Investments

How Tall Is A Second Grader

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Investing something even a second grader could understand would be fantastic. Even second graders have a good track record of making investments. In reality, after his grandmother handed him $10,000, second-grader Kevin Roth invested it with the help of his father, Allan Roth, as chronicled in the best-selling book “How a Second Grader Beats Wall Street.”

Little Kevin performed really well, I think you’ll agree. You can learn to invest successfully even if your father isn’t a financial expert. Young investors now have a simple entry point into the stock market with the Second Grader’s Starter Portfolio.

What Is a Starter Portfolio for a Second Grader?

Investing novices may get their feet wet with the help of financial journalist Paul B. Farrell’s “Second Grader’s Starter” method. When he originally introduced the method to the public, he used a scenario somewhat similar to Kevin’s, in which a second grader receives $10,000 from a grandmother and is advised to invest it using this portfolio.

The portfolio follows in a long tradition of “lazy” portfolios, which don’t necessitate a lot of effort on the part of the investor or portfolio manager. The minimum number of investments required by this portfolio approach is three, and they can be spread over two distinct asset categories.

The portfolio recommends extensive diversification via index investing to provide safety and stability; nevertheless, Farrell makes it plain that this approach was developed for the very young investor and is not suitable for those with a medium or short-term view.Investing novices may get their feet wet with the help of financial journalist Paul B. Farrell’s “Second Grader’s Starter” method. When he originally introduced the method to the public, he used a scenario somewhat similar to Kevin’s, in which a second grader receives $10,000 from a grandmother and is advised to invest it using this portfolio.

The portfolio follows in a long tradition of “lazy” portfolios, which don’t necessitate a lot of effort on the part of the investor or portfolio manager. The minimum number of investments required by this portfolio approach is three, and they can be spread over two distinct asset categories.

The portfolio recommends extensive diversification via index investing to provide safety and stability; nevertheless, Farrell makes it plain that this approach was developed for the very young investor and is not suitable for those with a medium or short-term view.

Asset allocation in a portfolio

The Second Grade Starter Investment Strategy recommends spreading your money over three assets. Funding was divided as follows:

  • The majority, or 60%, of the whole U.S. stock market. The primary holding of the portfolio is a passively managed exchange-traded fund (ETF) that provides exposure to the whole U.S. stock market. Your portfolio will be well-rounded if this fund invests across market sizes and industries in the United States.
  • A Thirty Percent Share in the Global Equity Market. The portfolio also recommends allocating 30% of assets toward foreign equities. Your foreign stock fund, like your domestic assets, should spread its bets widely over a wide variety of company sizes and industries. To properly protect itself as a global investment, the fund should spread its holdings across both established and developing markets.
  • A tenth of the whole U.S. bond market. In the end, the portfolio recommends putting the last 10% of your money into a total U.S. bond fund. This pool of money has to be well diversified, with holdings in bonds of varying maturities and credit quality.

The Portfolio’s Investment Hypothesis

The Second Grader’s Starter Strategy is focused on easy access to broad market exposure, much to Jack Bogle’s Bogleheads 3 Fund Portfolio. With only three assets to keep track of, managing this portfolio is a breeze. In addition, the portfolio’s simplicity is accompanied by unparalleled diversity since all assets are placed in funds with a high rating from the ratings agency.

After all, your portfolio will be exposed to thousands of businesses across several industries, geographies, and phases of development thanks to the funds you invest in when employing this technique. In the event that one of your stocks or an entire industry takes a nosedive, you will be protected from volatility by the profits you’ve made in other equities.

The inclusion of fixed-income assets is another way that this portfolio approach protects against volatility. Although equities have a greater growth potential, bonds and other comparable assets provide a safety net when market downturns occur.

Only 10% of the portfolio is invested in bonds, which may make some investors nervous. However, most investors want a larger safety net. Bear in mind that this is a portfolio made for kids, who have very long investment horizons and can handle a lot of risk. The low degree of safety-asset exposure makes sense in that light.

Portfolio Advantages and Disadvantages

The Second Grader’s Portfolio is not a one-size-fits-all investment plan, and it has its own benefits and drawbacks, just like any other portfolio. Some of the most crucial factors are listed below.

Advantages of the Second Grade Starter Portfolio

Investors that employ this technique in their portfolios are thrilled because:

  1. Makes It Easier to Enter the Market. When there are only three assets in a portfolio, setting it up and managing it is simple. Having a well-rounded portfolio that accurately reflects the market as a whole is a benefit of extensive diversification.
  2. Is a Fantastic Learning opportunity for Young People. This kid-friendly portfolio is a great way to introduce your young ones to the stock market. Even if you don’t have $10,000, you can begin going. Your children will learn a valuable and lifelong lesson about the need of saving, even if it’s just a little part of their allowance.
  3. Grants security by spreading risks across a wide area. I wouldn’t recommend this portfolio approach to my grandparents, but it’s safer than non-diversified portfolios. Spreading out one’s investing capital among several different options might help cushion the shock of losses from a few underperformers.

Disadvantages of a Second-Grade Starter Portfolio

Despite the fact that it shows great promise, this portfolio approach has some significant drawbacks, the most significant of which are:

  1. The allocation to fixed-income securities is rather low. It’s true that stocks of all sizes and in all industries can’t match the security offered by bonds and other Treasury debt products. As this approach only recommends a 10% allocation to these assets, it is too risky for most investors.
  2. Without Property. Opportunities in real estate investing are expected to be substantial as population expansion continues and the supply of newly built homes decreases.
  3. Regrettably, real estate isn’t included at all in this portfolio plan. If you’re going to invest with this method, you might want to consider including a real estate investment trust (REIT) in the mix.
  4. No Weighting Towards Small- or Value-Priced Stocks. Successful investment portfolios often weigh holdings more heavily in sectors and companies that offer a higher return in exchange for taking on more risk. For instance, small-cap stocks have consistently outperformed their large-cap counterparts despite the fact that investing in tiny firms carries a higher risk profile than investing in large, established organizations. Similarly, Warren Buffett favors value companies because of their track record of beating growth firms. This portfolio provides extensive exposure to the market but makes no effort to maximize returns by focusing on any one component.

Who Should Use the Starter Portfolio for Second Graders?

The Second Grader’s Starter plan isn’t appropriate for everyone, as the name would imply, but it’s a fantastic choice for a second grader or any other school-aged child whose parents or guardians are looking to give them a financial head start.

There is a significant allocation to stocks and a relatively low commitment to fixed-income bets, making this a high-risk portfolio. However, financial gurus typically argue that younger investors should be more risk-tolerant since they have time to recover if things go wrong.
Contrarily, this isn’t a good portfolio plan for the average investor.

Even a young investor starting a retirement portfolio right out of college would probably find a 10% bond allocation to be a bit too risky for their liking, let alone seniors living off of their life’s savings. In the end, this approach is best utilized by its intended audience, which consists of youngsters in the school setting.

Keep Your Portfolio Balanced

Every second, the market’s prices change, with certain assets fluctuating more rapidly than others. It doesn’t matter how well-balanced your portfolio is at the outset; over time, the more volatile assets will grow to include more or less than the portfolio’s prescribed allocation, depending on the phase of the market’s cycle.

This is a major issue. When your investing portfolio is out of whack, your assets are either overexposed to risk or underexposed to return. Consequently, it’s crucial to do periodic rebalancing.

Farrell didn’t think second graders (or their janitors) would be able to keep their portfolio balanced if they did it every day or even once a week. You should still make sure everything is in order at least once a quarter.

Bottom Line

In spite of the fact that the approach used by the Second Grader’s Starter Portfolio isn’t suitable for the ordinary investor, it is a fantastic choice for the demographic it was created for. The best thing is that each of these ready-made portfolios may be customized to suit individual tastes.

If you’re interested in the straightforwardness of this portfolio approach but are worried about the level of risk or the degree to which it exposes you to any particular assets, you may want to consider making some minor tweaks. Do your homework and have a firm grasp on the specifics of your investment before plowing money into it.

Curated posts

Someone from Denver, CO just viewed Best Online Colleges for Business Management