Paul Farrell’s The Second Grader’s Starter Portfolio: Backtesting, Allocations, and Performance Analysis
The Second Grader’s Starter Portfolio by Paul Farrell is a passive index portfolio that aims to diversify investments across stocks and bonds.
The Second Grader’s Starter Portfolio strategy can be implemented with only 3 ETFs. You do not need to pick individual stocks and bonds.
According to our backtests over the past 16 years, The Second Grader’s Starter Portfolio has the following performance metrics:
- Compound annual return (CAR): 6.68%;
- Standard deviation: 20.04%;
- Maximum drawdown (MDD): -52.00%;
- Sharpe ratio (with a risk-free rate of 3%): 0.18;
- CAR/MDD ratio: 0.13.
We’d also like to mention that we have plenty of similar investment strategies on our major landing page.
Who Is Paul Farrell
Paul has been in the investment business for over 30 years as a research analyst, portfolio manager and fund co-founder. Mr. Farrell is the Founder and Managing Member of Mayborn Partners, LLC, a family office based in Westport, CT.
He also serves on the LPAC for Next Frontier Capital, a Bozeman, an MT-based VC firm. Previously, he co-founded Bronson Point Management, an equity long-short hedge fund firm based in Fairfield, CT.
Mr. Farrell was previously a managing director and portfolio manager at Pequot Capital and prior to that, at Goldman Sachs. Earlier in his career, Mr. Farrell also worked at GEICO, WR Capital and Fred Alger Management.
What Is The Second Grader’s Starter Portfolio
The Second Grader’s Starter Portfolio consists of the following asset classes with their respective total weights:
| Asset class | Weight in the portfolio |
| Total U.S. Stock Market | 60.00% |
| Total International Stock Market | 30.00% |
| Total U.S. Bond Market | 10.00% |
Stocks In The Second Grader’s Starter Portfolio
Stocks are used as high-return securities that increase portfolio returns, but stocks are more risky and volatile than bonds. However, over time, you get paid for taking that extra risk: stocks have outperformed bonds by a wide margin over the last century. But also keep in mind that bonds can play a “safe haven” role in your portfolio when the markets are turbulent.
Related reading: Warren Buffett ETF Portfolio (90/10) – Performance And Returns
The Second Grader’s Starter Portfolio includes the following types of stocks:
- Total U.S. Stock Market – US large-cap growth and value stocks that virtually replicate the benchmark S&P 500 stock index;
- Total International Stock Market – international stocks allow you to increase diversification by reducing the overall correlation of the portfolio. International stocks are located on other continents (Europe, Asia, etc) and have low correlation with US stocks.
For stocks, we have picked these ETFs, which are well diversified, have high liquidity and a long performance history:
| Portfolio Sector | ETF Name | ETF Ticker |
| Total U.S. Stock Market | SPDR S&P 500 ETF Trust | SPY |
| Total International Stock Market | iShares MSCI EAFE ETF | EFA |
Bonds In The Second Grader’s Starter Portfolio
Bonds are used in the portfolio as low-risk, low-volatility securities that reduce the portfolio’s return but also reduce the maximum drawdown. Historically, a bond allocation has served a stock portfolio well to diversify risk.
The Second Grader’s Starter Portfolio includes the following types of bonds:
- Total U.S. Bond Market – short-term, medium-term and long-term US treasury and corporate bonds;
For bonds, we have picked these ETFs, which are well diversified, have high liquidity and a long performance history:
| Portfolio Sector | ETF Name | ETF Ticker |
| Total U.S. Bond Market | Vanguard Total Bond Market Index Fund | BND |
As an option, instead of total bond market, you can use other types of bonds, for example:
- Use corporate bonds, which are more risky, but also more profitable; or
- Use long-term treasury bonds, which are less risky and less profitable.
Backtesting The Second Grader’s Starter Portfolio
We backtested The Second Grader’s Starter Portfolio using a “buy and hold” strategy that we rebalanced at the beginning of each year. For backtesting, we used the ETFs we picked with the appropriate weights. The backtesting interval is from 2007 to 2023.
Portfolio equity curve:
Below is the portfolio’s underwater curve (drawdowns). A drawdown refers to the decline in value from a relative peak value to a relative trough. A maximum drawdown is the maximum observed loss from a peak to a trough of a portfolio before a new peak is attained:
Portfolio monthly and annual returns:
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Yr% |
| 2007 | 1.3% | -1.2% | 1.6% | 3.8% | 2.7% | -1.0% | -2.5% | 0.7% | 4.0% | 2.2% | -3.3% | -1.5% | 6.7% |
| 2008 | -5.9% | -1.8% | -0.4% | 4.4% | 1.2% | -7.6% | -1.5% | -0.2% | -9.0% | -16.0% | -5.2% | 3.6% | -33.7% |
| 2009 | -9.4% | -9.5% | 7.5% | 9.3% | 7.5% | -0.4% | 7.6% | 3.7% | 3.4% | -1.9% | 5.0% | 1.2% | 24.1% |
| 2010 | -3.5% | 2.0% | 5.5% | 0.2% | -8.0% | -3.6% | 7.5% | -3.6% | 8.2% | 3.4% | -1.5% | 6.3% | 12.1% |
| 2011 | 2.0% | 3.2% | -0.7% | 3.6% | -1.2% | -1.4% | -1.8% | -5.7% | -7.2% | 9.3% | -0.9% | 0.2% | -1.7% |
| 2012 | 4.4% | 4.1% | 2.0% | -0.9% | -6.9% | 4.5% | 0.9% | 2.5% | 2.4% | -0.8% | 1.2% | 1.8% | 15.4% |
| 2013 | 4.1% | 0.4% | 2.7% | 2.7% | 0.4% | -1.7% | 4.8% | -2.5% | 4.3% | 3.9% | 2.0% | 2.2% | 25.6% |
| 2014 | -3.5% | 4.6% | 0.3% | 1.0% | 2.0% | 1.5% | -1.6% | 2.6% | -2.0% | 1.5% | 1.8% | -1.2% | 6.8% |
| 2015 | -1.3% | 5.1% | -1.3% | 1.7% | 0.8% | -2.3% | 2.1% | -5.9% | -2.8% | 7.0% | -0.0% | -1.8% | 0.5% |
| 2016 | -4.5% | -1.0% | 6.1% | 0.9% | 1.0% | -0.3% | 3.4% | 0.2% | 0.4% | -1.8% | 1.5% | 2.1% | 7.9% |
| 2017 | 2.1% | 2.8% | 1.0% | 1.4% | 2.0% | 0.5% | 2.1% | 0.3% | 1.9% | 1.9% | 2.0% | 1.2% | 20.9% |
| 2018 | 4.8% | -3.7% | -1.8% | 0.7% | 0.9% | -0.1% | 3.1% | 1.4% | 0.6% | -6.7% | 1.4% | -6.8% | -6.9% |
| 2019 | 6.9% | 2.7% | 1.6% | 3.4% | -5.2% | 6.1% | 0.4% | -1.3% | 2.1% | 2.4% | 2.6% | 2.7% | 26.2% |
| 2020 | -0.7% | -6.9% | -11.7% | 9.5% | 4.5% | 2.1% | 4.3% | 5.5% | -2.9% | -2.6% | 10.8% | 3.7% | 14.1% |
| 2021 | -1.0% | 2.2% | 3.4% | 4.2% | 1.4% | 1.1% | 1.8% | 2.3% | -4.0% | 5.3% | -1.8% | 4.1% | 20.5% |
| 2022 | -4.4% | -2.9% | 2.1% | -7.7% | 0.8% | -7.7% | 7.2% | -4.5% | -8.7% | 6.4% | 7.5% | -4.1% | -16.5% |
| 2023 | 6.8% | -2.7% | 3.4% | 1.9% | -0.7% | N/A | N/A | N/A | N/A | N/A | N/A | N/A | 8.8% |
Portfolio performance statistics compared to benchmark S&P 500 Total Return index:
| Statistical Metric | Portfolio | S&P 500 TR |
| Annual Return % | 6.68% | 8.84% |
| Exposure % | 99.82% | 100.00% |
| Risk Adjusted Return % | 46.69% | 8.84% |
| Max. drawdown | -52.00% | -55.19% |
| CAR/MaxDD | 0.13 | 0.16 |
| Standard Deviation | 20.04% | 22.64% |
| Sharpe Ratio (3% risk-free) | 0.18 | 0.26 |
Conclusion On The Second Grader’s Starter Portfolio
The Second Grader’s Starter Portfolio lost out to the S&P 500 TR in terms of returns, but outperformed in terms of risk.
The maximum drawdown and standard deviation of the portfolio is slightly lower than that of the S&P 500 TR index, because a significant portion of the portfolio (90%) are stock ETFs.
If you want to get more returns then you should allocate 100% of your funds into stocks. For example put 60% into US stocks, and 40% into international stocks.
FAQ:
What is the Second Grader’s Starter Portfolio by Paul Farrell?
The Second Grader’s Starter Portfolio by Paul Farrell is a passive index portfolio designed to diversify investments across stocks and bonds. It aims to provide a simple yet effective investment strategy for individuals without the need to pick individual stocks and bonds.
What are the key performance metrics of the Second Grader’s Starter Portfolio?
According to backtests over the past 16 years, the Second Grader’s Starter Portfolio has a compound annual return (CAR) of 6.68%, a standard deviation of 20.04%, a maximum drawdown (MDD) of -52.00%, a Sharpe ratio of 0.18, and a CAR/MDD ratio of 0.13. These metrics provide insights into the portfolio’s historical performance.
How are stocks selected in the Second Grader’s Starter Portfolio?
The portfolio includes two types of stocks – Total U.S. Stock Market (US large-cap growth and value stocks) and Total International Stock Market. Exchange-traded funds (ETFs) such as SPDR S&P 500 ETF Trust (SPY) and iShares MSCI EAFE ETF (EFA) are chosen for their diversification, liquidity, and performance history.