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.

'The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This contrasts with the price return, which takes into account only the capital gain on an investment.'

Which means for our asset as example:- Looking at the total return, or increase in value of 49.9% in the last 5 years of Second Grader's Starter, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (74.4%)
- During the last 3 years, the total return, or performance is 20.6%, which is lower, thus worse than the value of 34.2% from the benchmark.

'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.'

Using this definition on our asset we see for example:- Looking at the annual performance (CAGR) of 8.4% in the last 5 years of Second Grader's Starter, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (11.8%)
- During the last 3 years, the annual performance (CAGR) is 6.5%, which is smaller, thus worse than the value of 10.3% from the benchmark.

'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.'

Using this definition on our asset we see for example:- Looking at the volatility of 16.2% in the last 5 years of Second Grader's Starter, we see it is relatively lower, thus better in comparison to the benchmark SPY (18.9%)
- Compared with SPY (22.6%) in the period of the last 3 years, the volatility of 19.1% is lower, thus better.

'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 12.1%, which is lower, thus better compared to the benchmark SPY (13.8%) in the same period.
- During the last 3 years, the downside risk is 14.4%, which is lower, thus better than the value of 16.7% from the benchmark.

'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.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (0.49) in the period of the last 5 years, the ratio of return and volatility (Sharpe) of 0.36 of Second Grader's Starter is lower, thus worse.
- During the last 3 years, the ratio of return and volatility (Sharpe) is 0.21, which is smaller, thus worse than the value of 0.35 from the benchmark.

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (0.67) in the period of the last 5 years, the excess return divided by the downside deviation of 0.49 of Second Grader's Starter is smaller, thus worse.
- During the last 3 years, the downside risk / excess return profile is 0.28, which is lower, thus worse than the value of 0.47 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.'

Applying this definition to our asset in some examples:- The Ulcer Ratio over 5 years of Second Grader's Starter is 5.48 , which is lower, thus better compared to the benchmark SPY (5.82 ) in the same period.
- Looking at Downside risk index in of 6.66 in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (7.13 ).

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Applying this definition to our asset in some examples:- The maximum drop from peak to valley over 5 years of Second Grader's Starter is -30.3 days, which is larger, thus better compared to the benchmark SPY (-33.7 days) in the same period.
- Compared with SPY (-33.7 days) in the period of the last 3 years, the maximum drop from peak to valley of -30.3 days is higher, thus better.

'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). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

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 greater, thus worse compared to the benchmark SPY (139 days) in the same period.
- Looking at maximum days below previous high in of 309 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (139 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 (37 days) in the period of the last 5 years, the average days below previous high of 64 days of Second Grader's Starter is greater, thus worse.
- Compared with SPY (45 days) in the period of the last 3 years, the average time in days below previous high water mark of 89 days is larger, 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.