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, 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.'

Using this definition on our asset we see for example:
  • Looking at the total return of 48.5% in the last 5 years of Second Grader's Starter , we see it is relatively smaller, thus worse in comparison to the benchmark SPY (66.9%)
  • During the last 3 years, the total return is 40.4%, which is lower, thus worse than the value of 50.6% from the benchmark.

CAGR:

'The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.'

Which means for our asset as example:
  • Compared with the benchmark SPY (10.8%) in the period of the last 5 years, the compounded annual growth rate (CAGR) of 8.2% of Second Grader's Starter is lower, thus worse.
  • During the last 3 years, the compounded annual growth rate (CAGR) is 12%, which is lower, thus worse than the value of 14.7% from the benchmark.

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:
  • The 30 days standard deviation over 5 years of Second Grader's Starter is 11.9%, which is lower, thus better compared to the benchmark SPY (13.5%) in the same period.
  • Looking at volatility in of 10.7% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (12.8%).

DownVol:

'The downside volatility is similar to the volatility, or standard deviation, but only takes losing/negative periods into account.'

Which means for our asset as example:
  • The downside deviation over 5 years of Second Grader's Starter is 13.2%, which is smaller, thus better compared to the benchmark SPY (14.8%) in the same period.
  • Compared with SPY (14.7%) in the period of the last 3 years, the downside volatility of 12.4% is smaller, thus better.

Sharpe:

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Which means for our asset as example:
  • Looking at the risk / return profile (Sharpe) of 0.48 in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.61)
  • During the last 3 years, the ratio of return and volatility (Sharpe) is 0.89, which is lower, thus worse than the value of 0.95 from the benchmark.

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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (0.56) in the period of the last 5 years, the ratio of annual return and downside deviation of 0.44 of Second Grader's Starter is lower, thus worse.
  • Compared with SPY (0.83) in the period of the last 3 years, the ratio of annual return and downside deviation of 0.77 is lower, thus worse.

Ulcer:

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Which means for our asset as example:
  • Looking at the Downside risk index of 4.33 in the last 5 years of Second Grader's Starter , we see it is relatively higher, thus worse in comparison to the benchmark SPY (3.99 )
  • Compared with SPY (4.1 ) in the period of the last 3 years, the Downside risk index of 3.89 is lower, thus better.

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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (-19.3 days) in the period of the last 5 years, the maximum drop from peak to valley of -16.7 days of Second Grader's Starter is larger, thus better.
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum DrawDown of -16.7 days is higher, thus better.

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

AveDuration:

'The Average 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. 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:
  • Looking at the average time in days below previous high water mark of 92 days in the last 5 years of Second Grader's Starter , we see it is relatively larger, thus worse in comparison to the benchmark SPY (42 days)
  • Compared with SPY (36 days) in the period of the last 3 years, the average days below previous high of 82 days is greater, thus worse.

Performance of Second Grader's Starter (YTD)

Historical returns have been extended using synthetic data.

Allocations of Second Grader's Starter
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Allocations

Returns of Second Grader's Starter (%)

  • 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.