Second Grader’s Starter Portfolio Review and ETF Pie

The Second Grader’s Starter Portfolio is comprised of U.S. stocks, international stocks, and U.S. bonds. Here we’ll take a look at its components, performance, and the best ETF’s to use in its execution.

Interested in more Lazy Portfolios? See the full list here.

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What is the Second Grader’s Starter Portfolio?

The Second Grader’s Starter Portfolio is a lazy portfolio created by financial columnist Paul Farrell. The portfolio is essentially a Bogleheads 3 Fund Portfolio.

Farrell proposed that the Second Grader’s Starter Portfolio, as the name implies, is a good “starter” portfolio for a young investor with a long investing horizon, using the example of a 2nd-grader who receives a $10,000 gift from his grandmother to invest.

The Second Grader’s Starter Portfolio utilizes broad index investing for diversification as follows:

• 60% Total U.S. Stock Market
• 30% Total International Stock Market
• 10% Total U.S. Bond Market

Second Grader’s Starter Portfolio Performance Backtest vs. the S&P 500

Going back to 1987, here’s the Second Grader’s Starter Portfolio’s performance vs. an S&P 500 index fund through 2021:

Compared to the S&P 500 index, the Second Grader’s Starter Portfolio has delivered lower general and risk-adjusted returns (Sharpe, Sortino), with volatility only slightly lower than the S&P 500. This makes sense, as small-cap stocks and international stocks have suffered in recent years.

I actually like the portfolio’s allocation to international stocks, providing a diversification benefit. Where I disagree with the Second Grader’s Starter Portfolio is the prescription for a total bond market fund, because of the premise of the portfolio being for a young, new investor.

A young investor with a long investing horizon can afford to utilize longer-term bonds, especially since the bond holding is small at 10%. Specifically, long-term treasury bonds would be my choice, since they would offer better diversification and are superior to corporate bonds. Keep in mind a total bond market fund will usually have about 30% allocated to corporate bonds.

Second Grader’s Starter Portfolio ETF Pie for M1 Finance

M1 Finance is a great choice of broker to implement the Second Grader’s Starter Portfolio because it makes regular rebalancing seamless and easy, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.

Using entirely low-cost Vanguard funds, we can construct the Second Grader Starter’s Portfolio pie like this:

• VTI – 60%
• VXUS – 30%
• BND – 10%

You can add the Second Grader’s Starter Portfolio pie to your portfolio on M1 Finance by clicking this link and then clicking “Save to my account.”

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Don’t want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.

Disclosure: I am long VXUS.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.