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.'

Applying this definition to our asset in some examples:- The total return over 5 years of Second Grader's Starter is 91.6%, which is lower, thus worse compared to the benchmark SPY (122.1%) in the same period.
- Compared with SPY (43.5%) in the period of the last 3 years, the total return, or increase in value of 30.6% is smaller, thus worse.

'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:- The annual performance (CAGR) over 5 years of Second Grader's Starter is 13.9%, which is lower, thus worse compared to the benchmark SPY (17.3%) in the same period.
- Compared with SPY (12.8%) in the period of the last 3 years, the compounded annual growth rate (CAGR) of 9.3% 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.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (18.8%) in the period of the last 5 years, the 30 days standard deviation of 16.1% of Second Grader's Starter is lower, thus better.
- During the last 3 years, the 30 days standard deviation is 19.4%, which is lower, thus better than the value of 22.9% 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.'

Using this definition on our asset we see for example:- Looking at the downside risk of 11.9% in the last 5 years of Second Grader's Starter, we see it is relatively smaller, thus better in comparison to the benchmark SPY (13.6%)
- During the last 3 years, the downside risk is 14.5%, which is smaller, thus better than the value of 16.8% 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.'

Applying this definition to our asset in some examples:- Looking at the risk / return profile (Sharpe) of 0.71 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)
- During the last 3 years, the risk / return profile (Sharpe) is 0.35, which is lower, thus worse than the value of 0.45 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.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (1.09) in the period of the last 5 years, the downside risk / excess return profile of 0.96 of Second Grader's Starter is lower, thus worse.
- Looking at ratio of annual return and downside deviation in of 0.47 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (0.61).

'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:- Compared with the benchmark SPY (5.59 ) in the period of the last 5 years, the Ulcer Index of 5.23 of Second Grader's Starter is smaller, thus better.
- During the last 3 years, the Ulcer Index is 6.68 , which is lower, thus better than the value of 7.15 from the benchmark.

'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:- Compared with the benchmark SPY (-33.7 days) in the period of the last 5 years, the maximum DrawDown of -30.3 days of Second Grader's Starter is greater, thus better.
- 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 larger, 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'

Using this definition on our asset we see for example:- The maximum time in days below previous high water mark over 5 years of Second Grader's Starter is 309 days, which is higher, thus worse compared to the benchmark SPY (139 days) in the same period.
- During the last 3 years, the maximum time in days below previous high water mark is 309 days, which is larger, 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.'

Applying this definition to our asset in some examples:- Looking at the average days below previous high of 61 days in the last 5 years of Second Grader's Starter, we see it is relatively greater, thus worse in comparison to the benchmark SPY (33 days)
- 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 greater, 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.