What ever happened to the Larry portfolio?

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grog
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Re: What ever happened to the Larry portfolio?

Post by grog » Fri Dec 29, 2017 12:04 pm

Yeah, I was just keeping it simple. The general principle is substituting tilts for equity and holding more and safer fixed income.

With 100% stocks with aggressive tilts, that’s essentially subtituting tilts for leverage. Which could make sense given the 100% ceiling and the cost of borrowing.

vesalius
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Re: What ever happened to the Larry portfolio?

Post by vesalius » Fri Dec 29, 2017 12:10 pm

You are right on LP being damn near impossible to set up for many with the majority of savings in Company 401k type accounts. Unless you have access to a 401k brokerage window or your taxable+personal IRA is enough to handle the stock side and you go all bonds in the 401k.

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Ketawa
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Re: What ever happened to the Larry portfolio?

Post by Ketawa » Fri Dec 29, 2017 12:22 pm

I find it fascinating that so many Bogleheads can accept the idea that fixed income investments have different riskiness, but insist that it's impossible for equities and that total market funds are the only correct way to invest. To me, it's obvious that small companies, due to their size, and value companies, due to their cost of capital, are riskier than the market as a whole. I think Larry has written about research showing that small and value companies have lower credit ratings, or higher interest rates on their debt. The market should recognize this and price the stocks of small and value companies so the risk/return relationship is appropriate.

The "Larry Portfolio" is a way to change the distribution/shape of potential outcomes by cutting the left and right tails. This can reduce the overall volatility of a portfolio while increasing risk in other ways, such as timing of losses, since nothing says that risk is one-dimensional. However, I think investors generally feel or experience the outcomes of risk in only one dimension by looking at their account balances, or withdrawing from a portfolio in retirement, and so there is something of an opportunity to shape risk differently from a total market portfolio. There's no particular reason that my portfolio balance should be tied to the fortunes of every investible company, whether it's their stock or debt. It's more important to keep costs low and avoid discretion in security selection.

I have also chosen to tilt towards quality, momentum, carry, and defensive factors. I'm less convinced that these have a risk/return relationship and will persist, but momentum and carry in particular have a long history. I'm encouraged by the performance of QSPIX, which I have held since March 2015, that these factors will continue in the future. My tilts are also tempered by fund limitations in the TSP.

My portfolio is tilted as much as possible in my IRA and TSP accounts. I have been 100% tilted since August 2012, with some changes to the particular funds as various options became available, e.g. PXSV, then AQR funds. I have held market cap region splits since September 2012.

75% Equities
Regions split according to world market capitalization - 51% Domestic, 37% Intl Developed, 12% Intl Emerging
Domestic about 38% QSMLX, 62% TSP S Fund
Intl Developed about 21% QICLX, 79% TSP I Fund
Intl Emerging 100% QEELX

15% Fixed Income
34% prepaid cards earning 5% FDIC insured
66% TSP G Fund

10% Alternatives (QSPIX)

I would probably stick with IJS/VIOV/VBR and VSS in taxable if I had a taxable account.

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saltycaper
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Re: What ever happened to the Larry portfolio?

Post by saltycaper » Fri Dec 29, 2017 1:00 pm

longinvest wrote:
Wed Dec 27, 2017 10:12 am

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."
On the contrary, and notwithstanding the performance of any specific portfolio, expecting small-cap value to offer better returns than the overall market depends on the bozos knowing about it. (Or, at least, a substantial number of people.) If nobody knew about it, nobody would demand a premium for taking the extra risk.
Quod vitae sectabor iter?

CULater
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Re: What ever happened to the Larry portfolio?

Post by CULater » Fri Dec 29, 2017 3:50 pm

saltycaper wrote:
Fri Dec 29, 2017 1:00 pm
longinvest wrote:
Wed Dec 27, 2017 10:12 am

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."
On the contrary, and notwithstanding the performance of any specific portfolio, expecting small-cap value to offer better returns than the overall market depends on the bozos knowing about it. (Or, at least, a substantial number of people.) If nobody knew about it, nobody would demand a premium for taking the extra risk.
Judging by the mix of pro and anti- posts, I'm guessing that not all of us bozos who know about it are believers. The bozo factor has more room to run!
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

venkman
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Re: What ever happened to the Larry portfolio?

Post by venkman » Fri Dec 29, 2017 11:02 pm

Call_Me_Op wrote:
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.
I don't know that Larry himself has ever suggested using only US small-cap value for the equity portion of the LP. He advocates diversifying equities among all the riskiest asset classes (SCV, Intl. SCV, EM/EM Value, etc).

As it has gotten much easier and cheaper to invest in small/value stocks, I would expect the outperformance of those asset classes to decrease, compared to historical numbers, by the decrease in the cost of investing (i.e. I would expect the actual, after-cost outperformance to remain relatively constant). There's no reason to believe the long-term risk premium would disappear.

stlutz
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Re: What ever happened to the Larry portfolio?

Post by stlutz » Fri Dec 29, 2017 11:23 pm

Call_Me_Op wrote:
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.
Sorry I'm a bunch of posts delayed in responding. :)

I wasn't really making a point about smallcap value stocks. Instead, suppose that instead of investing in the entire market, I only invest in companies that start with the letter "K". While I still have a bunch of different types of stocks I'll still end up with a portfolio that is more volatile and my terminal return will be based much more on random factors than if I was investing in the entire market. In short, by giving up the diversification of the entire market, I've made my portfolio more risky and there is no good reason for me to expect a higher return from doing this.

That's an absurd example, but often times investors see a trend that suggests that a favored industry might always beat the market. The country is a getting older, which means more need for healthcare. Ergo, healthcare stocks "are expected" to deliver a return premium. Is only investing in healthcare stocks more risky than investing in all industries? I sure think so.

Anytime I concentrate in one type of stock, I am adding this type of "non-diversification" risk. This is entirely distinct from any consideration of whether I expect my favored stocks to provide excess return above the market. I know it's a fairly obvious point, but it gets lost in the discussion on SV stocks as many claim that "risk" is the reason that SV will beat the market. The real risk here is that your expectations might be wrong w.r.t. your industry forecasts or your beliefs about what risk factors that market will reward going forward.

venkman
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Re: What ever happened to the Larry portfolio?

Post by venkman » Sat Dec 30, 2017 12:35 am

stlutz wrote:
Fri Dec 29, 2017 11:23 pm
Anytime I concentrate in one type of stock, I am adding this type of "non-diversification" risk. This is entirely distinct from any consideration of whether I expect my favored stocks to provide excess return above the market. I know it's a fairly obvious point, but it gets lost in the discussion on SV stocks as many claim that "risk" is the reason that SV will beat the market. The real risk here is that your expectations might be wrong w.r.t. your industry forecasts or your beliefs about what risk factors that market will reward going forward.
I think a good analogy is investment-grade corporate bonds vs. high-yield corporate bonds. Distressed companies who want to issue bonds MUST issue bonds with a higher yield; otherwise, no rational investor would buy those bonds, when they could get the same yield buying the bonds of a safer company. Given a choice between a small company and a large, established company with otherwise equal financials (P/E, debt ratios, etc.) and expected return, investors will prefer the large company, because of the lower risk that the large company will go out of business entirely.

The small and value premiums will fluctuate from year to year; but over the long term, investors must necessarily be rewarded for the risk they take investing in riskier companies. Based on the data I've seen, SCV never trails the TSM for more than 2 or 3 consecutive calendar years; and even when TSM outperforms over a long period, the difference tends to be very low.

Call_Me_Op
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Re: What ever happened to the Larry portfolio?

Post by Call_Me_Op » Sat Dec 30, 2017 7:48 am

Larry's approach (a variant of which I use myself) is to dial down the percentage of stocks and use very high quality bonds for the fixed-income portion of the portfolio. The stock portion is invested in a mix of asset sub-classes having the highest expected return (and is also highly diversified). In doing so, you approach the expected return of a more traditional portfolio that is stock-heavy. But maximum draw-down should be much more limited.

An important point, at least to me, is that if the return expectations do not materialize the investor should still be OK because the stock portion should really be using money that's not essential to maintain lifestyle.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

betablocker
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Re: What ever happened to the Larry portfolio?

Post by betablocker » Sat Dec 30, 2017 9:22 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."
Longvest,

I ran this starting in 2002 to today using vanguard S&P 500, vanguard intermediate term treasuries, and ishares scv ijs. The LP beats 60/40 by a hair with half the drawdown and loses to 100% S&P but if you move the final year back to 2016, the LP beats both with still half the drawdown. Neither your comparison nor mine are right but just an example of how data can be manipulated

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

Post by Random Walker » Sat Dec 30, 2017 9:50 am

I wouldn’t take specific comparisons too literally. The LP is more of a concept: lower equity exposure, all highest expected return equity classes, bigger helping of bonds. When he made the initial comparisons, he was intentionally looking for the back tested combination of S&P 500/bonds that would have provided similar returns. He just made the comparison for illustrative purposes to show the effect on narrowing SD and cutting tails.
Given current valuations of equities and current interest rates, one would likely compare different LP and TSM portfolios looking forward.

Dave
Last edited by Random Walker on Sat Dec 30, 2017 4:22 pm, edited 1 time in total.

grog
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Re: What ever happened to the Larry portfolio?

Post by grog » Sat Dec 30, 2017 1:53 pm

venkman wrote:
Sat Dec 30, 2017 12:35 am
The small and value premiums will fluctuate from year to year; but over the long term, investors must necessarily be rewarded for the risk they take investing in riskier companies.
Don't growth stocks present risks of their own? If a growth stock is priced assuming a lot of future sales and profits that never materialize, it'll be a long way down, no? And wouldn't a value company have more downside protection since it already trades near book value?

pascalwager
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Re: What ever happened to the Larry portfolio?

Post by pascalwager » Sat Dec 30, 2017 3:43 pm

I don't believe that the LP describes Larry's overall approach to investing. Before he dropped out of BH he mentioned that he also holds other investments.

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

Post by Random Walker » Sat Dec 30, 2017 4:39 pm

Grog,
I think it’s important to distinguish business risk versus stock risk. Growth companies are safer companies and as investments thus have lower expected returns. But I agree with you that their stocks are subject to a sort of unique growth stock risk: if they don’t live up to their generous-lofty earnings expectations, then the stock will get taken out and shot. I think there is an old saying that bad businesses make good stocks and good businesses make bad stocks.
I find the value premium so interesting because there are both risk and behavioral explanations for it. I used to see it as completely risk based. The more I read, the more significant I view the behavioral component. People extrapolate current circumstance too far into the future. They think the excellent earnings of growth companies will continue indefinitely and inflate stock prices accordingly. They don’t see value companies improving, and therefore perhaps bake too much continued expected bad news into their prices.

Dave

stlutz
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Re: What ever happened to the Larry portfolio?

Post by stlutz » Sat Dec 30, 2017 5:05 pm

I find the value premium so interesting because there are both risk and behavioral explanations for it
In terms of historical analysis there are actually at least 4 explanations:

1) Risk -- There is a financial or non-financial reason that many investors should logically and rationally eschew value stocks which results in a return premium.

2) Behavioral error -- People get irrationally exuberant about growth stocks which helps the value stocks outperform.

3) Random chance -- During the 2nd half of the twentieth century there were certain global economic events which occurred that were not and could not have been anticipated by the market that ended up favoring value companies in unexpected ways.

4) Characteristics-based anomaly -- Similar to the behavioral option in that the market was incorrectly valuing companies. However, in this scenario it's not a matter of being irrational--it's a matter of incorrectly weighing the relevant factors when valuing companies that was entirely logical, but not correct. In this approach, the factor data is providing the market the information it needs to more accurately value companies ahead of time.

Only considering options 1 and 2 is a problematic oversimplification in my view.

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Lauretta
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Re: What ever happened to the Larry portfolio?

Post by Lauretta » Sun Feb 11, 2018 6:00 am

I like the idea behind this portfolio, but there's something puzzling me. At the moment small caps seem to be much more expensive than large caps worldwide, so if you are a new investor and want to implement the LS portfolio by buying SCV, you will invest in SCV and leave out LC (which as a class are cheaper), with the aim of profiting from the value effect, which seems paradoxical:
http://mebfaber.com/2015/07/23/small-cap-cape-ratios/
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in_reality
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Re: What ever happened to the Larry portfolio?

Post by in_reality » Sun Feb 11, 2018 6:57 am

Lauretta wrote:
Sun Feb 11, 2018 6:00 am
I like the idea behind this portfolio, but there's something puzzling me. At the moment small caps seem to be much more expensive than large caps worldwide, so if you are a new investor and want to implement the LS portfolio by buying SCV, you will invest in SCV and leave out LC (which as a class are cheaper), with the aim of profiting from the value effect, which seems paradoxical:
http://mebfaber.com/2015/07/23/small-cap-cape-ratios/
I don't think you can evaluate the expense of scv by looking at small caps.

In your other question on the topic, MSCI small cap value had lower P/E Fwd and P/BV and a higher dividend yield than the MSCI USA index. Those are the criteria that the index uses to select.

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Lauretta
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Re: What ever happened to the Larry portfolio?

Post by Lauretta » Sun Feb 11, 2018 9:31 am

in_reality wrote:
Sun Feb 11, 2018 6:57 am



In your other question on the topic, MSCI small cap value had lower P/E Fwd and P/BV and a higher dividend yield than the MSCI USA index. Those are the criteria that the index uses to select.
ok tanks for your answer. You mean the MSCI index determines value on the basis of P/E Fwd (and P/BV and a dividend yield) instead of trailing P/E?
Would value funds and ETFs also use P/E Fwd?
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1nv35t
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Re: What ever happened to the Larry portfolio?

Post by 1nv35t » Sun Feb 11, 2018 10:29 am

Random Walker wrote:
Sat Dec 30, 2017 9:50 am
I wouldn’t take specific comparisons too literally. The LP is more of a concept: lower equity exposure, all highest expected return equity classes, bigger helping of bonds. When he made the initial comparisons, he was intentionally looking for the back tested combination of S&P 500/bonds that would have provided similar returns. He just made the comparison for illustrative purposes to show the effect on narrowing SD and cutting tails.
Given current valuations of equities and current interest rates, one would likely compare different LP and TSM portfolios looking forward.
+1

50/50 TSM/Bonds have produced relatively consistent results across periods of both economic expansion and contraction. For those with 'enough' 50/50 is neither too aggressive nor too conservative (generally better than being 100% in either all bonds or 100% all stocks). Risk balance that barbell however and as SCV had around 1.2 times the volatility of TSM - that had around twice the volatility of 10 year Treasuries, then you're at around the levels of a risk balanced portfolio 30/70 SCV/10 year T.

Compare the two, 50/50 TSM/10 year and 30/70 SCV/10 year and pick/stick either with the capital weighted (50/50 TSM/bond) or risk weighted (30/70 SCV/bond) barbell as you prefer. The historic indications are however that the risk/weighted had the better Sharpe ratio of the two. We have access to a 2x SCV total return swap that provides twice the volatility of SCV, so the barbell can be adjusted to 15/85 such that yearly reviews has our yearly loss contained to being <15%. With a 10 year treasury ladder you can deposit (within reason) unlimited amounts and the depositor protections are pretty much guaranteed no matter how much you might deposit, whilst broadly averaging the 10 year yield and having 10% returned as cash each year that can be rolled into a another 10 year, plus or minus rebalancing SCV holdings to realign that back to target weighting.

Will SCV tendency to higher volatility compared to TSM fade? I suspect not. The nature of small and value are both inclined towards higher volatility.

The Larry Portfolio concept is a good one IMO. Shame however that he felt hounded out of bogleheads. You tend to see quite a bit of that when alternatives are discussed. For instance threads that talk about gold often have many posts from those expressing their dislike of that asset. I agree with a earlier posting that highlighted the wise mum tale of if you've nothing good to say ...

Theoretical
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Re: What ever happened to the Larry portfolio?

Post by Theoretical » Sun Feb 11, 2018 1:20 pm

Small cap value tends to have higher PE's than their large cousins, but their price to sales, cash flow and book values are somewhat to a lot lower (sales especially). Also what's high in one industry is reasonable in another and there are noticeable sector differences between large and small

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Lauretta
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Re: What ever happened to the Larry portfolio?

Post by Lauretta » Sun Feb 11, 2018 1:48 pm

Theoretical wrote:
Sun Feb 11, 2018 1:20 pm
Small cap value tends to have higher PE's than their large cousins, but their price to sales, cash flow and book values are somewhat to a lot lower (sales especially). Also what's high in one industry is reasonable in another and there are noticeable sector differences between large and small
thanks for the explanation! Then if P/Sales is a lot lower for SCV (whereas P/E isn't), this would imply that the operating margin for large cap is higher if I understand that correctly. Is it the case, and is there a simple reason why?
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