The Larry Portfolio – or the Larry Swedroe Portfolio – as the name suggests, was created by the legendary evidence-based investor Larry Swedroe. Here we’ll take a look at its components, performance, and the best ETF’s to use in its execution.
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What is the Larry Portfolio?
The Larry Portfolio, also called the Larry Swedroe Portfolio, comes from (you guessed it) legendary investor Larry Swedroe.
The Larry Portfolio was designed to capture more risk-free return (alpha) by enhancing factor exposure to the known equity factors that explain stock market returns outside of market beta (from Fama and French), in this case particularly the Size and Value factors. Specifically, small stocks tend to have higher returns than large stocks, and Value stocks, usually somewhat-boring stocks that are believed to be underpriced, which tend to have higher returns than their Growth counterparts.
The Larry Portfolio attempts to capture the return of the stock market at a lower volatility and risk by tilting the portfolio toward Small Cap Value, a move that many seasoned investors seem to be making nowadays. This tilt allows for a smaller allocation to stocks and a higher allocation to intermediate treasury bonds which are considered “safer” and less volatile than stocks. The Larry Portfolio also diversifies internationally by incorporating Emerging Markets Value, another move that I like.
The Larry Portfolio looks like this:
- 15% Small Cap Value
- 7.5% Developed Markets Small Cap Value
- 7.5% Emerging Markets Value
- 70% Intermediate Treasury Bonds
Who is Larry Swedroe?
Larry Swedroe is the director of research for Buckingham and the BAM Alliance. Swedroe is a prolific writer and contributor in the investing world. You’ll see him making forum posts on the Bogleheads Forum as well as writing syndicated articles around the web for sites like ETF.com, Yahoo Finance, and Forbes. If you’ve read my take on dividends, you’ll know I’m a big fan. He takes a scientific, evidence-based, data-driven approach to investing, not unlike Paul Merriman; I usually try to do the same.
Swedroe originally presented the Larry Portfolio in a book with Kevin Grogan in 2014 titled Reducing the Risk of Black Swans. They released a new, updated edition of the book in 2018 that you can get on Amazon here. I would also highly recommend his book The Only Guide to a Winning Investment Strategy You’ll Ever Need. If you’re interested specifically in learning about factor investing, he also has a book titled Your Complete Guide to Factor-Based Investing.
Larry Portfolio Performance Backtest
Unfortunately we don’t have much historical data since Emerging Markets Value is a relatively new, very narrow asset class. ETF choices for it are few. Going back to 2011, here’s the Larry Portfolio’s performance vs. a traditional 70/30 and an S&P 500 index fund:
Looks pretty dismal, right? Let’s talk about why.
First, international stocks in general have underperformed the US in recent years. Keep in mind half of the equities slice in the Larry Portfolio is using ex-US stocks. We also shouldn’t expect stellar returns, as this is a bond-heavy portfolio from the beginning.
Secondly, the past decade also hasn’t been great for the Size and Value factors. I would argue this shouldn’t deter you from believing in them long-term. Small-caps have still crushed large-caps historically, and Value has beaten Growth historically. Moreover, we would expect negative factor premiums from time to time, even for extended time periods like the last decade. As a rule I don’t employ market timing, but now may very well be the worst time to give up on Size and Value. Giving up on a portfolio simply because it underperforms its benchmark is known as tracking error regret; don’t succumb to it.
I personally still very much believe in the Size and Value factors; like the Larry Portfolio, my portfolio tilts Small Cap Value.
Larry Portfolio ETF Pie for M1 Finance
M1 Finance is a great choice of broker to implement the Larry Portfolio because it makes regular rebalancing seamless and easy, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.
As I mentioned, there aren’t many great choices for an Emerging Markets Value ETF. I went with SPDR’s S&P Emerging Markets Dividend Fund (EDIV) due to its comparatively lower expense ratio for the class, its volume, and SPDR’s solid track record. Other options include the FlexShares Emerging Markets Factor Tilt (TLTE), WisdomTree’s Emerging Markets High Dividend Fund (DEM), and the AAM S&P Emerging Markets High Dividend Value ETF (EEMD). Comparing these is beyond the scope of this article.
Utilizing EDIV, DLS, and 2 Vanguard ETF’s, we can construct the Larry Portfolio pie like this:
- VBR – 15%
- DLS – 8%
- EDIV – 7%
- VGIT – 70%
Since M1 Finance doesn’t allow fractions of 1%, I made DLS 8% and EDIV 7%.
You can add the Larry Portfolio pie to your portfolio on M1 Finance by clicking this link and then clicking “Save to my account.”
Disclosures: I am long VBR.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information contained in the investing-themed posts on this website is for informational and recreational purposes only. Read my lengthier disclaimer here.