Fresh Look at the "Larry Portfolio" from Portfolio Charts

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hoops777
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by hoops777 » Mon Feb 13, 2017 4:05 pm

Just wondering how valid it is to compare the US and International stocks today based on looking back 30 years and more.My how things have changed between energy independence and other new technologies along with so many other major changes in the world.Different world.Different technologies.Different relationships.Kind of like comparing the NBA of 50 years ago to today.
I have never understood why what stocks did in 1935 is really that relavant to today.Yes you have numbers but what they are based on is so different.The way stocks are traded today did not even exist a short time ago.Of course none of this matters.
K.I.S.S........so easy to say so difficult to do.

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willthrill81
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Mon Feb 13, 2017 4:16 pm

hoops777 wrote:Just wondering how valid it is to compare the US and International stocks today based on looking back 30 years and more.My how things have changed between energy independence and other new technologies along with so many other major changes in the world.Different world.Different technologies.Different relationships.Kind of like comparing the NBA of 50 years ago to today.
I have never understood why what stocks did in 1935 is really that relavant to today.Yes you have numbers but what they are based on is so different.The way stocks are traded today did not even exist a short time ago.Of course none of this matters.
I often have the same thoughts.

Why should we believe that the CAPE will revert to its historic mean? It's been well above it for more than 25 years.

Why should we believe that international equities have the same long-term returns as U.S. equities? They haven't for the last 30 years (in total).

Why should we believe that the long-term returns of equities does not change (assumed with mean reversion proponents)? The returns of the last 40 years have been significantly higher than the prior 40 years.

I'm not advocating for a 'this time, it's different' mindset, but I really wonder what the answers to these sorts of questions really are. I don't think we have them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MikeMak27
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by MikeMak27 » Tue Feb 14, 2017 10:49 am

Has anyone thought of doing a portfolio for long term growth similar to Larry's portfolio? The idea that came to my head was using 45% US small cap value, 35% emerging markets, and 20% intermediate term treasuries. This allows us to have a good portion of both the small and value factors, while also having a decent amount of international, large, and blend stocks that will do well in a weak dollar environment. Throw in the bedrock of stable assets, intermediate term treasuries that we can use to rebalance in the 5/25 bands, and we have a very aggressive portfolio that has less volatility than the slice and dice portfolios of Merriman or the TSM.
I'm seriously considering dropping my complex portfolio for the simplicity of this one. If you backtest this asset class in portfolio charts, the results look good.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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

Post by betablocker » Tue Feb 14, 2017 10:54 am

Did you look at just replicating the LP with higher equities at the same percentages of total and lower bonds: something like 40% scv, 30% isv, 10% emv, and 20% treasuries?

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willthrill81
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by willthrill81 » Tue Feb 14, 2017 11:09 am

MikeMak27 wrote:Has anyone thought of doing a portfolio for long term growth similar to Larry's portfolio? The idea that came to my head was using 45% US small cap value, 35% emerging markets, and 20% intermediate term treasuries. This allows us to have a good portion of both the small and value factors, while also having a decent amount of international, large, and blend stocks that will do well in a weak dollar environment. Throw in the bedrock of stable assets, intermediate term treasuries that we can use to rebalance in the 5/25 bands, and we have a very aggressive portfolio that has less volatility than the slice and dice portfolios of Merriman or the TSM.
I'm seriously considering dropping my complex portfolio for the simplicity of this one. If you backtest this asset class in portfolio charts, the results look good.
That portfolio isn't even in the same ballpark as the LP. Granted, its CAGR from 1995-2016 was 9.58% rather than the LP's 7.44%, but the volatility is FAR higher as well. The standard deviation of that portfolio was 14.85%, compared to the LP's 5.23%. Further, its worst year was a loss of 30.25%, compared to a loss of 1.74% for the LP.

So despite the use of 20% ITT, it's still likely to be a very volatile portfolio.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by MikeMak27 » Tue Feb 14, 2017 11:24 am

betablocker wrote:Did you look at just replicating the LP with higher equities at the same percentages of total and lower bonds: something like 40% scv, 30% isv, 10% emv, and 20% treasuries?
Pretty much. I saw that intermediate term treasuries outperformed total bond market during the 2007-early 2009 period significantly. Additionally, I have read numerous posts from Larry on Bogleheads and from his website contributions on etf.com. Using this asset class along with the more risky, but potential rewarding stock classes have me thinking it is much simpler with better results than a standard 80/20 tilt.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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

Post by MikeMak27 » Tue Feb 14, 2017 11:28 am

willthrill81 wrote:
MikeMak27 wrote:Has anyone thought of doing a portfolio for long term growth similar to Larry's portfolio? The idea that came to my head was using 45% US small cap value, 35% emerging markets, and 20% intermediate term treasuries. This allows us to have a good portion of both the small and value factors, while also having a decent amount of international, large, and blend stocks that will do well in a weak dollar environment. Throw in the bedrock of stable assets, intermediate term treasuries that we can use to rebalance in the 5/25 bands, and we have a very aggressive portfolio that has less volatility than the slice and dice portfolios of Merriman or the TSM.
I'm seriously considering dropping my complex portfolio for the simplicity of this one. If you backtest this asset class in portfolio charts, the results look good.
That portfolio isn't even in the same ballpark as the LP. Granted, its CAGR from 1995-2016 was 9.58% rather than the LP's 7.44%, but the volatility is FAR higher as well. The standard deviation of that portfolio was 14.85%, compared to the LP's 5.23%. Further, its worst year was a loss of 30.25%, compared to a loss of 1.74% for the LP.

So despite the use of 20% ITT, it's still likely to be a very volatile portfolio.
What website / tool are you using to see the worst individual year possible? That statistic is certainly helpful when building or changing asset allocations.

Yes, I'm trying to still grow my portfolio, I'm 30, but also want to reduce the large tail risks. A 30% fall would certainly be a bummer, but it is better than going thru a 40% down year.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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

Post by willthrill81 » Tue Feb 14, 2017 11:35 am

MikeMak27 wrote:
willthrill81 wrote:
MikeMak27 wrote:Has anyone thought of doing a portfolio for long term growth similar to Larry's portfolio? The idea that came to my head was using 45% US small cap value, 35% emerging markets, and 20% intermediate term treasuries. This allows us to have a good portion of both the small and value factors, while also having a decent amount of international, large, and blend stocks that will do well in a weak dollar environment. Throw in the bedrock of stable assets, intermediate term treasuries that we can use to rebalance in the 5/25 bands, and we have a very aggressive portfolio that has less volatility than the slice and dice portfolios of Merriman or the TSM.
I'm seriously considering dropping my complex portfolio for the simplicity of this one. If you backtest this asset class in portfolio charts, the results look good.
That portfolio isn't even in the same ballpark as the LP. Granted, its CAGR from 1995-2016 was 9.58% rather than the LP's 7.44%, but the volatility is FAR higher as well. The standard deviation of that portfolio was 14.85%, compared to the LP's 5.23%. Further, its worst year was a loss of 30.25%, compared to a loss of 1.74% for the LP.

So despite the use of 20% ITT, it's still likely to be a very volatile portfolio.
What website / tool are you using to see the worst individual year possible? That statistic is certainly helpful when building or changing asset allocations.

Yes, I'm trying to still grow my portfolio, I'm 30, but also want to reduce the large tail risks. A 30% fall would certainly be a bummer, but it is better than going thru a 40% down year.
https://www.portfoliovisualizer.com/bac ... allocation

They have many useful tools. You can backtest a portfolio through asset allocation (above) or with tickers.

Your portfolio has a virtually identical return to the TSM, but it does have slightly lower volatility.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Tyler9000
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Re: Fresh Look at the "Larry Portfolio" from Portfolio Charts

Post by Tyler9000 » Tue Feb 14, 2017 12:09 pm

MikeMak27 wrote: What website / tool are you using to see the worst individual year possible? That statistic is certainly helpful when building or changing asset allocations.
I'd also recommend the website mentioned in the OP. (It's my site, so I admit I'm biased ;)). It includes a collection of calculators that display all possible investing timeframes simultaneously, saving you a lot of effort running multiple calculations and helping you see past start date bias. This one is particularly useful for studying historical drawdowns: https://portfoliocharts.com/portfolio/drawdowns/

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

Post by MikeMak27 » Tue Feb 14, 2017 12:35 pm

Tyler9000 wrote:
MikeMak27 wrote: What website / tool are you using to see the worst individual year possible? That statistic is certainly helpful when building or changing asset allocations.
I'd also recommend the website mentioned in the OP. (It's my site, so I admit I'm biased ;)). It includes a collection of calculators that display all possible investing timeframes simultaneously, saving you a lot of effort running multiple calculations and helping you see past start date bias. This one is particularly useful for studying historical drawdowns: https://portfoliocharts.com/portfolio/drawdowns/
Yes, Tyler! I've even tweeted you a question about your site before. I actually prefer it over portfolio visualizer and I used your site to backtest my modified riskier version of Larry's portfolio. I'm thinking of calling it the Saint Swedroe portfolio :)
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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

Post by Tyler9000 » Tue Feb 14, 2017 1:00 pm

MikeMak27 wrote: Yes, Tyler! I've even tweeted you a question about your site before. I actually prefer it over portfolio visualizer and I used your site to backtest my modified riskier version of Larry's portfolio. I'm thinking of calling it the Saint Swedroe portfolio :)
Ah -- I missed that you already mentioned using PC. My bad. I'm glad you find it useful!

FWIW, I think it's telling that a lot of the conversations on page 2 (US vs. International, LCB vs SCV, etc) utilize competing data calculated over different timeframes. Single averages and charts with a single line hide a lot of information, and it's easy to get lost in the weeds and lose sight of the big picture. Try studying the same issues using tools like this, and maybe you'll gain a new perspective. Personally, I didn't truly appreciate the impact of competing portfolio ideas until I could see the results in a chart like that.

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

Post by MikeMak27 » Tue Feb 14, 2017 2:52 pm

Tyler9000 wrote:
MikeMak27 wrote: Yes, Tyler! I've even tweeted you a question about your site before. I actually prefer it over portfolio visualizer and I used your site to backtest my modified riskier version of Larry's portfolio. I'm thinking of calling it the Saint Swedroe portfolio :)
Ah -- I missed that you already mentioned using PC. My bad. I'm glad you find it useful!

FWIW, I think it's telling that a lot of the conversations on page 2 (US vs. International, LCB vs SCV, etc) utilize competing data calculated over different timeframes. Single averages and charts with a single line hide a lot of information, and it's easy to get lost in the weeds and lose sight of the big picture. Try studying the same issues using tools like this, and maybe you'll gain a new perspective. Personally, I didn't truly appreciate the impact of competing portfolio ideas until I could see the results in a chart like that.
The heat map may just be the best tool on your site Tyler! I love how you can hover over any of the red/blue cells to see their return by year depending on the desired starting point year.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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

Post by betablocker » Sat Feb 18, 2017 5:31 pm

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

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

Image

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

Image

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

Image
Siamond,

Does this compare the LP to all equity portfolios of tsm, scv, scb, etc. or is there are bond element mixed in?

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

Post by siamond » Sun Feb 19, 2017 12:48 am

betablocker wrote:Does this compare the LP to all equity portfolios of tsm, scv, scb, etc. or is there are bond element mixed in?
Those charts were comparing the LP portfolio (or some approximation of it) against individual equity asset classes, i.e. Total-Market (TSM), Small-Cap-Value (SCV), Small-Cap-Blend (SCB) and against the inflation. No bond element in there (except in the LP portfolio itself). This chart was not intending to compare to other types of portfolios, I was more focused on illustrating the historical dynamics of the components (hectic trajectory) vs. the aggregate portfolio (remarkably steady trajectory, but not necessarily growing much). As far as I understand, this steadiness is what seems attractive to the proponents of such portfolio. Personally, I think this is a somewhat incidental historical outcome, and a portfolio only suitable for some pretty wealthy people (who can do pretty much anything they want anyway), but that's just me...

If you're interested in more portfolio-level comparisons, you can easily do so with the Simba spreadsheet, which I used to create those charts.

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

Post by Theoretical » Sun Feb 19, 2017 10:14 am

From playing with the numbers, especially the 1940-1980 period, it looks like 1LP equity unit = 1.5 TSM/Intermediate Treasuries in terms of return and standard deviation. So a 30/70 is a lot closer to a 45/55, a 50/50 LP is more or less an 80/20, and a 100% LP would presumably be about a 150% TSM portfolio. It's not a 1-1, as the standard deviation is typically significantly lower for the return received.

I think it gives some credence to Bill Bernstein's idea in The Ages of the Investor to use a small value tilt to provide the effects of leverage for young investors without the complexity/margin call risks.

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

Post by larryswedroe » Sun Feb 19, 2017 12:35 pm

theoretical, or the costs of the margin (:-))

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

Post by Boxtrap » Thu Jun 14, 2018 5:50 pm

garlandwhizzer wrote:
Sun Feb 05, 2017 1:06 pm
I don't think there's any portfolio with reasonable expected returns that better prepares for black swans than Larry's. It is expected to produce a very high Sharpe ratio (return per unit of risk). Having said that, like other bond dominated portfolios it currently looks great on backtesting because we've just been through a 30+ year bond bull market where bonds produced not only safety but also outsized returns. The same bond results are not expected over the next decade or two. Backtesting does not write the future in stone.

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

Garland Whizzer
I couldn’t have said this better. I find the LP to be a rather brilliant portfolio if one is in the position of focusing mainly on wealth preservation and/or if one has already “won the game”. In those scenarios you really can’t do better than the LP, in my opinion. But if you are NOT in that situation, you are betting an awful lot on the continuation of high small and value premiums. Especially with the forward expectation of bond returns being what they are. I love the idea behind the LP, but I probably won’t consider implementing it until I’m retired.

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

Post by Random Walker » Thu Jun 14, 2018 9:16 pm

I would contend that the LP is applicable at any stage of investing. I think it’s not a single specific stock bond split. Rather I think it’s a concept that can be tailored to any risk level. The concept is target an expected return and choose an equity / bond split that targets that return. The Larry twist is that the equity component is comprised of only the highest risk / highest expected return equity asset classes: SV, ISV, EMV. The bonds are very high quality and short to intermediate term. One can have an equity allocation anywhere from probably 20% to 100%.
The equity component is strongly diversified across market, size, value. It’s also diversified geographically. By having higher tilt than TSM portfolio with same expected return, also have more exposure to term factor via bonds. For any given expected return, the high equity tilt / larger bond allocation portfolio should have smaller tails, narrower SD, less volatility drag, greater compounded return relative to simple average return of the components.
I agree with the above poster that sequence of returns is especially important in early retirement, but portfolio efficiency is valuable at any stage of investing life.

Dave

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

Post by stlutz » Thu Jun 14, 2018 10:56 pm

I would contend that the LP is applicable at any stage of investing. I think it’s not a single specific stock bond split. Rather I think it’s a concept that can be tailored to any risk level. The concept is target an expected return and choose an equity / bond split that targets that return. The Larry twist is that the equity component is comprised of only the highest risk / highest expected return equity asset classes: SV, ISV, EMV. The bonds are very high quality and short to intermediate term. One can have an equity allocation anywhere from probably 20% to 100%.
I don't agree.

For the person who has a lot of money and is going to be 70% bonds, then with the 30% of stocks, it's not illogical to shoot for the fences. If it doesn't work out, you'll still be fine in the end. Your heirs are the only ones who really care.

For the person in their 50s who is aggressively saving for retirement, betting 75% of their portfolio on a very small corner of the market is just too much concentration and really isn't prudent. Taking a smaller portion of one's portfolio and attempting to beat the market with it is one thing--betting the whole farm is another. Being more broadly diversified is a better approach in this case. That most ensures that you'll get the returns you should get for the risk you are taking.

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

Post by Random Walker » Thu Jun 14, 2018 11:28 pm

Stlutz,
Strongly recommend Larry’s Black Swan book. The shorter the time period, like the critical few years on either side of starting retirement, the more important it is to be diversified across sources of return. What you view as a small corner of the market, SV, is actually highly diversified across the factors that drive equity returns: market, size, value. TSM is exposed to only one factor, market. When any one factor, including market, can do poorly at any time, makes sense to diversify across the factors. This is especially true when the time period is short. The key to the strategy is the maximal equity tilt goes together with big increase in safe bond exposure compared to TSM portfolio with same expected return. Tails get cut on both right and left sides. Serious risk is putting all your equity bets on the single market beta factor a few years before retirement with equity valuations historically relatively high.
By the way, did you see the posted essay and references regarding SV premia from Larry in the recent factor thread?

Dave

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

Post by KlangFool » Thu Jun 14, 2018 11:43 pm

stlutz wrote:
Thu Jun 14, 2018 10:56 pm
I would contend that the LP is applicable at any stage of investing. I think it’s not a single specific stock bond split. Rather I think it’s a concept that can be tailored to any risk level. The concept is target an expected return and choose an equity / bond split that targets that return. The Larry twist is that the equity component is comprised of only the highest risk / highest expected return equity asset classes: SV, ISV, EMV. The bonds are very high quality and short to intermediate term. One can have an equity allocation anywhere from probably 20% to 100%.
I don't agree.

For the person who has a lot of money and is going to be 70% bonds, then with the 30% of stocks, it's not illogical to shoot for the fences. If it doesn't work out, you'll still be fine in the end. Your heirs are the only ones who really care.

For the person in their 50s who is aggressively saving for retirement, betting 75% of their portfolio on a very small corner of the market is just too much concentration and really isn't prudent. Taking a smaller portion of one's portfolio and attempting to beat the market with it is one thing--betting the whole farm is another. Being more broadly diversified is a better approach in this case. That most ensures that you'll get the returns you should get for the risk you are taking.
stlutz,

Then, don't bet 75%. There is no reason why you must put 75% of your portfolio into SCV.

KlangFool

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

Post by stlutz » Fri Jun 15, 2018 12:00 am

stlutz,

Then, don't bet 75%. There is no reason why you must put 75% of your portfolio into SCV.
It was the post prior to mine that suggested that a 100% concentration in 2% of the market was sensible. That's not some straw man I manufactured. :happy

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

Post by stlutz » Fri Jun 15, 2018 12:32 am

By the way, did you see the posted essay and references regarding SV premia from Larry in the recent factor thread?
Dave: You mean the same list of papers that Mr. Swedroe has posted about 500 times in this forum over the years? :) None of those addressed the simple question I had: In order for a risk premium to exist, there has to be a logical reason for most investment money to take the side of the bet that most likely will lose. Who is that large group of people that should invest in only growth stocks and avoid value altogether? The only answer I can get to that question is that these people conceivably exist, but who cares about that question when I can link to a new backtest that shows that value beat growth in 17th century Kazakhstan?

When I came to this forum back in 2007, I was actually a big believer in small/value tilting. More than anybody else, Larry Swedore convinced me to go the other way. Not because I think he's a bad guy, but he really revealed to me the degree to which the whole approach is based on circular logic. The discussion always seems to go something like this:

Q: Why is value so great?
A: Because backtesting shows it beats the market.
Q: Why should I expect that to continue in the future?
A: Because value stocks are riskier than growth stocks.
Q: How do I know that?
A: Because value beat the market historically.
Q: No, seriously.
A: Okay. There are dozens of papers that show that value stocks have specific risks that growth stocks don't.
Q: Don't growth stocks have specific risks too?
A: Yes.
Q: So, how do I know value is riskier?
A: Because value stocks beat the market.
Q: For that matter, how do I know that riskier stocks beat the market?
A: Because backtesting shows value beats the market.
etc. etc.

The only thing SV has going for it is backtesting. The expectation is simply that markets will consult the history books before deciding which way to move in the future. I say maybe, maybe not.

In all seriousness, people doing sorts based on one or two calculations in today's market are so overmatched. Back in the 1990s those doing any type of quantitative backtesting were still a relatively small part of the market. At that time, finding a few metrics that worked and combining them into a "multi-factor" portfolio was a smart way to try to outperform. Nowadays, quants have tons of cash and terabytes of data. They've already done everything they can to squeeze return out of the market based on standard financial ratios. They've moved on multiple times over to less commonly used datasets where there isn't as much published literature. The notion that there are free lunches still out there just based on sorting on P/E or P/B is just not credible with me.

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

Post by Random Walker » Fri Jun 15, 2018 12:33 am

The key is decreasing overall equity allocation, strongly increasing equity tilt, and increasing high quality bond allocation very substantially. What matters is the portfolio as a whole. Don’t look at the equities in isolation.

Dave

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

Post by larryswedroe » Fri Jun 15, 2018 8:07 am

To help by showing how wrong the statement is
Here's the claim
In order for a risk premium to exist, there has to be a logical reason for most investment money to take the side of the bet that most likely will lose. Who is that large group of people that should invest in only growth stocks and avoid value altogether?
What a bunch of crap. I've posted many times on this issue and my books go into it. For example, value stocks tend to have more irreversible capital and more leverage and more volatility of earnings. Thus they tend to do worse in bad times. Thus people who have a high correlation of their labor capital to equity risk should have lower exposure to value stocks and small stocks as well.

There are many simple and commonsense explanations for the risk premium in value, as the three I noted above, but there are others, well documented in the literature and my books. It's all there, showing how wrong the depiction of the discussion is by stlutz.

This is well documented in the literature as well. It's actually one explanation for what has been called the equity risk premium puzzle.

And to show I've well documented it, the following is from my book The Only Guide You'll Ever Need for the Right Financial Plan which was published in 2010, so long ago.


Reasons to Increase Value Exposure
Increased expected return with increased risk. From a traditional finance point of view, investors should tilt toward value if they need to increase the expected return of their portfolios to meet their goals — but only if they are willing and able to accept the incremental risk of value stocks.
Diversification of Sources of Risk. Consider an investor needing a certain rate of return to achieve his goals. That rate of return can be achieved with a certain exposure to beta (total stock market) risk. The appropriate allocation to the total market (which has no value exposure) might be 60 percent. Another way to achieve the same goal is to lower the exposure to beta (50 percent), but add sufficient value exposure so the two portfolios have the same expected return. Historically, the value-tilted portfolio with a lower exposure to beta has exhibited less volatility. The reasons are that the value premium has been less volatile than the equity premium and has low correlation to the equity risk premium. (Appendix A provides further explanation)
Application: A high net worth investor with a low marginal utility of risk may still want to achieve a certain return. The downside risk of the portfolio can be reduced by lowering the exposure to beta while increasing the exposure to the value premium. The trade off is a lower probability of producing returns above the expected.
Application: An individual whose labor capital has a low correlation to the value premium should consider increasing their exposure to value stocks. Typical examples are tenured professors, doctors and retirees. Another good candidate for increasing the exposure to value stocks is a high net worth investor whose labor capital is a low percentage of his overall net worth.
Reasons to Decrease Value Exposure (or Maintain a “Market” Exposure):
Reduced risk. Those taking the traditional finance point of view believe in tilting towards growth stocks to reduce portfolio risk. Investors are exposed to value risk factors in ways other than their investments should use this strategy. This includes owners of distressed businesses, employees and top-level managers of value companies, as well as retirees who receive (or in the future will receive) pension benefits from a value company. For this type of investor, a neutral exposure to value or even a growth tilt (compared to the market) is more appropriate.
Tracking error. Portfolios tilted toward value will not move in lockstep with the overall market. Investors with value-tilted portfolios must be able to stomach the tracking error occurring during the inevitable periods of value underperformance. Depending on the investor, a more neutral exposure to value might make sense.
Application: An owner or employee of a value company (a company with a high BtM ratio) should probably not tilt as heavily toward value stocks as a tenured professor. Other individuals who should consider not tilting to value stocks (or limiting their tilt) are construction workers, automobile workers or any employee or owner of a highly cyclical business. For these investors, a neutral exposure to value, or even a growth tilt (compared to the market), might be more appropriate.

By the way, the same analysis is done for small stocks, and equity and EM and international.

Best wishes
Larry

stlutz
Posts: 4749
Joined: Fri Jan 02, 2009 1:08 am

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

Post by stlutz » Fri Jun 15, 2018 5:59 pm

...owners of distressed businesses, employees and top-level managers of value companies, as well as retirees who receive (or in the future will receive) pension benefits from a value company. For this type of investor, a neutral exposure to value or even a growth tilt (compared to the market) is more appropriate.
Now we're getting somewhere!

Traditionally the collective approach on Bogleheads can be summarized as follows:

--If you believe value will outperform the market, then tilt to value.
--If you're skeptical about the whole value premium thing, then use a total market fund.
--If you're not the sharpest tool in the shed, then tilt to growth.

What is being suggested here is much different:

--If your income is dependent on growth companies, then invest in value stocks.
--If you income is dependent on value companies, then invest in growth stocks.

I'd like to explore this further. I'm going to start a separate thread so this one can stay focused on the Larry Portfolio.

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