1. Background and Philosophy
The Second Grader’s Starter Portfolio was created by Paul B. Farrell, a former investment columnist for MarketWatch and author of multiple books on lazy investing. Farrell advocated for simple, low-cost, and hands-off strategies that even a second grader could understand. His philosophy emphasized broad diversification, minimal maintenance, and long-term growth through index funds. This portfolio is designed to be a foundational strategy for beginners or those who prefer a passive approach.
2. Asset Allocation Analysis
The portfolio consists of three ETFs:
- 60% VTI (Vanguard Total Stock Market ETF): Provides exposure to the entire U.S. equity market, including large-, mid-, and small-cap stocks.
- 30% VEU (Vanguard FTSE All-World ex-US ETF): Covers international developed and emerging markets, excluding the U.S.
- 10% BND (Vanguard Total Bond Market ETF): Offers diversified exposure to U.S. investment-grade bonds.
Key Aspects:
- Diversification: The portfolio is well-diversified across U.S. and international equities (90%) and bonds (10%), reducing concentration risk.
- Risk Level: Moderately aggressive due to the 90% equity allocation, but the bond component provides stability.
- Pros: Low-cost, simple to manage, and captures global market returns. The heavy equity focus aligns with long-term growth goals.
- Cons: Limited bond exposure may not suit risk-averse investors. No explicit allocation to alternatives like commodities or REITs.
3. Practical Application in Retirement Accounts
For 401(k) Accounts:
Investors can replicate this portfolio by identifying equivalent funds in their 401(k) plan:
- VTI Alternative: Look for a U.S. total stock market index fund (e.g., Fidelity’s FSKAX or Schwab’s SWTSX).
- VEU Alternative: Choose a broad international stock fund (e.g., Fidelity’s FTIHX or Vanguard’s VTIAX).
- BND Alternative: Use a total bond market fund (e.g., Fidelity’s FXNAX or Vanguard’s VBTLX).
If exact matches aren’t available:
- Allocate the VEU portion to a mix of developed and emerging market funds.
- Replace BND with a general bond fund or stable value fund if necessary.
For IRA Accounts:
Investors can directly purchase the ETFs (VTI, VEU, BND) or their mutual fund equivalents. IRAs offer more flexibility, allowing for precise allocation.
Note: Since commodities are rarely available in 401(k)s, investors can allocate that portion to stocks or omit it entirely.