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.'

Applying this definition to our asset in some examples:- The total return over 5 years of Second Grader's Starter is 77.4%, which is smaller, thus worse compared to the benchmark SPY (110.3%) in the same period.
- Compared with SPY (39.7%) in the period of the last 3 years, the total return of 28.2% is smaller, thus worse.

'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:- The annual return (CAGR) over 5 years of Second Grader's Starter is 12.2%, which is lower, thus worse compared to the benchmark SPY (16.1%) in the same period.
- Compared with SPY (11.8%) in the period of the last 3 years, the annual performance (CAGR) of 8.7% is lower, thus worse.

'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.'

Which means for our asset as example:- The historical 30 days volatility over 5 years of Second Grader's Starter is 17.9%, which is smaller, thus better compared to the benchmark SPY (20.9%) in the same period.
- Compared with SPY (17.5%) in the period of the last 3 years, the volatility of 15.2% is smaller, thus better.

'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:- Compared with the benchmark SPY (14.9%) in the period of the last 5 years, the downside risk of 12.9% of Second Grader's Starter is smaller, thus better.
- Looking at downside volatility in of 10.5% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (12.2%).

'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.'

Applying this definition to our asset in some examples:- Looking at the risk / return profile (Sharpe) of 0.54 in the last 5 years of Second Grader's Starter, we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.65)
- During the last 3 years, the Sharpe Ratio is 0.41, which is lower, thus worse than the value of 0.53 from the benchmark.

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

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 0.75, which is smaller, thus worse compared to the benchmark SPY (0.91) in the same period.
- During the last 3 years, the ratio of annual return and downside deviation is 0.59, which is lower, thus worse than the value of 0.76 from the benchmark.

'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.'

Applying this definition to our asset in some examples:- Looking at the Ulcer Ratio of 8.92 in the last 5 years of Second Grader's Starter, we see it is relatively lower, thus better in comparison to the benchmark SPY (9.32 )
- During the last 3 years, the Ulcer Ratio is 10 , which is larger, thus worse than the value of 10 from the benchmark.

'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:- The maximum DrawDown over 5 years of Second Grader's Starter is -30.3 days, which is greater, thus better compared to the benchmark SPY (-33.7 days) in the same period.
- During the last 3 years, the maximum reduction from previous high is -24.7 days, which is smaller, thus worse than the value of -24.5 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.'

Using this definition on our asset we see for example:- Looking at the maximum time in days below previous high water mark of 491 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 (488 days)
- Looking at maximum days under water in of 491 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (488 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.'

Which means for our asset as example:- Compared with the benchmark SPY (124 days) in the period of the last 5 years, the average time in days below previous high water mark of 123 days of Second Grader's Starter is lower, thus better.
- During the last 3 years, the average days below previous high is 178 days, which is smaller, thus better than the value of 179 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 and do not account for slippage, fees or taxes.
- Results may be based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.