Larry Swedroe Portfolio (30/70, Small-cap value) With Backtest

In the book, “Reducing the Risk of Black Swans”, an educational treatise on how to avoid unexpected catastrophic losses, Larry Swedroe presents the Larry Swedroe Portfolio. If you want a way to maximize returns while minimizing risk, the investment approach might intrigue you. But what is the Larry Swedroe Portfolio (30/70, small-cap value)?

The Larry Swedroe portfolio is a diversified investment portfolio that is based on the principles of evidence-based investing, as advocated by the financial advisor and author Larry Swedroe. The portfolio, which allocates 30% to stocks and 70% to bonds, is designed to provide long-term growth while minimizing risk.

This post answers some questions about Larry Swedroe Portfolio (30/70, small-cap value). We finish the article by doing a backtest of the strategy.

Larry Swedroe Portfolio

The Larry Swedroe portfolio is a diversified investment portfolio that is based on the principles of evidence-based investing, as advocated by the financial advisor and author Larry Swedroe. It balances small percentages of risky stocks with large percentages of safe bonds to maximize returns while minimizing risk.

The Larry Swedroe portfolio typically includes a mix of domestic and international stocks, as well as bonds of different maturities and credit quality. Generally, the portfolio allocation is as follows:

• 15% Small-cap value (VIOV, for example)
• 7.5% Int’l Small-cap value (VBR, for example)
• 7.5% Emerging Markets (EEMS, for example)
• 70% Intermediate Bonds (IEI, for example)

The portfolio is designed to provide long-term growth while minimizing risk. It can be attained by investing in a combination of low-cost index funds or exchange-traded funds (ETFs) that represent small-cap US stocks, bonds, small-cap international stocks, and emerging markets. The allocation of these funds is based on an individual’s risk tolerance, investment horizon, and other factors.

The goal of the Larry Swedroe portfolio is to achieve a balance between risk and return. It is designed to provide long-term growth while minimizing volatility and drawdowns. The portfolio is intended to be a “set it and forget it” type of investment strategy, meaning that the asset allocation is not meant to be constantly tweaked but reviewed and rebalanced periodically.

Value Investing with Larry Swedroe

Value investing is a strategy that involves buying stocks or other securities that are believed to be undervalued by the market. The goal of value investing is to identify companies or assets that are trading at a discount to their intrinsic value and then hold them for the long term until the market recognizes their true value.

As a financial advisor and author, Larry Swedroe has a unique approach to value investing, which he documented in his book, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He suggests that value investing can be an effective strategy for long-term investors.

Swedroe recommends using a bottom-up approach, which involves analyzing individual companies and their financials to identify those that are undervalued by the market. He also suggests that investors should focus on buying companies with strong fundamentals, such as strong balance sheets, consistent earnings, and good management teams. Additionally, he advises investors to avoid overpaying for a stock, even if it appears to be undervalued and be patient, and willing to hold on to their investments for the long term.

Investing Strategies with Larry Swedroe

Larry Swedroe is a proponent of evidence-based investing, which involves using academic research and historical data to inform investment decisions. His main investing strategy is to diversify a portfolio across multiple asset classes, such as stocks, bonds, and sometimes, real estate (REITs). He emphasizes the importance of low-cost index funds and exchange-traded funds (ETFs) as a way to achieve diversification while minimizing fees.

Swedroe advises investors to avoid actively managed funds and instead focus on low-cost index funds, which have been shown to perform as well or better than actively managed funds over the long term. He believes that it’s best to have a long-term perspective and avoid attempting to time the market.

Larry Swedroe on Small-cap value Investing

Small-cap value investing is a strategy that involves buying stocks of small-capitalization companies that are believed to be undervalued by the market. Swedroe suggests that small-cap value investing can be an effective strategy for long-term investors, but it can be riskier than investing in larger, more established companies.

According to him, using a bottom-up approach, which involves analyzing individual companies and their financials to identify those that are undervalued by the market, is a great approach when considering small-cap value investing. What is important is that investors should focus on buying companies with strong fundamentals — strong balance sheets, consistent earnings, and good management teams.

It’s important to note that small-cap value investing may involve higher volatility and a higher risk of loss than other types of investing. It may not be suitable for all investors. As always, consulting a financial professional is recommended before making any investment decisions.

Understanding Larry Swedroe’s Investment Philosophy

Swedroe advocates for evidence-based investing and diversification. His investment philosophy is built on the principles of modern portfolio theory, which emphasizes the importance of diversification and the use of historical data to inform investment decisions.

He believes in buying low-cost, passively managed index funds that track broad market indices. As a long-term investor, he understands the importance of maintaining a long-term perspective and avoiding the temptation to try to time the market or chase hot investment trends.

Swedroe’s philosophy is also based on value investing, which involves buying stocks or other securities that are believed to be undervalued by the market, with the goal of holding them for the long term until the market recognizes their true value. Using a bottom-up approach, he analyzes individual companies and their financials to identify those that are undervalued by the market.

Larry Swedroe’s Investment Strategies

Larry Swedroe’s investment strategies are based on evidence-based investing and diversification. These include:

• Value investing, which involves buying stocks or other securities that are believed to be undervalued by the market and holding them for the long term until the market recognizes their true value
• Diversifying across asset classes and geographies to reduce overall portfolio risk
• Buying low-cost, passively managed index funds that track broad market indices, rather than trying to beat the market through stock picking or market timing
• Maintaining a long-term perspective and avoiding the temptation to try to time the market or chase hot investment trends
• Using a bottom-up approach, which involves analyzing individual companies and their financials to identify those that are undervalued by the market

Why Larry Swedroe Favors Small-cap value Investing

Larry Swedroe favors small-cap value investing because of the potential for higher returns than larger, more established companies. Small-cap value companies have historically had higher returns than their large-cap counterparts, and they are less efficient markets, meaning there is more mispricing in the small-cap value market. These mispricings can be exploited by investors who can identify companies that are undervalued by the market.

Swedroe also believes that small-cap companies have more room for growth, as they are less well-known and have less analyst coverage. Additionally, small-cap value companies tend to be less correlated to the overall market, which can help to diversify a portfolio and lower overall risk. His bottom-up approach and focus on companies with strong fundamentals also make small-cap value investing more suitable for him.

Larry Swedroe’s Strategies for Rebalancing a Portfolio

Larry Swedroe’s strategies for rebalancing a portfolio involve periodically adjusting the allocation of assets to maintain the desired level of risk and return. He suggests rebalancing at least annually, or when any individual asset class deviates from its target allocation by a certain percentage, such as 5%.

Swedroe recommends using a systematic and disciplined approach. For example, selling the asset class that has grown the most and buying more of the asset class that has grown the least. This helps to prevent emotions from influencing the decision-making process and ensures that the portfolio stays aligned with the investor’s goals and risk tolerance.

The Benefits of Investing with Larry Swedroe

Investing with Larry Swedroe can provide several benefits, including:

• A focus on evidence-based investing and diversification
• Minimizing cost by investing in low-cost, passively managed index funds that track broad market indices
• Maintaining a long-term perspective and avoiding the temptation to try to time the market or chase hot investment trends
• Spreading out risk with diversification across asset classes and geographies
• Gaining high returns by investing in value stocks
• Using a bottom-up approach to analyze individual companies and their financials to identify those that are undervalued by the market
• Investing in fixed-income assets to offset risks in value stocks
• Using a systematic and disciplined approach for rebalancing the portfolio
• Using a combination of passive and active management to maximize returns and minimize risk

The Impact of Larry Swedroe’s Advice on Portfolio Performance

Larry Swedroe’s advice on portfolio management can positively impact portfolio performance over the long term. In the last 30 years, the Larry Swedroe Larry Portfolio presumably obtained a 6.28% compound annual return, with a 5.46% standard deviation. However, remember that the tailwind from lower rates has been consistent throughout the period.

By focusing on evidence-based investing and diversification, as well as investing in low-cost index funds, investors may be able to avoid the underperformance that often results from active management and market timing. Diversifying across asset classes and geographies can help to reduce overall portfolio risk. Value investing and bottom-up analysis of individual companies can also lead to higher returns over time. Using a systematic and disciplined approach to rebalancing the portfolio can also help keep the portfolio aligned with the investor’s goals and risk tolerance.

Why Investors Should Consider Larry Swedroe’s Strategies

Investors should consider Larry Swedroe’s strategies because they are based on evidence-based investing and the age-long principle of diversification. Investing in low-cost, passively managed index funds that track broad market indices, rather than trying to beat the market through stock picking or market timing, enables investors to reduce costs and retain the potential for high returns.

Similarly, diversifying across asset classes and geographies can help to reduce overall portfolio risk. Maintaining a long-term perspective and avoiding the temptation to time the market or chase hot investment trends make investing much simpler.

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Investors can use his bottom-up approach to value investing to identify undervalued companies and lead to higher returns over time. This can help them achieve their goal, which is to maximize returns while minimizing risk.

Analyzing the Benefits of Larry Swedroe’s Portfolio

Larry Swedroe’s portfolio strategies provide investors with a number of benefits, including:

• Evidence-based investing with good returns
• Value investing and bottom-up analysis of individual companies
• Investing in low-cost, passively managed index funds that track broad market indices
• Long-term perspective and avoiding market timing or chasing trends
• Diversification across asset classes and geographies
• Systematic and disciplined approach to portfolio rebalancing
• Combination of passive and active management to maximize returns and minimize risk

How to Use Larry Swedroe’s Strategies to Maximize Returns

To maximize returns using Larry Swedroe’s strategies, investors should focus on evidence-based investing and use diversification to reduce risks. This can be achieved by:

• investing in low-cost, passively managed index funds that track broad market indices
• maintaining a long-term perspective and avoiding the temptation to time the market or chase hot investment trends
• diversifying across asset classes and geographies can also help to reduce overall portfolio risk
• using a value investing approach to buy stocks or other securities that are believed to be undervalued by the market, can lead to higher returns over time
• using a systematic and disciplined approach to rebalancing the portfolio
• using a combination of passive and active management to maximize returns while minimizing risk

Investing Tips from Larry Swedroe

Some of Larry Swedroe’s investing tips include:

• Focus on evidence-based investing and diversification
• Invest in low-cost, passively managed index funds that track broad market indices
• Maintain a long-term perspective and avoid market timing and chasing trends
• Diversify across asset classes and geographies to reduce overall portfolio risk
• Use a value investing approach, which involves buying stocks or other securities that are believed to be undervalued by the market
• Use a bottom-up approach to analyze individual companies and their financials
• Use a systematic and disciplined approach to rebalancing the portfolio
• Combine passive and active management to maximize returns and minimize risk

Understanding Larry Swedroe’s Approach to Risk Management

Larry Swedroe’s approach to risk management involves diversification. It focuses on diversifying the portfolio across different assets and regions or economies. Swedroe pays special attention to bonds, which constitute up to 70% of the portfolio. The goal is to use such fixed-income assets to offset the risks in stocks.

Also, using a systematic and disciplined approach to rebalancing the portfolio helps to keep it aligned with the investor’s goals and risk tolerance. Swedroe also recommends avoiding chasing hot investment trends, trying to time the market, and maintaining a long-term perspective.

Analyzing Larry Swedroe’s Investment Strategies

Larry Swedroe’s investment strategies are based on evidence-based investing using time-tested strategies. One of them is value investing, which involves buying stocks or other securities that are believed to be undervalued by the market, with the goal of holding them for the long term. For this, he uses a bottom-up approach, which involves analyzing individual companies and their financials to identify those that are undervalued by the market.

Another is diversifying across asset classes and geographies to reduce overall portfolio risk. To achieve this with less cost, he focuses on buying low-cost, passively managed index funds that track broad market indices, rather than trying to beat the market through stock picking or market timing. He rebalances yearly and maintains a long-term perspective.

The Advantages of Larry Swedroe’s Portfolio Management

Larry Swedroe’s portfolio management strategies offer several advantages for investors, including:

• Low-cost and passive management, which can lead to higher returns and lower fees
• Value investing approach, which can lead to higher returns over time
• Diversification across asset classes and geographies, which can reduce overall portfolio risk
• Long-term perspective, which can lead to better investment outcomes
• Systematic and disciplined approach to rebalancing, which can help to keep the portfolio aligned with the investor’s goals and risk tolerance
• Combination of passive and active management, which can help to maximize returns while minimizing risk

Larry Swedroe’s Investment Tactics for Long-term Gains

Larry Swedroe’s investment tactics for long-term gains include:

• Using a value investing approach and diversifying across asset classes and geographies
• Investing in low-cost, passively managed index funds
• Allocating a chunk of the portfolio to fixed-income asset
• Focusing on small-cap value stocks that have the potential for huge returns
• Maintaining a long-term perspective to avoid market timing and chasing trends
• Rebalancing portfolio systematically and disciplined
• Combining passive and active management

The Pros and Cons of Investing with Larry Swedroe

Pros of Investing with Larry Swedroe:

• Low-cost and passive management can lead to higher returns and lower fees
• Diversification across asset classes and geographies can reduce overall portfolio risk
• A long-term perspective can lead to better investment outcomes
• Small-cap value investing approach can lead to higher returns over time
• Fixed-income assets taking a chunk of the allocation helps minimize risk
• A systematic and disciplined approach to rebalancing can help to keep the portfolio aligned with the investor’s goals and risk tolerance

Cons of Investing with Larry Swedroe:

• It may not perform as well in the short term due to fluctuations in the market
• It may not suitable for investors who want to actively manage their portfolios
• It may not be suitable for investors who want to achieve high returns in a short period of time.

How to Find the Best Stocks with Larry Swedroe’s Strategies

Here is how to find the best stocks with Larry Swedroe’s strategies:

• Focus on small-cap value stocks — stocks that are believed to be undervalued by the market
• Use a bottom-up approach, which involves analyzing individual companies and their financials to identify those that are undervalued by the market
• Analyze the company’s financials, including the balance sheet, income statement, and cash flow statement
• Research the company’s management, industry, and competitive environment
• Evaluate the company’s growth prospects and overall financial health
• Consider the company’s valuation relative to its peers and the overall market

Larry Swedroe Portfolio (30/70, Small-cap value) Backtest – Does It Work?

Let’s backtest the strategy to find its statistics and performance metrics. We make the following trading rules and settings:

Trading Rules

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VIOV (Vanguard S&P 600 Small-Cap Value ETF) is a proxy for US small-cap value.

The backtest only goes back to 2012 because we lack relevant data earlier.

The equity curve with daily rebalancing looks like this:

The annual return is 3.71% – significantly lower than the historical returns.

The annual returns read like this:

What can you expect from Larry Swedroe’s portfolio?

Because of the huge allocation to bonds, we expect the portfolio to trail stocks over the long term, something that backtests also prove. Thus, is the strategy best suited for pensioners or risk-averse investors?

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FAQ:

How does Larry Swedroe approach value investing?

Swedroe believes small-cap value companies offer potential for higher returns due to historical outperformance, less market efficiency, and more room for growth compared to larger, established companies. Swedroe recommends a bottom-up approach, analyzing individual companies with strong fundamentals, such as solid balance sheets and consistent earnings, while avoiding overpaying for stocks.

What are the key components of the Larry Swedroe Portfolio?

The portfolio achieves balance through evidence-based investing, diversifying across domestic and international stocks, as well as bonds, based on an individual’s risk tolerance and investment horizon. The portfolio typically includes allocations to small-cap value (15%), international small-cap value (7.5%), emerging markets (7.5%), and intermediate bonds (70%).

Can I implement Larry Swedroe’s strategies for short-term gains?

Swedroe’s strategies are designed for long-term gains, focusing on value investing and a disciplined approach to rebalancing. They may not be suitable for those seeking short-term returns. The historical performance of the Larry Swedroe Portfolio, as backtested, indicates an annual return of 3.71%, with a significant bond allocation contributing to lower returns compared to stocks.