A balanced portfolio with strong US exposure but limited diversification and high correlation

Report created on Jan 9, 2025

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 composed entirely of three Vanguard ETFs: 50% in the S&P 500 ETF, 25% in the Dividend Appreciation Index Fund ETF, and 25% in the Growth Index Fund ETF. Such a structure leans heavily towards large-cap US stocks, with minimal diversification across different asset classes. While this might align with a typical US equity benchmark, it lacks the diversification seen in more varied portfolios. To enhance diversification, consider incorporating other asset classes like bonds or international equities, which could help in reducing risk and providing stability during market fluctuations.

Growth Info

Historically, the portfolio has shown strong performance with a Compound Annual Growth Rate (CAGR) of 14.37%. This indicates robust growth, especially compared to typical market indices. However, it also experienced a significant maximum drawdown of -32.82%, highlighting potential volatility. The high returns are promising, but the drawdown underscores the importance of diversification to mitigate risk. Consider diversifying into less correlated assets to potentially reduce such drawdowns in the future, as past performance isn't a guarantee of future results.

Projection Info

Monte Carlo simulations, which use historical data to predict future outcomes, suggest a wide range of potential returns. With 1,000 simulations, the portfolio's projected annualized return is 15.52%, and 998 simulations showed positive returns. However, the 5th percentile outcome indicates a potential downside. While these projections are optimistic, they rely on historical trends and may not account for future market changes. It's vital to use these projections as a guide rather than a certainty, and regularly review your portfolio to align with changing market conditions.

Asset classes Info

  • Stocks
    100%

The portfolio is heavily weighted towards stocks, with 99.87% in equities and a negligible amount in cash. This lack of asset class diversification could increase volatility, as equities are generally more volatile than other asset classes like bonds or real estate. A more balanced allocation could provide smoother returns over time. Consider introducing other asset classes to cushion against stock market swings, which can help achieve a more stable risk-return profile.

Sectors Info

  • Technology
    35%
  • Financials
    13%
  • Health Care
    11%
  • Consumer Discretionary
    10%
  • Telecommunications
    8%
  • Industrials
    7%
  • Consumer Staples
    6%
  • Energy
    3%
  • Basic Materials
    2%
  • Utilities
    2%
  • Real Estate
    2%

Sector allocation is heavily skewed towards technology, which makes up 34.93% of the portfolio, followed by financial services and healthcare. While tech has been a strong performer, its high weighting can lead to increased volatility, especially during interest rate changes. A more balanced sector distribution could mitigate sector-specific risks. Explore opportunities to diversify into underrepresented sectors to better align with market benchmarks and reduce potential volatility.

Regions Info

  • North America
    100%

Geographically, the portfolio is almost entirely focused on North American assets, with 99.55% exposure. This concentration limits exposure to growth opportunities in other regions, such as emerging markets or developed Europe. A more globally diversified portfolio could reduce regional risks and capitalize on international growth. Consider adding international assets to enhance geographic diversification and potentially improve risk-adjusted returns.

Redundant positions Info

  • Vanguard Growth Index Fund ETF Shares
    Vanguard Dividend Appreciation Index Fund ETF Shares
    Vanguard S&P 500 ETF
    High correlation

The portfolio's assets are highly correlated, meaning they tend to move together in the market. This high correlation limits diversification benefits, as similar assets may all decline simultaneously during market downturns. To improve diversification, consider reducing the overlap of correlated assets and introducing investments with lower correlation. This approach can help in managing risk and achieving a smoother performance across different market conditions.

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.

While the portfolio's risk-return profile can be optimized using the Efficient Frontier, the high correlation among assets limits diversification benefits. The Efficient Frontier helps identify the best possible risk-return ratio based on current assets. To achieve this, consider reallocating to less correlated assets for better diversification. This strategy can potentially enhance returns without significantly increasing risk, ensuring a more efficient portfolio balance.

Dividends Info

  • Vanguard Dividend Appreciation Index Fund ETF Shares 1.70%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Growth Index Fund ETF Shares 0.50%
  • Weighted yield (per year) 1.15%

The portfolio's dividend yield stands at 1.15%, primarily driven by the Dividend Appreciation Index Fund ETF. While dividends can provide a steady income stream, the overall yield is modest. For investors seeking income, this may not be sufficient. Consider exploring higher-yielding assets if income is a priority, while maintaining a balance to avoid excessive risk. However, ensure that the pursuit of yield does not compromise the portfolio's overall risk profile.

Ongoing product costs Info

  • Vanguard Dividend Appreciation Index Fund ETF Shares 0.06%
  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Growth Index Fund ETF Shares 0.04%
  • Weighted costs total (per year) 0.04%

The portfolio benefits from low costs, with a Total Expense Ratio (TER) of just 0.04%. This is well-aligned with best practices, as lower costs contribute to better long-term performance by minimizing expenses that eat into returns. This efficient cost structure is a strong positive aspect, allowing more of your returns to compound over time. Continue to monitor costs and seek low-cost alternatives when considering new investments to maintain this advantage.

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