Balanced Portfolio with Broad Diversification but High Correlation Among Major Holdings

Report created on Nov 20, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

4/5
Broadly Diversified
Less diversification More diversification

Positions

The portfolio is composed of four ETFs, with a heavy focus on the Vanguard S&P 500 ETF, making up 60% of the allocation. The Invesco NASDAQ 100 ETF and Vanguard Total International Stock Index Fund ETF Shares each account for 15%, while the Avantis U.S. Small Cap Value ETF covers the remaining 10%. This composition indicates a strong emphasis on large-cap U.S. equities, complemented by international exposure and a small-cap value tilt. The portfolio's diversification is broad, covering multiple sectors and regions, aligning with a balanced risk profile that seeks both growth and stability.

Growth Info

Historically, the portfolio has delivered a robust CAGR of 15.4%, showcasing strong performance. Despite a maximum drawdown of -25.12%, the portfolio has bounced back effectively, indicating resilience. The concentration of returns in just 21 days suggests that timing and market conditions played a significant role in achieving these gains. Such performance is indicative of a portfolio that benefits from market upswings, especially in growth-oriented sectors. However, the volatility associated with these returns should be considered when assessing risk tolerance and future expectations.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's potential future performance was assessed, assuming a hypothetical initial investment. The results indicate a median return of 653.84%, with a 5th percentile return of 119.72% and a 67th percentile return of 955.58%. These projections highlight the potential for significant growth, but also the inherent uncertainty and variability in outcomes. The high percentage of simulations with positive returns (995 out of 1,000) suggests a favorable long-term outlook, assuming market conditions remain supportive.

Asset classes Info

  • Stocks
    100%

The portfolio is almost entirely invested in equities, with stock making up 99.71% of the asset allocation. This high equity concentration suggests a focus on growth, but also implies higher volatility compared to more diversified portfolios that include bonds or other asset classes. While this allocation aligns with a growth-oriented strategy, it may expose the portfolio to greater market fluctuations. To manage risk, it may be prudent to consider diversifying into other asset classes, such as fixed income, to balance the portfolio's risk-reward profile.

Sectors Info

  • Technology
    30%
  • Financials
    14%
  • Consumer Discretionary
    11%
  • Industrials
    9%
  • Health Care
    9%
  • Telecommunications
    9%
  • Consumer Staples
    6%
  • Energy
    4%
  • Basic Materials
    3%
  • Utilities
    2%
  • Real Estate
    2%

The sector allocation is dominated by technology at 30.05%, followed by financial services at 13.83% and consumer cyclicals at 11.43%. This indicates a strong tilt towards sectors known for growth and innovation. While this can drive substantial returns during bull markets, it also introduces sector-specific risks, particularly if these industries face downturns. To mitigate potential volatility, consider balancing the sector exposure by increasing allocation to more defensive sectors, which could provide stability during market turbulence.

Regions Info

  • North America
    85%
  • Europe Developed
    6%
  • Asia Emerging
    3%
  • Japan
    2%
  • Asia Developed
    2%
  • Australasia
    1%
  • Latin America
    1%
  • Africa/Middle East
    1%

Geographically, the portfolio is heavily weighted towards North America, with 85.23% exposure, followed by smaller allocations to Europe Developed and Asia Emerging. This concentration in North American assets aligns with the portfolio's focus on U.S. equities but may limit the benefits of global diversification. While North American markets have historically performed well, diversifying further into other regions could reduce geographic risk and potentially enhance returns by capturing growth opportunities in emerging markets.

Redundant positions Info

  • Invesco NASDAQ 100 ETF
    Vanguard S&P 500 ETF
    High correlation

A significant observation is the high correlation between the Invesco NASDAQ 100 ETF and the Vanguard S&P 500 ETF. This means that these assets tend to move in tandem, potentially reducing the diversification benefits within the portfolio. High correlation can amplify risk during market downturns, as correlated assets may decline simultaneously. To enhance diversification, consider reducing exposure to highly correlated assets and incorporating investments with lower correlations to the existing holdings, thereby potentially improving the portfolio's risk-adjusted returns.

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.

Portfolio optimization involves aligning investments with the efficient frontier, which represents the best possible return for a given level of risk. In this case, the high correlation between major holdings suggests that the portfolio may not be fully optimized. Reducing exposure to correlated assets could enhance diversification and potentially improve the risk-return profile. However, given the broad diversification and low costs, the portfolio is well-positioned within a balanced risk classification. Regular reviews and adjustments can help maintain alignment with personal financial goals and risk tolerance.

Dividends Info

  • Avantis® U.S. Small Cap Value ETF 1.50%
  • Invesco NASDAQ 100 ETF 0.60%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total International Stock Index Fund ETF Shares 3.00%
  • Weighted yield (per year) 1.41%

The portfolio's dividend yield stands at 1.41%, with the Vanguard Total International Stock Index Fund ETF Shares contributing the highest yield at 3.0%. This yield is relatively modest, reflecting the portfolio's growth orientation. While dividends provide a steady income stream, the current yield may not be sufficient for income-focused investors. If income generation is a priority, consider increasing exposure to dividend-paying stocks or funds. Balancing growth and income can provide a more stable cash flow while still participating in market appreciation.

Ongoing product costs Info

  • Avantis® U.S. Small Cap Value ETF 0.25%
  • Invesco NASDAQ 100 ETF 0.15%
  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Total International Stock Index Fund ETF Shares 0.08%
  • Weighted costs total (per year) 0.08%

The portfolio's total expense ratio (TER) is 0.08%, which is quite low, reflecting the cost-effective nature of the ETF holdings. The Vanguard S&P 500 ETF, with an expense ratio of 0.03%, contributes significantly to this efficiency. Low costs are advantageous as they enhance net returns over time. However, the Avantis U.S. Small Cap Value ETF has a higher expense ratio of 0.25%, which should be monitored. Maintaining low costs is crucial for optimizing portfolio performance, so it's important to periodically review and ensure that the expense ratios remain competitive.

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