Broadly Diversified Growth Portfolio with Strong Historical Performance but High Correlation Needs Attention

Report created on Jul 10, 2024

Risk profile

  • Secure
    Speculative

The risk profile, derived from past market volatility, reflects the level of risk the portfolio is exposed to. This assessment helps align your investments with your financial goals and comfort with market fluctuations.

Diversification profile

  • Focused
    Diversified

The diversification assessment evaluates the spread of investments across asset classes, regions, and sectors. This ensures a balanced mix, reducing risk and maximizing returns by not concentrating in any single area.

Positions

The portfolio is composed of four ETFs, with a heavy emphasis on stocks, specifically global and growth equities. The Vanguard Total World Stock Index Fund and Vanguard Growth Index Fund dominate, making up 80% of the portfolio, while the Avantis U.S. Small Cap Value ETF and Schwab U.S. Dividend Equity ETF add a value and income component. This composition suggests a focus on capital appreciation, with a secondary emphasis on dividends. With a broad diversification across sectors and geographies, the portfolio is well-positioned to capture global market trends but may need adjustments to reduce redundancy.

Growth Info

Historically, the portfolio has delivered impressive returns, with a compound annual growth rate of 16.45%. However, it has also experienced a significant maximum drawdown of -34.36%, indicating vulnerability during market downturns. The high returns are concentrated in a few days, which is typical for growth-oriented portfolios. This performance suggests a strong upside potential but also highlights the importance of maintaining a robust risk management strategy to weather volatile periods. Investors should be prepared for fluctuations and have a long-term horizon to benefit from the growth potential.

Projection Info

A Monte Carlo simulation, which uses random sampling to predict future outcomes, indicates a wide range of potential future portfolio values. With a hypothetical initial investment, the simulation shows a positive return in 987 out of 1,000 scenarios, with an annualized return of 19.23%. The median outcome suggests substantial growth, but the range of outcomes underscores the inherent uncertainty in investing. This projection emphasizes the importance of staying the course and being prepared for both the highs and lows of market performance. Regularly reviewing the portfolio can help ensure alignment with financial goals.

Asset classes Info

  • Stocks
    100%

The portfolio is heavily weighted in stocks, accounting for over 99% of the asset allocation, with negligible amounts in cash and other asset classes. This allocation is typical for a growth-oriented portfolio, aiming for high returns through equity investments. However, the lack of diversification across asset classes could increase vulnerability to stock market volatility. Investors may consider introducing other asset classes, such as bonds, to balance risk and return. This could provide a buffer during market downturns and offer more stability in the portfolio's performance over time.

Sectors Info

  • Technology
    29%
  • Financials
    15%
  • Consumer Discretionary
    12%
  • Industrials
    10%
  • Health Care
    9%
  • Telecommunications
    8%
  • Consumer Staples
    5%
  • Energy
    5%
  • Basic Materials
    3%
  • Real Estate
    2%
  • Utilities
    2%

The portfolio's sector allocation is diverse, with a strong emphasis on technology, financial services, and consumer cyclicals. These sectors are known for their growth potential, aligning with the portfolio's growth profile. However, the heavy concentration in technology could expose the portfolio to sector-specific risks. A more balanced allocation across sectors could reduce risk and enhance stability. While the current allocation captures growth opportunities, diversifying further into defensive sectors, like utilities or consumer staples, might provide a hedge against market volatility and economic downturns.

Regions Info

  • North America
    82%
  • Europe Developed
    7%
  • Asia Emerging
    3%
  • Japan
    3%
  • Asia
    2%
  • Australasia
    1%
  • Africa/Middle East
    1%
  • Latin America
    1%

Geographically, the portfolio is predominantly focused on North America, with over 82% of its assets allocated there. While this aligns with the client's region and benefits from the robust U.S. market, it may limit exposure to international growth opportunities. A more balanced geographic allocation could capture diverse economic cycles and reduce regional risk. Expanding exposure to emerging markets and other developed regions could enhance diversification and potentially boost returns. This approach would align with a global investment strategy, providing a broader range of opportunities and reducing dependency on any single market.

Redundant positions Info

  • Vanguard Total World Stock Index Fund ETF Shares
    Vanguard Growth Index Fund ETF Shares
    High correlation

The portfolio exhibits high correlation between the Vanguard Total World Stock Index Fund and Vanguard Growth Index Fund. This means these assets tend to move in the same direction, limiting diversification benefits. High correlation can increase risk, as downturns in one asset may be mirrored by the other. To improve diversification, consider reducing exposure to highly correlated assets and introducing investments that behave differently under similar market conditions. This strategy can help mitigate risk and enhance the portfolio's resilience against market fluctuations, ensuring a more balanced risk-return profile.

Risk vs. return

This chart shows the Efficient Frontier, calculated using your current assets with different allocation combinations. It highlights the best balance between risk and return based on historical data. "Efficient" portfolios maximize returns for a given risk or minimize risk for a given return. Portfolios below the curve are less efficient. This is informational and not a recommendation to buy or sell any assets.

Click on the colored dots to explore allocations.

Before optimizing the portfolio, focus on addressing the high correlation between assets, as this limits diversification benefits. By reducing exposure to overlapping investments, the portfolio can achieve better risk-adjusted returns. Once this is addressed, investors can explore moving along the efficient frontier to align with their risk tolerance. A riskier portfolio may involve increasing exposure to equities, while a more conservative approach could introduce bonds. Optimizing the portfolio involves balancing risk and return, ensuring alignment with financial goals. Regular reviews and adjustments can maintain this balance over time.

Dividends Info

  • Avantis® U.S. Small Cap Value ETF 1.50%
  • Schwab U.S. Dividend Equity ETF 3.30%
  • Vanguard Total World Stock Index Fund ETF Shares 1.80%
  • Vanguard Growth Index Fund ETF Shares 0.50%
  • Weighted yield (per year) 1.53%

The portfolio's dividend yield stands at 1.53%, with the Schwab U.S. Dividend Equity ETF contributing the highest yield at 3.3%. This yield provides a moderate income stream, supplementing the portfolio's growth focus. While dividends are not the primary objective, they can add stability and reduce overall portfolio volatility. Investors seeking higher income may consider increasing their allocation to dividend-focused investments. However, maintaining a balance between growth and income is crucial to achieving long-term financial goals. Regularly reviewing the dividend strategy can ensure it aligns with the investor's evolving needs.

Ongoing product costs Info

  • Avantis® U.S. Small Cap Value ETF 0.25%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • Vanguard Total World Stock Index Fund ETF Shares 0.07%
  • Vanguard Growth Index Fund ETF Shares 0.04%
  • Weighted costs total (per year) 0.08%

The portfolio's total expense ratio is a low 0.08%, reflecting cost-effective management. Low fees are crucial for maximizing net returns over time, especially in a growth-focused portfolio where compounding is key. The Vanguard Growth Index Fund ETF has the lowest cost, while the Avantis U.S. Small Cap Value ETF is the highest. Keeping costs low allows more of the investment returns to be reinvested, enhancing the power of compounding. Investors should continue to monitor and manage costs, ensuring that any changes in the portfolio do not significantly increase the overall expense ratio.

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