The Second Grader's Starter Portfolio is a Lazy Portfolio proposed by Paul Farrell. It was meant as a portfolio solution to a very small investor, with a long investment horizon. Farrell gives an example of 8-year old Kevin who got a $10,000 gift form his gramdmother. With a time horizon of 30+ years, the portfolio uses no load, low-cost index funds. It splits the money into 60% Total Stock Market Index, 30% Total International Stock and 10% Total Bond Market Index. The portfolio can be constructed using ETFs such as Vanguard Total Stock Market Index - VTI, iShares MSCI EAFE International Index - EFA and iShares Lehman Aggregate Bond Index - AGG.

Using mutual funds: VBMFX=10%, VGTSX=30%, VTSMX=60%

Using ETFs: AGG=10%, EFA=30%, SPY=60%

The backtest uses allocation to ETFs.

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Applying this definition to our asset in some examples:- The total return, or performance over 5 years of Second Grader's Starter is 51.3%, which is lower, thus worse compared to the benchmark SPY (78.4%) in the same period.
- Looking at total return, or performance in of 30.8% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (44.1%).

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Which means for our asset as example:- Looking at the compounded annual growth rate (CAGR) of 8.6% in the last 5 years of Second Grader's Starter, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (12.3%)
- Compared with SPY (12.9%) in the period of the last 3 years, the annual return (CAGR) of 9.4% is smaller, thus worse.

'Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.'

Which means for our asset as example:- Looking at the volatility of 16.9% in the last 5 years of Second Grader's Starter, we see it is relatively smaller, thus better in comparison to the benchmark SPY (19.9%)
- Looking at volatility in of 19.7% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (23.1%).

'Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference. Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Which means for our asset as example:- Compared with the benchmark SPY (14.6%) in the period of the last 5 years, the downside risk of 12.6% of Second Grader's Starter is smaller, thus better.
- Compared with SPY (16.9%) in the period of the last 3 years, the downside deviation of 14.7% is lower, thus better.

'The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William F. Sharpe.'

Using this definition on our asset we see for example:- The ratio of return and volatility (Sharpe) over 5 years of Second Grader's Starter is 0.36, which is smaller, thus worse compared to the benchmark SPY (0.49) in the same period.
- Compared with SPY (0.45) in the period of the last 3 years, the risk / return profile (Sharpe) of 0.35 is lower, thus worse.

'The Sortino ratio improves upon the Sharpe ratio by isolating downside volatility from total volatility by dividing excess return by the downside deviation. The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative asset returns, called downside deviation. The Sortino ratio takes the asset's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation. The ratio was named after Frank A. Sortino.'

Applying this definition to our asset in some examples:- The excess return divided by the downside deviation over 5 years of Second Grader's Starter is 0.49, which is lower, thus worse compared to the benchmark SPY (0.67) in the same period.
- Compared with SPY (0.62) in the period of the last 3 years, the downside risk / excess return profile of 0.47 is lower, thus worse.

'The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987, and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period. Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn't mind upward movement, it's the downside that causes stress and stomach ulcers that the index's name suggests.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (6.16 ) in the period of the last 5 years, the Ulcer Ratio of 5.77 of Second Grader's Starter is lower, thus better.
- During the last 3 years, the Ulcer Index is 6.41 , which is lower, thus better than the value of 6.87 from the benchmark.

'Maximum drawdown measures the loss in any losing period during a fund’s investment record. It is defined as the percent retrenchment from a fund’s peak value to the fund’s valley value. The drawdown is in effect from the time the fund’s retrenchment begins until a new fund high is reached. The maximum drawdown encompasses both the period from the fund’s peak to the fund’s valley (length), and the time from the fund’s valley to a new fund high (recovery). It measures the largest percentage drawdown that has occurred in any fund’s data record.'

Using this definition on our asset we see for example:- The maximum drop from peak to valley over 5 years of Second Grader's Starter is -30.3 days, which is higher, thus better compared to the benchmark SPY (-33.7 days) in the same period.
- During the last 3 years, the maximum drop from peak to valley is -30.3 days, which is larger, thus better than the value of -33.7 days from the benchmark.

'The Maximum Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (139 days) in the period of the last 5 years, the maximum days below previous high of 309 days of Second Grader's Starter is larger, thus worse.
- Looking at maximum time in days below previous high water mark in of 133 days in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (119 days).

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (35 days) in the period of the last 5 years, the average days under water of 63 days of Second Grader's Starter is greater, thus worse.
- Compared with SPY (27 days) in the period of the last 3 years, the average time in days below previous high water mark of 30 days is greater, thus worse.

Historical returns have been extended using synthetic data.
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- Note that yearly returns do not equal the sum of monthly returns due to compounding.
- Performance results of Second Grader's Starter are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.