Larry Swedroe, a prolific author and the former chief research officer at Buckingham Strategic Wealth, is a prominent voice in the world of evidence-based investing. His philosophy centers on passive investing, diversification, and a deep understanding of market history and behavioral finance.

On Passive Investing and Beating the Market

  1. "Active management is a loser's game. It's possible to win, but the odds are so poor it's not prudent to try." This is a cornerstone of Swedroe's philosophy, emphasizing the difficulty of outperforming the market over the long term.
  2. "The evidence is clear: The more active a manager is, the more likely they are to underperform."
  3. "Don't try to find the needle in the haystack. Just buy the haystack." This memorable quote encapsulates the wisdom of buying the entire market through index funds rather than trying to pick individual winning stocks.
  4. "The siren song of active management is the triumph of hope over experience."
  5. "Alpha is shrinking as it gets converted into beta, or factor exposures."[1] Swedroe argues that what was once considered skill (alpha) is now understood as exposure to known risk factors (beta).
  6. "The competition in the market is getting tougher, the amount of alpha available is declining, and it must be split among an increasing amount of investment dollars."[1]
  7. "In investing, the winning strategy is not to play the loser's game of trying to beat the market."[2]
  8. "The two greatest enemies of the equity investor are expenses and emotions."
  9. "Costs matter. Minimize expenses and taxes for better returns."[3]
  10. "The 'Larry Portfolio' is a low-beta/high-tilt (to small-cap and value stocks) portfolio."[4] This strategy aims to reduce exposure to overall market risk while increasing exposure to factors with higher expected returns.

On Diversification

  1. "Diversification is the only free lunch in investing." While a classic finance adage, Swedroe frequently reiterates its importance.
  2. "If some part of your portfolio isn't doing poorly, you're not properly diversified."[5][6] This highlights that true diversification means holding assets that will perform differently in various market conditions.
  3. "The safest port in a sea of uncertainty is diversification."[7]
  4. "International investments provide crucial portfolio diversification."[3]
  5. "Diversification reduces the risks of any single asset dragging down the portfolio."[8]

On Risk and Market Behavior

  1. "Risk is not a knob that you can just dial up or down. It's a multi-faceted thing."
  2. "The biggest risk confronting most investors is staring right back at them when they look in the mirror."[9] Swedroe emphasizes that behavioral mistakes are often the most significant threat to investment success.
  3. "Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed."[2][7]
  4. "It isn't the head, but the stomach that determines your fate."[2][7] This underscores the importance of emotional discipline in investing.
  5. "We have met the enemy, and he is us."[9] A quote he often uses to describe investors' self-sabotaging behavior.
  6. "A down market is when investors should be buying, not selling."[7][10]
  7. "Pessimism always misses the key point in human development: not just the continuing miracle of technological progress, but its second derivative – the change in the rate of change."[7]
  8. "Real risk is not inherent in the normal, cyclical and above all temporary declines. Risk is that people will read into those declines something that isn't there and that having done so, they will panic and sell."[7]
  9. "Every single risk asset must go through long periods of bad performance, and that's not a reason to avoid the asset class. What is that a reason to do? Diversify."[5]
  10. "Markets are efficient: Active management is a loser's game."[3]
  11. "There have been five years when both the S&P 500 Index and long-term Treasury bonds produced negative returns... The lesson is that correlations are time-varying."[11] This serves as a cautionary tale against relying on historical correlations.
  12. "Investors tend to buy AFTER periods of good performance and sell AFTER periods of poor performance."[8] This describes the common and detrimental behavior of chasing returns.
  13. "Overconfidence provides a natural explanation for why investors who process the same public information end up disagreeing so much.”[9]

On Investment Strategy and Planning

  1. "The most important decision you make is your asset allocation."
  2. "A written investment policy statement is the essential document for successful investing."
  3. "You should focus on the four critical things you can actually control: What risks do you want to take... Diversifying the risks you take... Invest only in passively managed vehicles. Keep all of your costs low, including fees and taxes."[12]
  4. "The best measure we have of estimating future returns is the Shiller CAPE ratio."[8]
  5. "The odds of getting 10% over the next 30 years are extremely low. People should be planning on more like 5% or 6% … if we're lucky."[13] (Published in July 2023)
  6. "If you have already 'won' the game, why still play?"[14] A reminder to de-risk portfolios once financial goals have been met.
  7. "Don't include your home in your financial asset allocation decisions."[14] He views a primary residence as a lifestyle asset, not an investment.
  8. "It takes lots of patience and discipline to stay the course through periods of poor performance as all risk assets go through them."[5]
  9. "Your horizon better be at least 10 years, should be longer, or you shouldn't be investing in any risk asset."[5]
  10. "The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient."[7]
  11. "Success is purely a function of two things: 1) recognition of the inevitability of major market declines; and 2) emotional/behavioral preparation to regard such declines as non-events."[2][7]
  12. "What every investor wants is to profit from other investors' irrationality, but quickly and painlessly. Sadly, it just doesn't work that way."[6]

On Factor Investing

  1. "Small-cap and value stocks offer higher expected returns."[3]
  2. "There are really only a relatively small number of factors. For equities, we have market beta, size, value, profitability and quality."[3]
  3. To be considered a true factor, it should be persistent, pervasive, robust, investable, and intuitive.[3]
  4. "A buy-and-hold strategy for a random factor fund yields 110 basis points per annum in excess of the return earned by the average traditional actively managed mutual fund."[15]
  5. "If investors believe in the value and momentum premiums but they only invest in value or momentum funds after a period of strong performance they lose a significant portion of the factor premium due to cyclicality in factor returns."[15]

On the Broader Financial World

  1. "There's an inherent conflict of interest between Wall Street and Main Street."[4]
  2. "The financial media is not your friend. They are in the business of selling advertising, not making you a better investor."
  3. "Insights aren't enough. The real advantage comes from turning research into investable, low-cost strategies that can withstand real-world frictions."[16]
  4. "If the conventional wisdom is, 'Don't just sit there. Do something,' Larry shows us that it should be 'Don't just do something. Sit there.'" (A quote from Ross L. Stevens about Swedroe's philosophy).[6]
  5. "Managing human behavior is the keystone to being a successful investor."[7]

Sources:

Larry Swedroe is a regular contributor to several financial publications. Many of his articles can be found on:

His numerous books, which provide in-depth explorations of these topics, include:

  • "The Only Guide to a Winning Investment Strategy You'll Ever Need"[20]
  • "The Incredible Shrinking Alpha"
  • "Your Complete Guide to Factor-Based Investing"[3]
  • "Think, Act, and Invest Like Warren Buffett"[10]
  • "Investment Mistakes Even Smart People Make and How to Avoid Them"

Sources

  1. thinkadvisor.com
  2. goodreads.com
  3. etf.com
  4. youtube.com
  5. advisorperspectives.com
  6. e-bookshelf.de
  7. amazonaws.com
  8. youtube.com
  9. etf.com
  10. youtube.com
  11. purefinancial.com
  12. soundretirementplanning.com
  13. etf.com
  14. youtube.com
  15. etf.com
  16. muckrack.com
  17. etf.com
  18. seekingalpha.com
  19. sifma.org
  20. thriftbooks.com