What We Can Learn About Capital Preservation from Larry Swedroe’s Portfolio.

Larry Swedroe, principal and Director of Research at BAM Alliance, joins the Validea team on their Excess Returns podcast to talk about his portfolio.

Here is the breakdown in timeline:

• 02:54 – Larry’s biggest long-term goals with his portfolio
• 06:31 – The relationship between wealth and happiness
• 08:00 – How Larry views retirement
• 10:39 – Larry’s framework for constructing his portfolio
• 19:43 – How Larry’s market exposure has changed over time
• 24:39 – How Larry thinks about incorporating illiquid assets
• 28:30 – How Larry approaches fixed income
• 31:28 – How Larry approaches his equity exposure
• 36:56 – Larry’s thoughts on market timing
• 40:09 – How Larry thinks about international diversification
• 42:41 – Larry’s approach to private investing
• 48:56 – Overcoming investor’s behavioral problems
• 53:22 – Investments that generate happiness instead of returns
• 57:21 – The one lesson Larry would teach the average investor

If you are deep in the wealth management space, you will come across Swedroe’s commentary of style factor, passive, systematic investing or whether specific types of investing are backed by evidence.

I will not list out everything, but my main takeaway is:

How you set up your portfolio dramatically depends on the financial objective you wish to achieve.

Larry basically explained that he had made his money (as early as 30 years ago). He also explain the evolution of his portfolio.

When he started investing, due to his time horizon and risk tolerance, he invested 100% in equities. When he sold his first business thirty years ago, he moved to a 60% equity and 40% bond portfolio because… why do you need to take so much risk if you won the game?

When his firm sold their second business to Focus Financial, he moved his equity allocation lower to 30% (Which sounds like 100% Small Cap Value in Dimensional, Avantis and BridgeWay). Eight years ago, when a sort of interval fund structure make it possible to gain liquidity for relatively illiquid private investments, Larry shifted his portfolio to 50% alternative investments.

He has also given his children his money so they have enough. In financial planning terms, he has fulfilled all his financial goals.

His portfolio will interest more for those in the capital preservation mode, or those thinking of leaving a legacy.

At no point did he says that he is targeting X% a year in return.

For sure, he takes into consideration getting returns but also minimizing risks.

Knowing what he knows, he prefers to be diversified over a portfolio of different risks to earn the premium from those risks.

Here is how he puts it:

I think when it comes to capital preservation, do you consider the returns you get so much? I think returns is essential, but we should frame it as “we want every chance to get good returns and the only way is through taking risks that we can be compensated (basically premiums)”.

But what is big enough is for the portfolio not to die.

But how to prevent the portfolio from dying?

1. Rely on evidence of how different risks behave.
2. Be diversified over different risks.

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