Second Grader’s Index Portfolio

Second Grader Portfolio

About a year ago, Allan S. Roth, financial adviser, wrote a book I referenced in my last bog post. Roth helped his son, Kevin, set up this basic portfolio when Kevin was a second grader. I think he is now a fifth or sixth grader. The "second grader" portfolio is a three asset class portfolio or about as simple as it gets. The three asset classes are: U.S. Equities, International Markets, and Bonds. The three index funds used in this portfolio are; VTSMX, VGTSX, and VBMFX and the percentage allocated to each is shown in the slide below. Equivalent ETFs would be VTI, VEU, and BND. Before I post my QPP analysis of this simple portfolio, let me introduce Allan and his son through this youtube video.

While the video is an advertisement for the book, it does point out several salient points to new and young investors. Obviously one needs to save and doing it early in life is critical. Diversification is important. This portfolio is very limited in this area as I will show later. Keeping costs to a minimum is essential.

Below is the QPP analysis for the three asset class portfolio. Note that the Diversification Metric (DM) is well below our goal of 40% in this market. Also, the projected Return/Risk ratio is nothing special. Nevertheless, one could do a lot worse by constructing a portfolio through some stock selection process.


Before I show how well this simple portfolio performs as a retirement portfolio, let me reference Paul Farrell's 10 Lazy Portfolios. Look over this web site as one will pick up numerous suggestions for putting together a passive portfolio.

And now for the screen shot showing the probability of running out of money in retirement. I used the same assumptions I used in past blog posts. The results are a little worse, but not by much, than some other portfolios shown in past blog posts.


Retirement: Five Asset Class Portfolio


Five Asset Class Retirement Portfolio

If you think many of the portfolios discussed on this blog are overly complicated, try this five asset class portfolio on for size and see if it meets your needs. This portfolio is only slightly more complicated than the “Second Grader” portfolio Allan S. Roth writes about in his book, “How a Second Grader Beats Wall Street.” I thought I’d written a blog post on Roth’s book, but a search reveals nothing so it was likely lost on the old blog site. I’ll post something later today on this very simple portfolio.

Below is the five asset class portfolio made up of U.S. equities, developed international markets, emerging markets, domestic REITs and TIPs. The ETFs used in this portfolio are VTI, VEU, VWO, VNQ, and TIP.  All should be familiar to ITA Wealth Management readers.

The five asset class portfolio is by no means an ideal portfolio as I will explain below. See if you can spot any weaknesses.


Close examination of the above portfolio shows two weak spots. 1) The Diversification Metric is too low at 13%. This is to be expected from a portfolio as concentrated as this one. 2) The projected return at 7.07% is below that projected for the S&P 500. I consider this to be unacceptable.

Just how well is this portfolio projected to perform as a retirement portfolio if one uses the same assuptions I’ve been using in the prior blog posts. Check below in the next screen shot for the results. You may be surprised. [Read more…]