Mimicking Swedroe's Portfolio

[tulak]

Ever since reading this thread on the bogleheads forum:

Bogleheads :: View topic - Larry, re your portfolio

I've been toying with the idea of restructuring my portfolio along these lines.

His portfolio is roughly 30/70 with the 30 in EM/SV/Intl SV and the 70 in high grade bonds.

I wouldn't mimic this exact configuration, but the idea of holding a small % of riskier asset classes in the equity part of my portfolio is appealing.

Of course, this backtests very well. Less upside, but less downside and the overall return is slightly better than a 60/40 portfolio with significantly less SD.

This also reminds of a Bernstein analysis where he demonstrates that there's a rebalancing bonus between asset classes with higher volatility. That might be another plus to this type of portfolio (need to re-read Bernstein's analysis).

On the thread, someone also determined that historically, the correlations between some of these asset classes are very low (.3-.4), which looks like another plus.

Anybody have any experience with this type of portfolio?

I'm curious to know what's the downside. Based on the numbers I've looked at so far, it's looking very appealing.

 

[walkinwood]

Please share your back test data. This sounds interesting, but I would like to see how it performed in 2008 and so far in 2009. Those 3 equity asset classes got hit quite hard, though, if you had the 70% in treasuries, that would have done well and may have compensated.

For me, I think I need the higher equity exposure (60%) to help my portfolio recover from the 2008 downturn. As of last week, the 2009 deficit has been erased.. for now.

 

[walkinwood]

I finally got to the last thread of your linked post in the bogleheads forum, and it shows the back-testing. Quite impressive.

I think I need the upside potential of a 60/40 equity/bond portfolio to recover from 2008.

 

[LOL!]

I suppose if I had $10 million and only needed to live off of $100K a year, that I might do something like Swedroe. He always preaches that he does not have the need to take risk and does not need any performance from his portfolio. He could probably put it in CDs if he wanted to.

 

[tulak]

I used Simba's spreadsheet, which includes returns for 2008.

For 1972-2008:

60/40 - TSM/Total Bond - CAGR 9.11%, SD 12.17%
15/15/70 - SDV/EM/Total Bond - CAGR 10.58%, SD 8.22%

For 2008, 60/40 was -20.2% and 15/15/70 was -9.2.

Naturally this has recovered for 2009, but I don't have the numbers to determine which has performed better.

When I backtest data, I always like to look at each of the individual years to see how the portfolios compare and imagine how I'd feel with the results. Based on this, I could easily have been happy with the 30/70 mix during this timeframe. 2008 was the worse, next worse for 30/70 was 1973 at -3.83%, where 60/40 had -9.69%. For 1974, 30/70 -1.86% and 60/40 -13.71%.

Of course, there were years where you trailed a 60/40 portfolio, but not by so much that I'd personally be bothered.

LOL, I agree with you in principle, but this isn't the same as just investing in CDs. The way I understand it, you're taking more equity risk, with less exposure to equities. For me, it makes sense that this combination can perform as well as taking less equity risk with a higher exposure to equities.

Looking at the 1972-2008 timeframe, the 30/70 portfolio CAGR was 10.58%. My current portfolio is 90/10 and has a CAGR 11.18% with double SD (16.67% vs 8.22%). Based on that, 30/70 doesn't necessarily mean lower returns.

Of course, who knows if history will repeat. Personally, I believe that EM will perform well, with high volatility, but I have less confidence in real growth in developed markets relative to EM. As for SCV, I'm guessing that it will tend to outperform TSM overall, again, with higher volatility, but at minimum will most likely track TSM.

Smaller overall exposure to equities, rebalancing bonus, both positive. The only downside I see is that suddenly these asset classes stop being volatile, show no real growth. But I think if that happens, TSM and Intl developed would also be affected, at which point having a lot of bonds wouldn't be bad.

 

[unclemick]

I suppose if I had $10 million and only needed to live off of $100K a year, that I might do something like Swedroe. He always preaches that he does not have the need to take risk and does not need any performance from his portfolio. He could probably put it in CDs if he wanted to.

Hormones. If you have enough in high quality fixed - really whizzy equity classes might be more fun than watching football.

heh heh heh - Seriously though(well sort of) - the Swedroe portfolio is supposed to provide plenty of current income with enough 'expected growth' equity asset classes to stay competitive with inflation.

 

[tulak]

Hormones. If you have enough in high quality fixed - really whizzy equity classes might be more fun than watching football.

heh heh heh - Seriously though(well sort of) - the Swedroe portfolio is supposed to provide plenty of current income with enough 'expected growth' equity asset classes to stay competitive with inflation.

Right now I'm feeling that TSM's been just as interesting as the other whizzy equity classes...

 

[Dawg52]

Hormones. If you have enough in high quality fixed - really whizzy equity classes might be more fun than watching football.

I imagine hormones will get in the way of me transitioning to an all cd portfolio. But if I ever recoup most of what I'm down, I can see something like a 25/75 portfolio.(20% core stocks, 5% high octane, 75% cd's) I can't see me with 25% whizzy stocks.