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.'

Which means for our asset as example:- Looking at the total return, or increase in value of 56.1% in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus worse in comparison to the benchmark SPY (77.6%)
- During the last 3 years, the total return is 42.6%, which is lower, thus worse than the value of 54.9% from the benchmark.

'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.'

Applying this definition to our asset in some examples:- The annual return (CAGR) over 5 years of Second Grader's Starter is 9.3%, which is smaller, thus worse compared to the benchmark SPY (12.2%) in the same period.
- Looking at annual performance (CAGR) in of 12.6% in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (15.7%).

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (13.3%) in the period of the last 5 years, the volatility of 11.7% of Second Grader's Starter is lower, thus better.
- During the last 3 years, the volatility is 10.7%, which is smaller, thus better than the value of 12.8% from the benchmark.

'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:- The downside volatility 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.
- During the last 3 years, the downside deviation is 12.4%, which is lower, thus better than the value of 14.8% from the benchmark.

'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:- Looking at the ratio of return and volatility (Sharpe) of 0.58 in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.73)
- Compared with SPY (1.03) in the period of the last 3 years, the risk / return profile (Sharpe) of 0.94 is lower, thus worse.

'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 downside risk / excess return profile of 0.52 in the last 5 years of Second Grader's Starter , we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.66)
- During the last 3 years, the downside risk / excess return profile is 0.81, which is lower, thus worse than the value of 0.89 from the benchmark.

'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.'

Which means for our asset as example:- Looking at the Downside risk index of 4.32 in the last 5 years of Second Grader's Starter , we see it is relatively higher, thus worse in comparison to the benchmark SPY (3.97 )
- Compared with SPY (4.09 ) in the period of the last 3 years, the Ulcer Ratio of 3.89 is smaller, thus better.

'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.'

Which means for our asset as example:- Looking at the maximum DrawDown of -16.7 days in the last 5 years of Second Grader's Starter , we see it is relatively larger, thus better in comparison to the benchmark SPY (-19.3 days)
- Looking at maximum drop from peak to valley in of -16.7 days in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (-19.3 days).

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs) in days.'

Which means for our asset as example:- The maximum days under water over 5 years of Second Grader's Starter is 309 days, which is higher, thus worse compared to the benchmark SPY (187 days) in the same period.
- During the last 3 years, the maximum days under water is 309 days, which is greater, thus worse than the value of 139 days from the benchmark.

'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.'

Which means for our asset as example:- Looking at the average time in days below previous high water mark of 93 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 (42 days)
- During the last 3 years, the average days under water is 82 days, which is higher, thus worse than the value of 37 days from the benchmark.

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.