Welcome to another interesting discussion on lazy portfolios. Today, we will be exploring Larry Swedroe’s Portfolio as another example of the popular lazy portfolios out there.
If you are an investor looking to pitch your tent with a portfolio that requires you to do the bare minimum while offering healthy returns, this article is definitely for you.
Read on as we examine the Larry Swedroe’s Portfolio through a clear, analytical lens.
In a hurry? Save time by reading through the key points of this article instead.
- Larry Swedroe is the creator of the Larry Portfolio (LP) – a lazy portfolio designed for risk-averse investors.
- Swedroe is an author of and contributor to top financial books and case studies, with works on Yahoo! Finance, ETF.com, and the BAM Alliance.
- The LP portfolio contains more low volatility asset classes (for safety) and a few assets from the high-risk asset classes (for higher returns).
- The Larry Portfolio comprises 30% stocks and 70% bonds, creating a perfect portfolio for most conservative investors.
- The portfolio’s investment strategy is called the “Factor Tilts,” i.e., tilting the portfolio to higher risk assets and balancing it with diversification.
- The S&P 500 has outperformed the Larry Swedroe’s Portfolio over the last decade.
- You can set up your LP portfolio using a few ETFs and Index funds.
Who is Larry Swedroe?
Our priority is to learn more about the Larry Swedroe Portfolio. But what better way to start than getting to know who is behind this million-dollar idea?
Larry Swedroe – the creator of the Larry Portfolio – is a big name in the finance industry. Swedroe is the director of research at the Buckingham Strategic Wealth and The BAM Alliance. In addition to being one of the prolific financial authors in the industry, he is a revered investor contributor at Yahoo! Finance, ETF.com, and other top websites.
Swedroe co-authored the book, Reducing The Risk of Black Swans with Kevin Grogan in 2014. In the book, the authors extensively educated readers on the best ways to avoid severe investment losses. One of the ways to achieve this, according to the authors, is through a lazy portfolio – the Larry Portfolio. And since its introduction, this portfolio has become a top favorite among conservative investors seeking the right ways to invest.
According to Swedroe’s Twitter Profile, his life’s mission is “to educate people about the right way to invest.”
The Larry Swedroe’s Portfolio Explained
When Swedroe mentioned The Larry Portfolio in that book, most people only knew it as a practical way to minimize risk without missing out on good returns. This initial conviction grew bigger with time, and most investors now see it as an advanced financial technique with simple ideas anyone can replicate.
The primary idea behind the Larry Portfolio is about holding fewer stocks and safer investment vehicles, for example, bonds. This 30%/70% asset allocation makes the portfolio tile to higher-risk asset classes, thus generating superior returns. It is called the “low-beta/high tilt portfolio” and clearly differs from the traditional 60%/40% stock/bond portfolio we are all used to.
We can say the Larry Portfolio aims to strike a balance between low volatility and high performance, considering it favors fixed-income investments more. That makes it a valid investment option for risk-averse investors like retirees looking to avoid loss-generating events, especially those difficult to recover from.
Summarily, the Larry Swedroe’s portfolio is heavy on low volatility asset classes (for safety) and a few assets from the high-risk asset classes (for higher returns).
The Larry Swedroe’s Portfolio: Investment Strategy
Certain assets have proven to generate returns outside of market beta. These assets often fluctuate more strongly compared to the general market. For example, the small-cap stocks have performed better than large-cap stocks over the years, while the cheaper value stocks have also outperformed the growth stocks in the long run. The enhanced exposure of any portfolio to these assets can lead to improved returns.
So, the investment strategy of the Larry Portfolio is to capture the returns generated by the stock market while minimizing exposure to volatility and risk. Swedroe believes combining a few small-cap value stocks and more U.S. Treasury securities can create an excellent balance between reward and risk. The portfolio tilt toward the small-cap and value stocks helps to minimize volatility-related risks. However, this tilt creates increased risks due to limited stocks, and the portfolio dispels that by adopting more intermediate-term Treasury securities.
Consequently, the Larry Portfolio investment strategy is called the “Factor Tilts” because it adopts a risk-returns model that tilts the portfolio to higher risk and balances it with diversification. It ensures diversification using small-cap stocks and emerging markets value stocks and treasury securities.
We have seen critics arguing against the Larry Swedroe’s Portfolio. But this is not unexpected, considering just 30% of the Larry Portfolio accounts for equities, while the other 70% accounts for bonds. Theoretically, portfolios that are heavy on bonds are not expected to suit long-term wealth plans. So, these claims are logically justifiable.
Interestingly, Swedroe has silenced his critics by presenting a different view of diversification. According to him, we can access diversification “by the exposure to factors that determine the risk and return of a portfolio.” The diversification of the LP portfolio risks cuts across the market risk, term risk, value, and size of the bond holdings. This explains why it opts for value stocks, considering they offer positive exposure to the value factor, unlike growth stocks that offer negative exposure.
Having understood the investment thesis of the LP portfolio, let’s examine how assets are distributed and how the portfolio has performed over the past years.
The Larry Swedroe’s Portfolio: Asset Allocation and Historical Performance
As mentioned earlier, the Larry Swedroe Portfolio adopts a 30/70 (stocks/bonds) asset allocation to neutralize risk. That’s just the overview. A closer look at the portfolio’s composition reveals its exact components:
- 70% Intermediate Treasury Bonds; and
- 30% stocks, subdivided into:
- 7.5% Emerging Markets Value Stocks
- 7.5% International Small Cap Value Stocks
- 15% U.S. Small Cap Value Stocks
15% U.S. Small Cap Value Stocks
Small Value Stocks are more volatile because they combine both value and size. However, this volatility comes with higher potential returns. Small-cap value stocks are stocks under $1 billion in market capitalization and trade below their book values. In terms of capitalization rankings, they often make up the bottom 10% of the U.S. stock market.
7.5% International Small Cap Value Stocks
Like their small-cap stock counterparts, International Small Cap Value Stocks do not perfectly correlate to the entire market. However, they are more diversified, considering they originate from developed markets abroad. The difference between these and U.S. small-cap value stocks is their lower correlation to U.S. markets.
7.5% Emerging Markets Value Stocks
Emerging Market Value Stocks, like the name, indicates, come from up-and-coming economies. Such economies are marked by rapidly increasing GDP and high growth. Unlike the stocks from developed markets, they are more prone to liquidity, inflation, and currency devaluation risks. Their point of attraction lies in their non-correlation.
70% Intermediate Treasury Bonds
The maturity dates of intermediate treasury bonds range between two and ten years. Unlike short-term bonds, they offer better yields and are less volatile than long-term debt. Intermediate bonds are also less sensitive to interest rates – they are somewhere in the middle. Therefore, investors can get more in returns without risking their overall returns.
A proper assessment of any portfolio involves how well (or poorly) it has performed over the years. We will be examining the historical performance of the Larry Swedroe Portfolio since its inception in 2014. We will adopt the S&P 500 index as the benchmark for this performance comparison for a clearer picture. The choice of Standard & Poor’s 500 index is informed by its stability and popularity among investors, compared to other indices.
In terms of portfolio returns (%), the Larry Swedroe Larry Portfolio has turned in 7.48% over the last ten years. It boasts an 8.06% return over the previous five years. The portfolio returns of the S&P 500 within the same periods are 123.37% and 13.74%, respectively. Also, the best annual return within the last 25 years came in 1995 – 6.77%. When it comes to the portfolio dividends, the portfolio returned a 1.20% dividend yield in the year 2021. The figure for the last five years is 8.53%, and 15.88 for the previous ten.
The highest maximum drawdown within the same 25-year period was -11.47%, which came within the April 2008 and Feb 2009 investment periods. The lowest was -2.41%, as recorded within January 2022 and February 2022. Moving on to capital growth, a $1000 investment in the Larry Portfolio in January 2010 would have yielded a net total return of 152.88% by now. This translates to a $25,288 net yield within the same period.
Interestingly, if you had invested the same amount in the S&P 500, you would have a net total return of 293.75%, which translates to about $39,000. When it comes to volatility and risk, the current LP portfolio volatility is 15.42%, while the Sharpe Ratio is 0.44, according to PortfoliosLab.
From the findings above, it is clear that the S&P 500 is a better performer than the Larry Swedroe’s Portfolio.
The Larry Swedroe’s Portfolio: Pros and Cons
Like other lazy portfolios out there, the LP portfolio is not flawless. In this section of the article, I have identified the upsides and downsides of the portfolio.
Why invest in the Larry Swedroe’s Portfolio?
1. It promises high earnings from stocks.
Although stocks represent just 30% of the portfolio, the spread and choice of these stocks are well thought out. For example, 50% of the stock allocation in Larry Swedroe’s Portfolio are small value U.S. stocks, while the other half are international value stocks. This combination promises relatively higher growth potentials in the stock section of the portfolio’s holdings.
2. It prioritizes treasury securities.
Treasury holdings account for 70% of this portfolio’s holdings. Treasuries are arguably the least risky assets you will find in the market today. Yes, not every investor will find this heavy allocation a good fit, but it works excellently for retirees. Similarly, other investors who cannot afford to wait for recoveries from stock market declines will also appreciate this distribution.
3. It is easy to set upset up and manage.
Like most lazy portfolios, the Larry Portfolio requires little effort to set up and maintain. There are just four ETFs and index funds, so you will have no hard time choosing your options. In the end, you have more time to do other things aside from monitoring your investments.
Why avoid the Larry Swedroe’s Portfolio?
1. It exposes investors to Ex-U.S. stocks.
50% of the stock holdings in this portfolio are investments outside the United States. Furthermore, half of these ex-U.S. stocks are small-cap stocks. These two sources of risk are things some conservative or risk-averse investors would worry about.
2. Track records show underwhelming performance.
The historical performance of the Larry Swedroe’s portfolio has shown it is not a winning technique for everyday investors. Yes, risk-averse investors will enjoy security and stability with this portfolio, but not so much in gains. The S&P 500 has outperformed the LP portfolio significantly since its launch. We can attribute the limited growth potential to the presence of more fixed-income assets.
Creating the Larry Portfolio With ETFs
Ready to create your Larry Portfolio?
You can use the following Vanguard and iShares exchange-traded funds (ETFs) and index funds to replicate a LP portfolio.
- 35% Inflation-Protected Bonds – iShares TIPS Bond ETF (TIP)
- 35% Government Bonds – iShares 1-3 Year Treasury Bond ETF (SHY)
- 15% Small Cap Value Equities – iShares S&P SmallCap 600 Value ETF (IJS)
- 15% Emerging Markets Equities – Vanguard FTSE Emerging Markets ETF (VWO)
Alternatively, you can combine Avantis funds with Vanguard funds to create your own LP portfolio.
- 15% U.S. Small Cap Value Stock – Avantis U.S. Small Cap Value ETF (AVUV)
- 8% International Small Cap Value – Avantis International Small Cap Value ETF (AVDV)
- 7% Emerging Markets Equities – Avantis Emerging Markets Equity ETF (AVEM)
- 70% Treasury Bonds – Vanguard Intermediate-Term Treasury Index Fd ETF (VGIT)
You can also use other ETFs and index funds, provided they fit into the primary asset allocations Swedroe described in his original publication.
The Larry Swedroe’s portfolio is known for its minimal exposure and reduced potential returns. So, do not expect outstanding returns from the Larry Swedroe’s Portfolio – the S&P 500, and by extension, the general stock market is a better performer.
Who should use the Larry Swedroe Portfolio?
Investors with shorter-time investment goals will find the LP portfolio a good fit. For instance, you can save up for a car down payment using your investment account if you pitch your tent with the LP portfolio. Such goals are for the short term, lasting only a few years. The portfolio helps you avoid volatility and, consequently, losses.
Retirees can also adopt the Larry Swedroe’s portfolio. It protects them from major market changes or corrections, which often take years of recovery. In addition, the portfolio is minimally exposed to volatility by combining small and value stocks with bonds. However, it priortizes security and safety – the two must-have features for anyone investing in their golden years.
Finally, this portfolio will most likely not match or beat the overall market benchmarks. Therefore, if you are a non-conservative investor looking to take risks, you are better off than a portfolio that offers a 5% average annual growth. But if you only want to protect your investment from inflation, the LP portfolio can be your winning investment strategy.
And with that, we have come to the end of the Larry Swedroe Portfolio expedition. Before you leave, feel free to check out more value-packed articles on portfolios, assets, and benchmarks.