Eerily similar difference.

It could be the the bozos have ruined the LP and other risk-parity portfolios like it forever. But I'm not sure that the last 5 years prove that conclusively, any more than the 4 years from 1997-2000 proved it. We'll just have to wait until the end of the next bear market and see how things look then. :beer
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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nedsaid
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Re: What ever happened to the Larry portfolio?

Post by nedsaid » Thu Dec 28, 2017 11:30 am

CULater wrote:
Thu Dec 28, 2017 10:17 am
Random Walker wrote:
Thu Dec 28, 2017 9:49 am
Top99 and CU Later,
It was my thoughts about low interest rates and current stock market valuations that contributed to my decision to replace a portion of my muni bonds with alternatives. Although the alts are tax inefficient, their expected after tax return still greater than bonds. Added lots of diversification, added some risk, increased portfolio expected return, should improve portfolio edificiency substantially. Increases costs too :-)

Dave
What are "alts" and why should I own them?
This has been discussed in different threads. The alternatives that Larry Swedroe talks about are
alternative lending, multi-factor funds like AQR funds, reinsurance, portfolio insurance, and managed volatility. The multi-factor funds use shorting and leverage and from what I could tell managed volatility uses leverage, these both are sort of like retail hedge funds. Reinsurance is mainly reinsuring insurance companies to spread risk for things like catastrophic events. Berkshire-Hathaway does this. Portfolio insurance relates to the volatility risk premium, that is the implied volatility of stock options is higher than the actual historical volatility. The fund sells stock options and scoops up the difference. Quantpedia says, "Most researchers speculate that the volatility premium is caused by investors who strongly dislike negative returns and the high volatility on equity indexes and are therefore willing to pay a premium for portfolio insurance offered by puts."

Alternative lending and reinsurance are direct investments in the business, the funds don't trade but you have limited liquidity. The idea is that you participate in the business without the volatility of the stock market that you get if you owned these businesses in public stock form.

Other alternative investments exist and are such things as precious metals and currencies. But the other items discussed above are the current hot discussion topics. Larry Swedroe's new book coming out in 2018 will discuss these topics in detail.

I do not own any of these type of investments myself. Some of these products are offered only through advisors and thus you pay an additional layer of fees. Many of the alts are semi-liquid or illiquid and this raises a caution flag for me. There was a day when you could get 6% or more yield from investment grade bonds with low correlation to the stock market. Today, quality bonds pay 2%, maybe 3%, hence the search for alternative investments.

The goal is to include in a portfolio asset classes with equity-like returns with low correlation to the stock market. Again, I think what is going on is that the market is searching for a bond substitute as bond yields are so darned low.

My view is that 20% of a portfolio in these alts is as much as I would do, if I would do them. To me, the jury is out on these products though there is a good theoretical case for them. Let's see how these actually perform. I am open minded but so far have preferred plain vanilla stocks and bonds.
A fool and his money are good for business.

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Re: What ever happened to the Larry portfolio?

Post by longinvest » Thu Dec 28, 2017 11:34 am

CULater,
CULater wrote:
Thu Dec 28, 2017 11:08 am
longinvest wrote:
Wed Dec 27, 2017 10:12 am
On December 23, 2011, Ron Lieber made the Larry Portfolio known to the wide public with his "Taking a Chance on the Larry Portfolio" article in The New York Times.

Here's an illustration that the article gave of one version of this portfolio along with a benchmark:
For illustration purposes, [Larry Swedroe] points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.
For the fun of it, I just ran a new comparison of this 32% small-cap value / 68% short-term treasuries versus its S&P 500 benchmark in Portfolio Visualizer, but for the period starting in January 2012 (just a few days after the article was published) and ending in November 2017 (the end of last month, as I'm writing this on December 27, 2017).

Here's the comparative growth of $10,000:

Source: Portfolio Visualizer
Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Benchmark (blue): Vanguard 500 Index Investor (VFINX) - 100%

Image

Some readers were possibly thinking that the Larry Portfolio would provide as much returns as the S&P 500 but with less volatility, as it did on paper in the past (in backtests). It didn't in real life after being published in The New York Times.

This reminds me of Rekenthaler’s Rule that William Bernstein is found of telling us about in his writings: "If the bozos know about it, it doesn’t work anymore."
Well the NY Times article got one thing right. The LP with short treasuries did return about 10% a year over the 1970-2010 time period. But as far as I know Larry has suggested that the LP, with 30% SCV, has generally matched the returns of a portfolio of 60% LC + bonds -- NOT a portfolio of 100% stocks. That would be downright foolish.
I simply reproduced (in a forward period) the comparison that Larry Swedroe himself suggested to Ron Lieber. You don't have to trust me on this. Just go and read the article in The New York Times:

Taking a Chance on the Larry Portfolio - The New York Times
In The New York Times, Ron Lieber wrote: [...]
As for the Larry Portfolio, which he prefers to refer to by more technical names, the only stocks it contains are mutual funds that hold small or value stocks (preferably both) from around the world. Everything else tends to go into very safe bonds.

For illustration purposes, he* points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.
[...]
* It's obvious, when reading the full article, that "he" refers to Larry Swedroe.

I was quite surprised of seeing 100% stocks investment used as benchmark for a 32% stocks / 68% bonds portfolio, but this is what was suggested according to the article. I have never seen Mr. Swedroe denying it publicly, which I'm sure he would have if Ron Lieber had lied about it, given the high visibility this article gave to the Larry Portfolio.
Last edited by longinvest on Thu Apr 12, 2018 6:46 am, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

vesalius
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Re: What ever happened to the Larry portfolio?

Post by vesalius » Thu Dec 28, 2017 12:00 pm

CULater wrote:
Thu Dec 28, 2017 11:08 am
Well the NY Times article got one thing right. The LP with short treasuries did return about 10% a year over the 1970-2010 time period. But as far as I know Larry has suggested that the LP, with 30% SCV, has generally matched the returns of a portfolio of 60% LC + bonds -- NOT a portfolio of 100% stocks. That would be downright foolish.

There are two periods in particular that the LP fell noticeably behind the 60/40. The first was the period from 1997-2000 when U.S. large cap stocks had their big runup to the bust. During that period to the peak in August 2000, the 60/40 returned about 74% while the LP returned 32%. The second has been the period from 2012 to the present when U.S. large cap stocks have enjoyed another big runup. During that period, the 60/40 has returned 73% while the LP returned 35%. Eerily similar difference.

It could be the the bozos have ruined the LP and other risk-parity portfolios like it forever. But I'm not sure that the last 5 years prove that conclusively, any more than the 4 years from 1997-2000 proved it. We'll just have to wait until the end of the next bear market and see how things look then. :beer
Glad you have read enough to easily see through this comparison, but yes before the New York Times helped shorten and coin the name as it is now most frequently used Larry called it the "Eliminate Fat Tails Portfolio". Larry has never shied away from the fact a portfolio set up this way, at least those set up like his own personal portfolio with a high percentage of bonds, would cut the left and right tails of a normal distribution of returns. He did argue that the negative left tails would be cut more than the positive right tails, but as with any portfolio that deviates from the what most like to call the market, which is really just the big Beta S&P because in the end that is where the TV and, as a result, most people are fixated, the emotional response and buyers remorse when the S&P does well will be the largest hindrance to staying the course. Like any portfolio staying the course matters. Larry has talked extensively here in the past as well as written books on the topic and never once have I seen or read him suggest this portfolio is anything but a comparison for a 60/40. That some writer might want to pizazz up their article with such a comparison should surprise no one.

Anyway, the addition of Alts to an LP are an evolution to further diversify sources of risk. They are harder to understand and somewhat harder to own outside of an advisor, but that is still possible. They can be used to diversify and slightly increase the EXPECTED returns of an LP, if their allocation replaces a portion of your bonds, or to further dampen the volatility of your portfolio if their allocation replaces a portion of your stocks.

You can read through the thread below for info on Alt Funds:

My Favorite Alternative Funds

As an aside and because he puts in his well researched 2 cents in the thread above, I personally over the years have found post by Robert T to always be enlightening and free from bias as much as a person is able to do so.

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Re: What ever happened to the Larry portfolio?

Post by garlandwhizzer » Thu Dec 28, 2017 12:22 pm

vesalius wrote:
As an aside and because he puts in his well researched 2 cents in the thread above, I personally over the years have found post by Robert T to always be enlightening and free from bias as much as a person is able to do so.
1+

IMO Robert T's posts are always very well researched, sound in concept and inexpensive in execution. I also believe that Robert T is as objective as a person can be in discussing his own choice of portfolio. He has suggested in the past for those who are interested in multi-factor approaches a low cost SCV index fund plus sufficient MTUM exposure to neutralized the negative MOM of SCV. This seems like a reasonable approach for those who are looking for a simple and inexpensive way to do a multi-factor long-only approach. As Robert T always adds, and something we should all keep in mind when it comes to portfolio construction, "No guarantees."

Garland Whizzer

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Re: What ever happened to the Larry portfolio?

Post by grog » Thu Dec 28, 2017 12:30 pm

The Larry seems like a decent portfolio for people who are already rich.

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Re: What ever happened to the Larry portfolio?

Post by Solo Prosperity » Thu Dec 28, 2017 12:36 pm

The Larry Portfolio is an extremely niche portfolio, one that even Larry would say very few investors should try and replicate. It is based purely on the deep belief in the small + value premiums. The value premium has been pretty non-existent since ~2011, so it is no wonder that a value titled, short duration portfolio has struggled. These are the exact periods that would test even the most disciplined investors in this strategy, including Larry himself. My guess is that some of the moves to add small allocations to alternative risk premia strategies (Re-Insurance and AQR products) has a lot to do with the heavy short-term bond allocation & the recent lack of performance.

Using DFA funds and going back to the late 1990s, the portfolio has kept up pretty well to the S&P 500. I still think that 100% US Stocks is an awful benchmark to compare the Larry Portfolio against, even if he (maybe) suggested it in the NYT article.

Again, this portfolio is a potential strategy for a very small subset of investors imo, investors who believe in the small + value premiums but have "won the game" (Kind of like Larry). And even for those investors I would most likely consider changing the bond allocation from 68% ST Treasuries to 34% IT Treasuries and 34% TIPS.
The Larry seems like a decent portfolio for people who are already rich.
Bingo. Different portfolio allocations for different goals. Find what works for your situation and don't worry about trying to discredit or disprove other approaches.

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Re: What ever happened to the Larry portfolio?

Post by vesalius » Thu Dec 28, 2017 1:22 pm

QuietProsperity wrote:
Thu Dec 28, 2017 12:36 pm
Bingo. Different portfolio allocations for different goals. Find what works for your situation and don't worry about trying to discredit or disprove other approaches.
Exactly, too much time and energy is wasted here. Getting to the point that it is OK for others not to agree with your decisions and go another path, without feeling the need to convert them to your true way with religious fervor is a good thing.

There are many roads to Dublin.

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Re: What ever happened to the Larry portfolio?

Post by longinvest » Thu Dec 28, 2017 1:33 pm

Dear QuietProsperity,
QuietProsperity wrote:
Thu Dec 28, 2017 12:36 pm
I still think that 100% US Stocks is an awful benchmark to compare the Larry Portfolio against, even if he (maybe) suggested it in the NYT article.
I just found that Larry Swedroe actually expressed his opinion about the New York Times article on our forums!

First, here's the initiating post of a thread started by forum member EvelynTroy on the morning of December 24, 2011:
On Sat Dec 24, 2011 6:51 am, EvelynTroy wrote: Today's New York Times Your Money section - article by Ron Leiber - The Larry Portfolio.

Named for Larry Swedroe, the director of research and a principal at BAM, a wealth management firm in Clayton, Mo., the portfolio tracks indexes that achieved nearly the same 10 percent annual return between 1970 and 2010 as a portfolio invested entirely in the Standard & Poor’s 500-stock index. And here’s the Larry Portfolio’s trick: It did so with less than a third of its money in stocks, with the rest in one-year Treasury bills.

http://www.nytimes.com/2011/12/24/your- ... your-money

Ev
It's immediately followed with a reply by Larry Swedroe himself:
On Sat Dec 24, 2011 8:48 am, larryswedroe wrote: Thanks Evelyn
Ron IMO is one of the good guys in the media. We spent hours discussing the subject and the issues like tracking error regret. He wanted to be sure he understood all the issues. Even spent quite a bit of time fact checking what he wrote, wanting to be sure it was accurate. And then even after it first went on line and I pointed out two minor errors, he corrected them immediately. Ron is one of the few financial journalists I read.

Best wishes
Larry
He did fact check the article and agreed with its final revision. There's no doubt, anymore, that he agreed to a comparison between a 100% stocks portfolio and a 32% stocks / 68% bonds portfolio.

Best regards,

longinvest
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Re: What ever happened to the Larry portfolio?

Post by vesalius » Thu Dec 28, 2017 1:47 pm

The difference between something being a one-time historical fact or even anomaly, which is easily fact-checked as pointed out, and what Larry has consistently said innumerable times before and after the NY Times article is the intended benchmark of his 30/70 LP portfolio going forward, a 60/40 market portfolio, should be obvious to all. As I mentioned Larry has written books on this topic please look it up for yourselves. He has never maintained that rough future benchmark or approximation of his 30/70 LP is a 100% stock portfolio.

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Re: What ever happened to the Larry portfolio?

Post by Random Walker » Thu Dec 28, 2017 1:51 pm

I think people are taking too literally the LP equity and bond allocations and what the portfolio is compared to. It’s the overall philosophy that is relevant. Use only the highest expected return equity asset classes, decrease overall equity allocation, increase bond allocation. Compared to a TSM portfolio with same expected return, this portfolio should have smaller SD and cut tails. Because the equities are all SV and equally weighted US & Int, the equity portion is diversified across factors and geographies. There are young people who are 100% equity using this approach and people who have won the game who are 30/70. It’s the philosophy that counts: use highest expected return SV equities only, and increase allocation to safe bonds.

Dave

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Re: What ever happened to the Larry portfolio?

Post by triceratop » Thu Dec 28, 2017 2:01 pm

longinvest wrote:
Thu Dec 28, 2017 1:33 pm
Dear QuietProsperity,
QuietProsperity wrote:
Thu Dec 28, 2017 12:36 pm
I still think that 100% US Stocks is an awful benchmark to compare the Larry Portfolio against, even if he (maybe) suggested it in the NYT article.
I just found that Larry Swedroe actually expressed his opinion about the New York Times article on our forums!

First, here's the initiating post of a thread started by forum member EvelynTroy on the morning of December 24, 2011:
On Sat Dec 24, 2011 6:51 am, EvelynTroy wrote: Today's New York Times Your Money section - article by Ron Leiber - The Larry Portfolio.

Named for Larry Swedroe, the director of research and a principal at BAM, a wealth management firm in Clayton, Mo., the portfolio tracks indexes that achieved nearly the same 10 percent annual return between 1970 and 2010 as a portfolio invested entirely in the Standard & Poor’s 500-stock index. And here’s the Larry Portfolio’s trick: It did so with less than a third of its money in stocks, with the rest in one-year Treasury bills.

http://www.nytimes.com/2011/12/24/your- ... your-money

Ev
It's immediately followed with a reply by Larry Swedroe himself:
On Sat Dec 24, 2011 8:48 am, larryswedroe wrote: Thanks Evelyn
Ron IMO is one of the good guys in the media. We spent hours discussing the subject and the issues like tracking error regret. He wanted to be sure he understood all the issues. Even spent quite a bit of time fact checking what he wrote, wanting to be sure it was accurate. And then even after it first went on line and I pointed out two minor errors, he corrected them immediately. Ron is one of the few financial journalists I read.

Best wishes
Larry
He did fact check the article and agreed with its final revision. There's no doubt, anymore, that he agreed to a comparison between a 100% stocks portfolio and a 32% stocks / 68% bonds portfolio.

Best regards,

longinvest
The article didn't make a forward-looking prediction about the 32/68 portfolio, though, as I mentioned above. I am sure it was fact checked on the historical time period mentioned. Larry knows more than anyone about the risks of bonds going forward and that we cannot expect the rate decreases we have seen over the past decades.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: What ever happened to the Larry portfolio?

Post by CULater » Thu Dec 28, 2017 3:39 pm

Random Walker wrote:
Thu Dec 28, 2017 1:51 pm
I think people are taking too literally the LP equity and bond allocations and what the portfolio is compared to. It’s the overall philosophy that is relevant. Use only the highest expected return equity asset classes, decrease overall equity allocation, increase bond allocation. Compared to a TSM portfolio with same expected return, this portfolio should have smaller SD and cut tails. Because the equities are all SV and equally weighted US & Int, the equity portion is diversified across factors and geographies. There are young people who are 100% equity using this approach and people who have won the game who are 30/70. It’s the philosophy that counts: use highest expected return SV equities only, and increase allocation to safe bonds.

Dave
You beat me to it. Less important what the exact LP allocation is or what the benchmark is. I believe SCV is recommended because it is more diversified factor-wise than TSM (which is only beta). One can choose smaller or larger weighting. One can also choose how much weight to give to term risk in the selection of bond duration. This type of portfolio allocation is one of a class of portfolio strategies based around risk parity, low-beta, or minimize fat tails. Not appropriate for everybody; certainly not for anyone who doesn't feel comfortable with the strategy. Historically, it would seem that holding total market equity funds will get you to Dublin although the road may be a bit rocky at times. If the ride quality is important, then maybe LP represents another road travelled. You need to faithfully stick to whichever path you select.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: What ever happened to the Larry portfolio?

Post by CULater » Thu Dec 28, 2017 6:52 pm

If 80% of your portfolio is in ITT, losing purchasing power, and the other 20% is in SCV which has underperformed the market for a about a decade that portfolio has not done well over that time frame.
Not sure what data you looked at. Actually, SCV has slightly outperformed TSM over the last decade. The reason that a classical 60/40 portfolio has outperformed the 30/70 LP over the last decade is the result of simple mathematics - it had twice as much in stocks, and stocks have had a CAGR of about 15% since 2009 (SCV CAGR = 15.70%; TSM CAGR = 15.40%)
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: What ever happened to the Larry portfolio?

Post by jmk » Thu Dec 28, 2017 7:25 pm

If you look at the Research Affiliates optimized portfolios based on expected returns (click the black dotes on their 10y expected returns chart), you'll see they closely resemble the Larry Portfolio: All Emerging and EAFE, little small with no US large growth....

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Re: What ever happened to the Larry portfolio?

Post by garlandwhizzer » Thu Dec 28, 2017 9:55 pm

CU later wrote:
Not sure what data you looked at. Actually, SCV has slightly outperformed TSM over the last decade.
I compared the results on Morningstar 10 year graphs of DFSVX to Vanguard's VTI. I didn't count the increased DFSVX access fee which should favor DFSVX relative to the real world. I just looked at the how the two funds did with dividends re-invested.The results of the two at 10 years is so close it's basically a tie but VTI wins by a hair as of today. More importantly VTI wins by more than a hair YTD, I YR, 3 YR, 5YR. So if you're an impatient person having waited for a decade for expected outperformance you might be tempted to give up the ship and revert to a low cost cap weighed index fund. True believers will hold onto DFSVX patiently waiting for the expected long term payoff. The most important word that last sentence is "expected". It is not written in stone that the market delivers on what was expected over the last decade, nor the next one. Those who choose either approach, TSM, simple rock bottom cost market exposure, or DFSVX, 100% SCV factor, are making a bet. It is unclear to me at least which bet will work out over my time frame. There is no debate, however, that over the last decade holding a high percentage of the safest bonds, STT, provided safety but that safety came at a cost, massive underperformance relative to almost any equity choice. So the thing that was supposed to outperform didn't and the safety you paid a lot for wasn't needed over this particular time frame. The vagaries of markets! If you actually need robust gains to meet your investing goals and you're loaded up with STT, you have blown a great opportunity to harvest the returns in one of the greatest bull markets of all time. Very rich folks can afford to do that and appreciate the safety but many of us need to be largely on board when the rocket ship takes off.

The LP portfolio is brilliantly designed based on academic backtesting. Almost all of that backtesting until recently was during a period of ever decreasing inflation and interest rates (35 years of that) which increases returns of bond investments especially safe ones. So that large percentage of safe bonds looks good on backtesting. Will it look good going forward? Good luck.

The classic LP portfolio is a no-brainer for someone already quite wealthy whose major goal is preserving that wealth and maximally reducing volatility rather than aiming for maximal gains. It takes the lowest degree of equity risk. The bond risk which it does take is not default or duration risk but the risk of low real returns with a substantial portion of the portfolio allocated to the lowest yielding sector in the bond market STT. If the SCV ship doesn't come in, you're in trouble. 100% of your equity in SCV is too much for my taste. I have some skepticism about how well the the underlying backtesting research on SCV, bonds, and other described factors will translate going forward in real funds. Hence in the US, I tilt only modestly, 25% SCV, 75% TSM. I believe US markets are highly efficient in general and that the value premium is not harvestable after costs in the heavily scrutinized LC space. I also believe that SCV will modestly outperform over the long run but with much lower than historical levels of outperformance. Backtesting results in cost-free long/short factor portfolios over long time periods in much of which factors weren't even described let alone sought after by countless funds and efts. How much relevance does that have for real results of real funds after costs going forward in more efficient markets dominated by professionals all of whom are totally aware of factors. Just my opinion but I don't put factor funds in the slam dunk category. I have no problem with those who tilt 100% but my level of faith is not as high as theirs.

Garland Whizzer

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Re: What ever happened to the Larry portfolio?

Post by Random Walker » Fri Dec 29, 2017 12:55 am

Many people focus purely on the historical returns of SCV. We can only invest looking forward, and I too would have very little faith in the factors if all I looked at were historical results. But there are strong intuitive risk based and behavioral based rationale to expect the factors to perform in the future. An efficient market will appropriately price risk and human behavior with regard to fear and greed may be very persistent. I find value particularly noteworthy because there are both strong risk and behavior stories supporting it.
Also, because any given factor can underperform over any given long time period, I think most factor investors diversify across them.

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Re: What ever happened to the Larry portfolio?

Post by Theoretical » Fri Dec 29, 2017 1:07 am

Something else to consider re: value is that one of the ultimate value plays in bonds was described by Benjamin Graham and is still strong today, and that is the Fallen Angels phenomenon of where there's a lot of opportunities in corporate bonds that started as investment grade and got downgraded to junk.

It's a well known factor that's existed for decades and remains persistently strong. Furthermore, by their very nature, the fallen angels get more diversified in terms of issuers during economic bad times as more issues falter and institutional investors who can't hold junk have to sell.

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Re: What ever happened to the Larry portfolio?

Post by FIREchief » Fri Dec 29, 2017 1:28 am

longinvest wrote:
Wed Dec 27, 2017 10:12 am
On December 23, 2011, Ron Lieber made the Larry Portfolio known to the wide public with his "Taking a Chance on the Larry Portfolio" article in The New York Times.

Here's an illustration that the article gave of one version of this portfolio along with a benchmark:
For illustration purposes, [Larry Swedroe] points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.
For the fun of it, I just ran a new comparison of this 32% small-cap value / 68% short-term treasuries versus its S&P 500 benchmark in Portfolio Visualizer, but for the period starting in January 2012 (just a few days after the article was published) and ending in November 2017 (the end of last month, as I'm writing this on December 27, 2017).

Here's the comparative growth of $10,000:

Source: Portfolio Visualizer
Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Benchmark (blue): Vanguard 500 Index Investor (VFINX) - 100%

Image

Some readers were possibly thinking that the Larry Portfolio would provide as much returns as the S&P 500 but with less volatility, as it did on paper in the past (in backtests). It didn't in real life after being published in The New York Times.

This reminds me of Rekenthaler’s Rule that William Bernstein is found of telling us about in his writings: "If the bozos know about it, it doesn’t work anymore."
Longinvest - this is a fantastic post. Thank you for running the numbers for us. Choosing the timeframe of "just after the article was published until today" hardly seems to constitute cherry picking to me. It is cold hard facts that should provide a wake up call to anybody thinking about changing their investing strategy due to the lastest book/article/academic research/ etc., regardless of how compelling the "facts" may seem at the time. I understand that others haven't yet been able to come to grips with the big picture here, but your data speaks volumes. :sharebeer
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: What ever happened to the Larry portfolio?

Post by david1082b » Fri Dec 29, 2017 2:23 am

FIREchief wrote:
Fri Dec 29, 2017 1:28 am
longinvest wrote:
Wed Dec 27, 2017 10:12 am
On December 23, 2011, Ron Lieber made the Larry Portfolio known to the wide public with his "Taking a Chance on the Larry Portfolio" article in The New York Times.

Here's an illustration that the article gave of one version of this portfolio along with a benchmark:
For illustration purposes, [Larry Swedroe] points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.
For the fun of it, I just ran a new comparison of this 32% small-cap value / 68% short-term treasuries versus its S&P 500 benchmark in Portfolio Visualizer, but for the period starting in January 2012 (just a few days after the article was published) and ending in November 2017 (the end of last month, as I'm writing this on December 27, 2017).

Here's the comparative growth of $10,000:

Source: Portfolio Visualizer
Larry Portfolio (red): Vanguard Small Cap Value Index (VISVX) - 32% / Vanguard Short-Term Treasury (VFISX) - 68%
Benchmark (blue): Vanguard 500 Index Investor (VFINX) - 100%

Image

Some readers were possibly thinking that the Larry Portfolio would provide as much returns as the S&P 500 but with less volatility, as it did on paper in the past (in backtests). It didn't in real life after being published in The New York Times.

This reminds me of Rekenthaler’s Rule that William Bernstein is found of telling us about in his writings: "If the bozos know about it, it doesn’t work anymore."
Longinvest - this is a fantastic post. Thank you for running the numbers for us. Choosing the timeframe of "just after the article was published until today" hardly seems to constitute cherry picking to me. It is cold hard facts that should provide a wake up call to anybody thinking about changing their investing strategy due to the lastest book/article/academic research/ etc., regardless of how compelling the "facts" may seem at the time. I understand that others haven't yet been able to come to grips with the big picture here, but your data speaks volumes. :sharebeer
I think small value also underperformed in the 1990s, so that a "Larry Portfolio" would have underperformed the S&P 500 then as well. The underperformance from 2011 to now doesn't necessarily tell us that small-value outperformance disappeared from 2011 to now due to it being known about too much. The last big burst of small-value outperformance was concentrated from 2000 to 2005 mostly after a long stretch of underperformance. Another big burst of outperformance may or may not happen again of course. We can also wonder the same about the S&P 500 versus bonds or cash or anything else. Will the stock premium itself disappear entirely at some point due to over-investment? It had "appeared" to disappear from 2000 to 2009 after the disaster decade, but it has returned with a vengence. Small value could also have its revenge again at some point.

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Re: What ever happened to the Larry portfolio?

Post by vesalius » Fri Dec 29, 2017 2:30 am

FIREchief wrote:
Fri Dec 29, 2017 1:28 am
Longinvest - this is a fantastic post. Thank you for running the numbers for us. Choosing the timeframe of "just after the article was published until today" hardly seems to constitute cherry picking to me. It is cold hard facts that should provide a wake up call to anybody thinking about changing their investing strategy due to the lastest book/article/academic research/ etc., regardless of how compelling the "facts" may seem at the time. I understand that others haven't yet been able to come to grips with the big picture here, but your data speaks volumes. :sharebeer
Agreed, the shocking fact that 100% stocks beats 30% stocks over any period in time Is something you have to see to believe. 8-) :beer

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Re: What ever happened to the Larry portfolio?

Post by james22 » Fri Dec 29, 2017 6:56 am

You know Vanguard's Small Cap Value Index (VISVX) does not mimic the United States stock index of small and value companies that Mr. Fama and Mr. French developed, yeah?
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: What ever happened to the Larry portfolio?

Post by Call_Me_Op » Fri Dec 29, 2017 7:53 am

CULater wrote:
Sun Dec 24, 2017 2:21 pm
Just wondering if Larry Swedroe is still recommending the 25% SCV + 75% Bonds portfolio allocation or has moved away from it.
Why on earth would he move away from it in such a short time? Larry is well aware that this strategy involves tracking error and the ability to persevere.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: What ever happened to the Larry portfolio?

Post by Call_Me_Op » Fri Dec 29, 2017 7:58 am

stlutz wrote:
Mon Dec 25, 2017 1:56 pm

b) The additional risk in concentrating solely in smallcap value comes from giving up on diversification. There is no additional expected return in doing that. Instead what you get is a wider possible range of outcomes through such concentration. That risk of the Larry Portfolio tends to be under-appreciated.
I am sure you are aware that Larry would disagree with this claim.

I am not sure why you believe that there is no additional expected return with riskier small-cap value stocks. History says there has been substantially higher return. And this is a lot of history.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: What ever happened to the Larry portfolio?

Post by Random Walker » Fri Dec 29, 2017 10:07 am

When I ponder this SV stuff, I think I spend a lot less time focusing on historical returns than most people discussing SV here at Bogleheads. I rely much more on the forward looking intuitive rationale for premia to exist. The expected return on a company is it’s cost of capital. It makes strong sense to me that a lender would perceive a small or distressed company as a riskier loan, and thus charge it a higher interest rate.
Also, it’s not just about the potential extra return from the SV, it’s also about the diversification benefits. The correlation of size to market is about 0.4, value to market 0.1, and size to value 0.1. The size and value premia are truly independent of market and each other. This is why we can say that investing solely in a small segment of the market, SV, is actually quite diversified compared to TSM. There is a lot of market risk baked into SV along with the two other unique risks.

Dave

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Re: What ever happened to the Larry portfolio?

Post by Call_Me_Op » Fri Dec 29, 2017 10:13 am

Random Walker wrote:
Fri Dec 29, 2017 10:07 am
When I ponder this SV stuff, I think I spend a lot less time focusing on historical returns than most people discussing SV here at Bogleheads. I rely much more on the forward looking intuitive rationale for premia to exist. The expected return on a company is it’s cost of capital. It makes strong sense to me that a lender would perceive a small or distressed company as a riskier loan, and thus charge it a higher interest rate.
Also, it’s not just about the potential extra return from the SV, it’s also about the diversification benefits. The correlation of size to market is about 0.4, value to market 0.1, and size to value 0.1. The size and value premia are truly independent of market and each other. This is why we can say that investing solely in a small segment of the market, SV, is actually quite diversified compared to TSM. There is a lot of market risk baked into SV along with the two other unique risks.

Dave
Hi Dave,

While I agree with you that there are theoretical reasons to expect a premium from SCV, in my opinion there is nothing more powerful than 90 years of actual history. Many of the reasons for the put-performance are behavioral, and the behavior of large masses of people, in aggregate, tends to be quite consistent (although unpredictable, because the events that drive the behavior are unpredictable).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: What ever happened to the Larry portfolio?

Post by timmy » Fri Dec 29, 2017 10:37 am

My sense is that it isn't talked about because of the current Bull in US equities. When we enter the next Bear, you'll see it mentioned a lot, and it's many variants.

Larry is a smart man. I'm betting that he's betting on a Bear market next year, thus the refresh of the book. The odds favor a Bear market sooner than later.

I've read the book and looked at the portfolio. Having lived through two Bears, I don't have a high pain threshold. Thus the interest in the book. I've settled on 50/50. Meaning, with our various accounts, I try to replicate ETF = VT and USD 5-yr bonds. I've hiked our savings rate to compensate. So far so good, as we are blessed with a respectable income and we live modestly.

In terms of the book's portfolio, it just seemed like an overly specific bet. It seems to rely too much on back-testing. I can't say I gave it more thought than that.

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Re: What ever happened to the Larry portfolio?

Post by CULater » Fri Dec 29, 2017 10:52 am

Tilting equity investments toward SCV is not just for the rich who are interested in preserving wealth. Dr. Bernstein also discusses the merits of the tilting strategy for younger investors in the wealth accumulation stage. Technically, he's not discussing this as a "left-tail" strategy for reducing portfolio volatility but as a more aggressive long-term accumulation strategy for increasing returns. The objective of tilting can either be to reduce volatility (small allocation) or to increase expected returns with the same portfolio volatility as holding TSM (larger allocation). Just playing around with Portfolio Visualizer, since 1972 an allocation of 50% SCV + 50% Bonds would have outperformed an allocation of 60% TSM + 40% Bonds by about 1.5% per year with about the same annualized volatility and drawdowns, based on making equal systematic annual contributions to each. Dr. Bernstein has a more detailed examination in his book "Ages of the Investor."
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: What ever happened to the Larry portfolio?

Post by grog » Fri Dec 29, 2017 11:09 am

If someone were to go Larry style for the accumulation phase, I guess rather than say an 80/20 TSM/TBM, you might do something like 60/40 IJS (iShares small value)/IEI (iShares 1-3 yr treasury). The Larry is designed to lose less in a 2008 style crash, but max drawdown isn’t the most important consideration early on. The bigger concern is that you are betting big on SV beating TSM over time by enough to overcome the drag of the extra treasuries. Not a bet I’d be willing to take. In contrast, someone with a preservation focus probably cares a lot about drawdowns and might consider the upside more of a “nice to have.” Bernstein has commented on the “permanent portfolio” and the tracking error problem and this strategy probably has a similar issue.

Practically speaking, the Larry would also be hard to implement if your primary investment account is your 401k. S&P 500 is a pretty standard option whereas low cost small value options, etc. are not a given.

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Re: What ever happened to the Larry portfolio?

Post by vesalius » Fri Dec 29, 2017 11:23 am

grog wrote:
Fri Dec 29, 2017 11:09 am
If someone were to go Larry style for the accumulation phase, I guess rather than say an 80/20 TSM/TBM, you might do something like 60/40 IJS (iShares small value)/IEI (iShares 1-3 yr treasury). The Larry is designed to lose less in a 2008 style crash, but max drawdown isn’t the most important consideration early on. The bigger concern is that you are betting big on SV beating TSM over time by enough to overcome the drag of the extra treasuries. Not a bet I’d be willing to take. In contrast, someone with a preservation focus probably cares a lot about drawdowns and might consider the upside more of a “nice to have.” Bernstein has commented on the “permanent portfolio” and the tracking error problem and this strategy probably has a similar issue.

Practically speaking, the Larry would also be hard to implement if your primary investment account is your 401k. S&P 500 is a pretty standard option whereas low cost small value options, etc. are not a given.
This has been mentioned a few times here, but the LP can be 100% stock for super agressive accumulators, but no one, Larry himself or others here recommend going 100% US Small Value. All are roughly 50% US SMall Value and 50% International Small Value/ Emerging Value mix. Much less concentrated and significantly better diversified. Those that believe the research into Factors and the LP are also less likely to agree with Bogle on 0% international as well.

In fact a few posters here are near 100% stock in a LP type of portfolio, if memory serves me right. I myself am using a 50/50 stock to bond version.

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