As an investor, you’ll quickly learn that your portfolio strategy makes a huge difference in your returns in the stock market. Some strategies are designed for the investor who is interested in taking risks in exchange for better potential performance. Others are designed for the conservative investor who is more interested in safe, steady growth.
The Larry Swedroe Portfolio, also known as the Larry Portfolio, is on the safe side of the spectrum. A strong fit for retirees who can’t afford to risk their financial stability on market volatility, the portfolio combines aggressive stock allocation with low-risk fixed-income allocation to provide a steady stream of income and value retention.
What Is the Larry Swedroe Portfolio?
The Larry Portfolio, as its name suggests, was developed by Larry Swedroe, who is famous as an investing contributor to websites like ETF.com and Yahoo! Finance, as well as the director of research for Buckingham Strategic Wealth and the BAM Alliance. The portfolio was first introduced in the 2014 book “Reducing the Risk of Black Swans,” co-authored by Swedroe and Kevin Grogan.
Geared toward retirees and other risk-averse investors who don’t have the time to bounce back from loss-generating events, the portfolio is heavily allocated to fixed-income investments.
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Portfolio Asset Allocation
The Larry Portfolio is traditionally made up of four index funds and exchange-traded funds (ETFs), each of which comes with a low expense ratio. The asset allocation traditionally included in the portfolio includes:
- 15% in Avantis U.S. Small-Cap Value Fund ETF (AVUV). The AVUV fund invests in U.S. companies with small market caps that Avantis believes offer low valuations with higher potential profitability. The fund follows an index fund-like strategy but keeps the door open in terms of making price- and value-based decisions when purchasing positions. This fund represents half of the portfolio’s overall stock allocation.
- 8% in Avantis International Small-Cap Value Fund (AVDV). The AVDV fund invests in non-U.S. companies that trade with small market capitalizations. These are also companies that Avantis believes come with low valuations and a high potential for profitability.
- 7% in Avantis Emerging Markets Equity ETF (AVEM). The final piece of the stock allocation is the AVEM fund, which invests in emerging markets companies of all market caps. The fund seeks to expand profitability by weighting the fund toward companies that are believed to be trading at lower valuation and higher profitability ratios.
- 70% in Vanguard Intermediate-Term Treasury Index Fund ETF (VGIT). The VGIT invests in intermediate-term bonds issued by the United States Treasury. These are essentially two- through 10-year Treasury bonds, which are backed by the full faith and stability of the U.S. government.
Pro Tip: You don’t have to build this portfolio in your brokerage account yourself. If you use M1 Finance, you can simply load the Larry Swedroe Portfolio prebuilt expert pie to gain access to a curated allocation of securities that follows this strategy.
The Investment Thesis Behind the Portfolio
The investment thesis behind the portfolio is that a heavy allocation to U.S. Treasury securities mixed with investments in small-cap value stocks offers a perfect balance between risk and reward for the risk-averse investor.
Essentially, the portfolio aims to capture the returns generated by the stock market with lower exposure to volatility-related risks.
The idea is that returns on stock holdings can be expanded by enhancing exposure to assets that are known to produce returns outside of market beta — in other words, assets that tend to fluctuate more strongly than the overall market. The portfolio does this using small-cap and value stocks. Small-cap stocks have historically outperformed their large-cap counterparts, while value stocks have historically outperformed growth stocks over the long term.
Then, the risk of these more volatile assets is greatly reduced by adding in a heavy allocation to intermediate-term Treasury securities.
Portfolio Pros and Cons
As with any other prebuilt investment portfolio, there are pros and cons to consider before diving into the Larry Portfolio.
Pros of the Larry Portfolio
Investors who don’t have much of an appetite for risk tend to love the portfolio. Here’s why:
- Heavy Allocation to Treasury Securities. 70% of the portfolio’s asset allocation is invested in Treasury securities. While this heavy allocation to safe-haven assets isn’t a good fit for everyone, it is a great point of interest for retirees and other investors who don’t have the time horizon needed to recover from market declines, because Treasuries come with less risk than just about any other asset on the market today.
- High Earnings Potential on Stocks. Only about 30% of the portfolio is allocated to stocks, but that allocation is spread out wisely. Half of the stock allocation is focused on small value stocks in the U.S., with the other half focused on international value plays. This allocation gives some of the highest potential growth in the stock percentage of the portfolio’s holdings.
- Simple Setup and Management. The portfolio is made up of four ETFs and index funds. With such a low number of assets to consider, the portfolio is very easy to set up and maintain, taking much of the time commitment involved with investing out of the equation.
Cons of the Larry Portfolio
While the Larry Portfolio is a strong pick for many retirees and other risk-averse investors, there are some downsides to consider before you dive in. The most significant of these risks include:
- Ex-U.S. Exposure. Half of the allocation in the stock portfolio using this strategy are investments outside of the United States. Half of those investments are in small-cap stocks. Ex-U.S. and small caps are both sources of risk, and with the portfolio being designed for the risk-averse investor, these holdings may be concerning to some.
- Significant Underperformance. While investors who are extremely risk averse will benefit from investing following this model, it wouldn’t necessarily be considered a winning investment strategy by everyday investors. Since its creation, the portfolio has consistently underperformed the S&P 500 by a wide margin due to its heavy allocation to the fixed-income asset class, which greatly limits growth potential.
Who Should Use the Larry Swedroe Portfolio?
With an average annual growth rate of around 5%, the portfolio will keep you ahead of inflation for the most part, but it won’t be a major growth opportunity. Ultimately, the minimal exposure to volatility results in reduced potential returns.
For most investors, higher risks would be acceptable for higher expected returns.
However, there are some investors who would benefit from investing this way. Retirees who live off their retirement accounts simply can’t afford a major hit due to a recession or market correction, because it could take years to recover. As such, the minimal exposure to volatility adds safety and security in the investor’s golden years.
The portfolio model is also a great option for those with shorter time periods associated with their investing goals. For example, if you’re using your investment account to save up for a down payment on a car, your investment horizon will ultimately be short term — a few years at most. With short-term investments, volatility should be avoided at all costs to avoid losses, making this portfolio a strong choice.
Keep Your Portfolio Balanced
If you decide to move forward with the Larry Portfolio, you’re likely attracted to the stability and diversity offered by the strategy. However, your portfolio is only protected when it’s in balance, and as the values of stocks and bonds move up and down, that balance will become skewed.
As such, it’s important to rebalance your portfolio from time to time.
The good news is that this is a buy-and-hold strategy, and a stable one at that. As a result, you won’t need to rebalance too often. Nonetheless, taking part in quarterly rebalancing will keep your portfolio on track and ensure you’re provided all the protection the strategy has to offer.
The Larry Portfolio isn’t a good fit for everyone — it’s specifically designed for a particular population of market participants who have relatively short time horizons.
Nonetheless, for this portion of the investing community, the portfolio is a great fit.
If you draw your income from your investing account, or have a relatively short time horizon and simply can’t afford to take part in the volatility the stock market is known for, you’ll find solace in the stability this portfolio offers. However, if you’re looking to match overall market benchmarks or beat the market, you’ll want to consider other investment strategies.