Larry Swedroe Minimize FatTails Portfolio
0.30%June 04 | MyPlanIQ portfolio symbol P_79097

Portfolio Overview

Larry Swedroe Minimize Fat Tails Portfolio Overview

1. Background and Philosophy

The Larry Swedroe Minimize Fat Tails Portfolio is designed by Larry Swedroe, a renowned financial author, researcher, and principal at Buckingham Strategic Wealth. Swedroe is a proponent of evidence-based investing, emphasizing low-cost, passive strategies grounded in academic research. His philosophy focuses on minimizing risk, particularly the impact of extreme market events ("fat tails"), while still capturing long-term returns through diversification and factor-based investing (e.g., small-cap value and emerging markets).

This portfolio reflects Swedroe's conservative approach, prioritizing capital preservation and reducing volatility through a heavy allocation to fixed income (70%) while still maintaining exposure to equities (30%) for growth potential. The strategy is ideal for risk-averse investors or those nearing retirement who want to mitigate downside risk without sacrificing all growth opportunities.

2. Asset Allocation, Diversification, and Risk

Asset Allocation:
-- Equities (30%):

• IJS (15%): iShares S&P Small-Cap 600 Value ETF, providing exposure to undervalued small-cap U.S. stocks, which historically offer higher returns with higher risk.
• VWO (15%): Vanguard FTSE Emerging Markets ETF, diversifying into higher-growth but volatile emerging markets.

-- Fixed Income (70%):

• SHY (35%): iShares 1-3 Year Treasury Bond ETF, offering short-term Treasury exposure for stability and liquidity.
• TIP (35%): iShares TIPS Bond ETF, protecting against inflation with Treasury Inflation-Protected Securities.

Diversification: The portfolio spans U.S. small-cap value, emerging markets, short-term Treasuries, and inflation-protected bonds, reducing concentration risk. The heavy bond allocation dampens equity volatility.

Risk Level: Low to moderate. The 70% bond allocation significantly reduces risk, but the equity portion (especially emerging markets) introduces some volatility. The focus on small-cap value and TIPS adds inflation and factor risk.

Pros:

• Strong downside protection due to high bond allocation.
• Inflation hedge via TIPS.
• Diversification across asset classes and factors.
• Low-cost, passive ETFs.

Cons:

• Lower growth potential due to conservative allocation.
• Emerging markets and small-cap value can underperform in certain cycles.
• Interest rate risk for short-term bonds (SHY).

3. Application for Retirement Accounts (401(k) and IRA)

This portfolio is well-suited for conservative retirement investors, particularly those in or near retirement who prioritize capital preservation. Here's how to implement it in a 401(k) or IRA:

401(k) Implementation:
Many 401(k) plans lack specific ETFs like IJS or VWO. In such cases:

• IJS (Small-Cap Value): Use a U.S. small-cap or small-cap value fund if available. If not, allocate to a broader U.S. equity fund.
• VWO (Emerging Markets): Substitute with an international or emerging markets fund. If unavailable, allocate to a global equity fund.
• SHY (Short-Term Treasuries): Use a short-term bond fund or stable value fund.
• TIP (TIPS): Replace with an inflation-protected bond fund or general bond fund.

Note: If a 401(k) lacks specific options (e.g., commodities), reallocate to the nearest asset class (e.g., stocks for missing commodity exposure).

Rule of Thumb: 

• For stock funds, prioritize index funds, especially low-cost index funds
• For bond funds, prioritize core bond funds or high-quality actively managed total return bond funds  (if available).

IRA Implementation:
IRAs offer more flexibility. Investors can directly purchase the ETFs (IJS, VWO, SHY, TIP) to match the portfolio exactly.

Rebalancing: Annually rebalance to maintain the 30/70 equity/bond split and adjust sub-allocations as needed.

Asset Allocation

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Historical Performance

Calculators

Rolling Returns

Maximum Drawdown

Larry Swedroe Minimize FatTails Portfolio Maximum Drawdown