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A few clients have asked us about the per­sonal allo­ca­tion of the renowned invest­ment advi­sor and author, Larry Swe­droe. Is it ‘the answer’, the per­fect port­fo­lio? Before we dis­sect this port­fo­lio, it should be pointed out that Mr. Swe­droe does not rec­om­mend this port­fo­lio for any of his clients. Nev­er­the­less, the way this port­fo­lio was con­structed ties together a num­ber of con­cepts of port­fo­lio design, and, for that rea­son, it is fas­ci­nat­ing to exam­ine this allocation.

There are two glar­ing anom­alies. First, notice the 70% in fixed income, which is very much on the high side. Sec­ond, much of the equi­ties are either small or value or both. What’s going on here? Para­phras­ing what Mr. Swe­droe explained on a num­ber of posts:

  1. He is pretty well off. He doesn’t require more wealth. He is more inter­ested in pro­tect­ing the wealth he has acquired. Thus the over­abun­dance of fixed income.
  2. Over many years, the small/value and emerg­ing mar­kets have out­per­formed most other classes. While very risky, given a very long (poten­tially multi-generational) time frame, things should work out. Besides, Mr. Swe­droe said that for him addi­tional wealth has ‘very low mar­ginal util­ity.’ He is will­ing to take extra risk, but on a fairly small por­tion (25%) of his portfolio.
  3. He does not rec­om­mend his own port­fo­lio to any of his clients.

Now let’s see how this ‘Swe­droe Madonna’ 30/70 allo­ca­tion fared com­pared to a num­ber of 60/40 port­fo­lios over the past 10 years:

Ouch! Over the long haul, it appeared to do the best. Mr. Swedroe’s ‘bet’ paid off. More­over, dur­ing the past three years — which included the sec­ond worst mar­ket crash in a hun­dred years — its hefty 70% fixed income por­tion saved the day. And most aston­ish­ingly, its risk, mea­sured by stan­dard devi­a­tion, was the low­est, by far — only 8.5%!

Obvi­ously, Swe­droe must be the genius investor we’ve all been look­ing for. Has he cre­ated the per­fect port­fo­lio? Absolutely not. This port­fo­lio is an extreme out­lier. First of all, there have been long peri­ods of time when small/value under­per­formed the gen­eral mar­ket. Only the most patient investor could han­dle the poten­tially long peri­ods when it sig­nif­i­cantly under­per­formed his or her neighbor’s hold­ings. With that in mind, let’s take a peek how it did against other port­fo­lios dur­ing some dif­fer­ent time frames:

Are you still ready to grab this baby and run with it? Maybe not so fast. Its per­for­mance from 1995 – 2000 is the sec­ond worst of the bunch. Yet it was in the mid­dle of the pack for the longer time period (1995−2009). This is a great illus­tra­tion of the time period arti­facts we men­tioned before. Just because a port­fo­lio hits it big-time in one period by no means guar­an­tees that it will per­form well dur­ing other peri­ods – more proof that ‘per­fect’ allo­ca­tions don’t exist.

This is why Mr. Swe­droe does not rec­om­mend his own per­sonal port­fo­lio for clients. Being an out­lier allo­ca­tion, it can be all over the map. In the final analy­sis, choos­ing an allo­ca­tion is a mat­ter of per­sonal pref­er­ences: beliefs about the future of mar­kets com­bined with your own finan­cial situation.

So, for whom might this port­fo­lio be appro­pri­ate? Well, not many peo­ple. But if you are for­tu­nate enough that addi­tional wealth isn’t all that impor­tant, such that 70% of your assets invested in fixed income could sup­port your lifestyle, then, at first blush, this may be for you. For exam­ple, say you need $150,000/year before taxes to live. You would need a ‘nest egg’ of a bit over $5.3M, assum­ing you can get 4% on your bonds.

But if you are quite wealthy, have a mav­er­ick soul, and are some­one who would be com­fort­able with poten­tially lag­ging more tra­di­tional allo­ca­tions, this might be intrigu­ing given its very low volatility.

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The views and infor­ma­tion con­tained within this arti­cle are pro­vided for infor­ma­tional pur­poses only and are not meant as invest­ment advice. They rep­re­sent the author’s cur­rent good-faith views at pub­li­ca­tion time and are sub­ject to change with­out notice. As with any strat­egy, it is impor­tant for an investor to fully under­stand the strat­egy prior to invest­ing; seek­ing advice from a pro­fes­sional advi­sor can be a good place to start.

The infor­ma­tion that is pro­vided on herein has been com­piled to the best of our abil­ity. How­ever, the authors makes no war­ranty of any kind, expressed or implied, and will not be held respon­si­ble, or liable for errors, or omis­sions result­ing in any loss or dam­age caused or alleged to be caused, directly, or indi­rectly, by infor­ma­tion con­tained in 3 factor Indexing’s publications.

Links to other web sites are pro­vided as gen­eral infor­ma­tion sources for the reader. 3 factor Indexing has not for­mally eval­u­ated the infor­ma­tion pro­vided via these sites and inclu­sion of these links does not con­sti­tute an endorse­ment of any orga­ni­za­tion. The links pro­vided are main­tained by their respec­tive orga­ni­za­tions and they are solely respon­si­ble for their con­tent. Trade­marks are the prop­erty of their respec­tive owners.

3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “impor­tant dis­clo­sure” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analy­sis.