Balanced Portfolio with Low Diversity and High U.S. Exposure Showing Strong Historical Performance but High Correlation

Report created on Nov 25, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

This portfolio is made up of three Schwab ETFs, with the U.S. Broad Market ETF taking up half of the allocation. The remaining half is split equally between the U.S. Dividend Equity ETF and the U.S. Large-Cap Growth ETF. While this composition ensures exposure to a broad market, it lacks diversity, as it heavily leans on U.S. equities. A balanced risk profile is evident, but the low diversification score suggests a need for broader asset allocation.

Growth Info

Historically, this portfolio has performed well, boasting a compound annual growth rate (CAGR) of 15.31%. However, it has endured a maximum drawdown of nearly 34%, indicating vulnerability during market downturns. The fact that 90% of returns come from just 37 days suggests that timing has played a significant role in its success. This performance history underscores the importance of maintaining a long-term perspective and being prepared for volatility.

Projection Info

The Monte Carlo simulation, which uses random sampling to model potential future outcomes, shows promising results for this portfolio. Based on a hypothetical initial investment, the median projection suggests a robust return of 622.3%, with a high probability of positive returns. However, it also highlights the potential for variability, with a 5th percentile return of just over 102.56%. This variability underscores the need for a well-considered risk strategy.

Asset classes Info

  • Stocks
    100%

The portfolio is overwhelmingly invested in stocks, with negligible allocations to cash and bonds. This heavy stock concentration can lead to higher returns but also increases risk. A more balanced asset class distribution could help mitigate risk and provide stability during market fluctuations. Considering the addition of bonds or other fixed-income securities might be beneficial for achieving a more stable risk-return profile.

Sectors Info

  • Technology
    30%
  • Financials
    14%
  • Health Care
    12%
  • Consumer Discretionary
    11%
  • Telecommunications
    8%
  • Industrials
    8%
  • Consumer Staples
    6%
  • Energy
    5%
  • Basic Materials
    2%
  • Real Estate
    1%
  • Utilities
    1%

The sector allocation reveals a strong emphasis on technology, which comprises over 30% of the portfolio. Financial services, healthcare, and consumer cyclicals also have significant representation. While this sector allocation has likely contributed to past performance, it also exposes the portfolio to sector-specific risks. Diversifying into underrepresented sectors could enhance stability and reduce vulnerability to sector downturns.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

Geographically, the portfolio is almost entirely concentrated in North America, with minimal exposure to other regions. This heavy U.S. focus can be a double-edged sword, offering familiarity and stability but also limiting growth opportunities abroad. Expanding geographic exposure could improve diversification and tap into growth in emerging markets, potentially enhancing long-term returns while reducing regional risk.

Redundant positions Info

  • Schwab U.S. Large-Cap Growth ETF
    Schwab U.S. Broad Market ETF
    Schwab U.S. Dividend Equity ETF
    High correlation

The high correlation among the three ETFs indicates that they tend to move in similar directions, which limits diversification benefits. This correlation means that during market downturns, the entire portfolio is likely to suffer simultaneously. Reducing the overlap by incorporating less correlated assets could provide a buffer against market volatility and improve the overall risk-return balance.

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.

Optimizing this portfolio involves addressing its high correlation and low diversification. By exploring the efficient frontier, investors can adjust their asset mix to achieve a desired risk level. Moving towards a more diverse allocation can help reduce risk without sacrificing returns. Before optimizing, it's crucial to address the overlapping assets that contribute little to diversification. This step is vital for achieving a more efficient portfolio.

Dividends Info

  • Schwab U.S. Broad Market ETF 1.20%
  • Schwab U.S. Dividend Equity ETF 3.40%
  • Schwab U.S. Large-Cap Growth ETF 0.40%
  • Weighted yield (per year) 1.55%

With a total yield of 1.55%, this portfolio provides moderate dividend income, largely driven by the U.S. Dividend Equity ETF. While dividends are a nice income stream, they are not the primary focus here. Investors seeking higher income might consider increasing exposure to dividend-focused assets. However, it's important to balance income needs with growth objectives to maintain a well-rounded portfolio.

Ongoing product costs Info

  • Schwab U.S. Broad Market ETF 0.03%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • Schwab U.S. Large-Cap Growth ETF 0.04%
  • Weighted costs total (per year) 0.04%

The portfolio's total expense ratio (TER) is impressively low at 0.04%, which is advantageous for long-term returns. Low costs mean more of the investment returns stay in the portfolio, enhancing compounding effects over time. Keeping expenses low is a key principle of investing, and this portfolio does well in that regard. Continuing to monitor and minimize costs will support ongoing portfolio growth.

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