Description of Second Grader's Starter

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.

Statistics of Second Grader's Starter (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund). Total return is a strong measure of an investment’s overall performance.'

Which means for our asset as example:
  • Looking at the total return of 42.1% in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus worse in comparison to the benchmark SPY (66.2%)
  • Compared with SPY (47.5%) in the period of the last 3 years, the total return, or increase in value of 36% is lower, thus worse.

CAGR:

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Applying this definition to our asset in some examples:
  • The annual performance (CAGR) over 5 years of Second Grader's Starter is 7.3%, which is lower, thus worse compared to the benchmark SPY (10.7%) in the same period.
  • Looking at compounded annual growth rate (CAGR) in of 10.8% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (13.9%).

Volatility:

'In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Commonly, the higher the volatility, the riskier the security.'

Applying this definition to our asset in some examples:
  • Looking at the volatility of 11.7% in the last 5 years of Second Grader's Starter , we see it is relatively smaller, thus better in comparison to the benchmark SPY (13.3%)
  • During the last 3 years, the historical 30 days volatility is 10.9%, which is smaller, thus better than the value of 12.5% from the benchmark.

DownVol:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the downside risk of 12.9% in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus better in comparison to the benchmark SPY (14.6%)
  • Looking at downside deviation in of 12.6% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (14.2%).

Sharpe:

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Using this definition on our asset we see for example:
  • The Sharpe Ratio over 5 years of Second Grader's Starter is 0.41, which is lower, thus worse compared to the benchmark SPY (0.62) in the same period.
  • Compared with SPY (0.91) in the period of the last 3 years, the Sharpe Ratio of 0.77 is smaller, thus worse.

Sortino:

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Applying this definition to our asset in some examples:
  • Looking at the ratio of annual return and downside deviation of 0.37 in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.56)
  • Looking at excess return divided by the downside deviation in of 0.66 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (0.8).

Ulcer:

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Applying this definition to our asset in some examples:
  • Looking at the Ulcer Index of 4.33 in the last 5 years of Second Grader's Starter , we see it is relatively greater, thus better in comparison to the benchmark SPY (3.96 )
  • Looking at Ulcer Ratio in of 3.86 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (4.01 ).

MaxDD:

'A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown is an indicator of downside risk over a specified time period. It can be used both as a stand-alone measure or as an input into other metrics such as 'Return over Maximum Drawdown' and the Calmar Ratio. Maximum Drawdown is expressed in percentage terms.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (-19.3 days) in the period of the last 5 years, the maximum reduction from previous high of -16.7 days of Second Grader's Starter is greater, thus better.
  • During the last 3 years, the maximum drop from peak to valley is -16.7 days, which is greater, thus better than the value of -19.3 days from the benchmark.

MaxDuration:

'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:
  • The maximum days below previous high over 5 years of Second Grader's Starter is 309 days, which is greater, thus worse compared to the benchmark SPY (187 days) in the same period.
  • Looking at maximum days under water in of 309 days in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (139 days).

AveDuration:

'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.'

Using this definition on our asset we see for example:
  • The average days under water over 5 years of Second Grader's Starter is 92 days, which is larger, thus worse compared to the benchmark SPY (41 days) in the same period.
  • Looking at average days below previous high in of 81 days in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (36 days).

Performance of Second Grader's Starter (YTD)

Historical returns have been extended using synthetic data.

Allocations of Second Grader's Starter
()

Allocations

Returns of Second Grader's Starter (%)

  • "Year" returns in the table above are not equal to 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.