Description

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 (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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (113.4%) in the period of the last 5 years, the total return, or performance of 85.5% of Second Grader's Starter is lower, thus worse.
  • During the last 3 years, the total return, or performance is 58.9%, which is lower, thus worse than the value of 69.8% 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.'

Applying this definition to our asset in some examples:
  • The annual performance (CAGR) over 5 years of Second Grader's Starter is 13.2%, which is smaller, thus worse compared to the benchmark SPY (16.4%) in the same period.
  • Compared with SPY (19.4%) in the period of the last 3 years, the annual return (CAGR) of 16.8% is lower, thus worse.

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.'

Which means for our asset as example:
  • Looking at the historical 30 days volatility of 14.9% in the last 5 years of Second Grader's Starter, we see it is relatively lower, thus better in comparison to the benchmark SPY (17.6%)
  • Looking at volatility in of 14.8% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (17.5%).

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.'

Using this definition on our asset we see for example:
  • The downside deviation over 5 years of Second Grader's Starter is 10.2%, which is lower, thus better compared to the benchmark SPY (12.1%) in the same period.
  • Compared with SPY (11.5%) in the period of the last 3 years, the downside risk of 9.7% is smaller, thus better.

Sharpe:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the Sharpe Ratio of 0.72 in the last 5 years of Second Grader's Starter, we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.79)
  • Compared with SPY (0.97) in the period of the last 3 years, the ratio of return and volatility (Sharpe) of 0.96 is lower, thus worse.

Sortino:

'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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (1.15) in the period of the last 5 years, the downside risk / excess return profile of 1.05 of Second Grader's Starter is smaller, thus worse.
  • Looking at ratio of annual return and downside deviation in of 1.47 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (1.47).

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:
  • Compared with the benchmark SPY (8.48 ) in the period of the last 5 years, the Downside risk index of 8.02 of Second Grader's Starter is lower, thus better.
  • Looking at Downside risk index in of 4.24 in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (5.31 ).

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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (-24.5 days) in the period of the last 5 years, the maximum reduction from previous high of -24.7 days of Second Grader's Starter is lower, thus worse.
  • Looking at maximum DrawDown in of -15.5 days in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (-18.8 days).

MaxDuration:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the maximum days under water of 491 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 (488 days)
  • Looking at maximum time in days below previous high water mark in of 115 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (199 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.'

Which means for our asset as example:
  • Looking at the average time in days below previous high water mark of 118 days in the last 5 years of Second Grader's Starter, we see it is relatively lower, thus better in comparison to the benchmark SPY (120 days)
  • Compared with SPY (47 days) in the period of the last 3 years, the average days below previous high of 26 days is smaller, thus better.

Performance (YTD)

Historical returns have been extended using synthetic data.

Allocations ()

Allocations

Returns (%)

  • 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.