Balanced Portfolio with Strong Historical Performance but Low Geographic and Sector Diversification

Report created on Dec 3, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

The portfolio is heavily invested in ETFs, with a significant 50% allocation in the Vanguard S&P 500 ETF. This concentration suggests a strong focus on large-cap U.S. equities, which can provide stability and growth potential. However, the low diversification score indicates limited exposure to other asset classes or geographic regions. This could be a concern if the U.S. market underperforms. While the current allocation suits a balanced risk profile, exploring additional diversification options could enhance resilience against market volatility and potential downturns.

Growth Info

Historically, the portfolio has delivered a solid compound annual growth rate (CAGR) of 14.09%, reflecting strong performance. However, the maximum drawdown of -34.67% highlights potential vulnerability during market downturns. This volatility is a typical characteristic of equity-heavy portfolios. The performance indicates that while the portfolio has significant growth potential, it also carries substantial risk. To mitigate this risk, consider strategies that can reduce drawdowns, such as incorporating more defensive assets or increasing cash reserves during uncertain times.

Projection Info

The Monte Carlo simulation, which uses random sampling to predict future outcomes, indicates a wide range of potential returns. With a hypothetical initial investment, the median scenario projects a 486.44% return, while the worst-case scenario still shows a positive 87.68% return. This suggests a high likelihood of positive returns, but also highlights the uncertainty and potential risk. Given the variability in outcomes, maintaining a balanced approach and regularly reviewing the portfolio's alignment with financial goals and risk tolerance is crucial for long-term success.

Asset classes Info

  • Stocks
    100%

The portfolio is almost entirely composed of stocks, with a negligible cash position. This heavy stock allocation can drive growth but also increases exposure to market volatility. For a balanced risk profile, integrating more asset classes like bonds or real estate could provide stability and reduce overall risk. Diversifying into different asset classes can also help smooth returns over time. Consider revisiting the asset class allocation to ensure it aligns with both short-term needs and long-term objectives, potentially reducing the impact of market fluctuations.

Sectors Info

  • Technology
    27%
  • Financials
    15%
  • Health Care
    11%
  • Consumer Discretionary
    11%
  • Industrials
    9%
  • Telecommunications
    8%
  • Consumer Staples
    7%
  • Energy
    5%
  • Real Estate
    3%
  • Utilities
    2%
  • Basic Materials
    2%

Sector allocation is concentrated, with significant exposure to technology (27.27%), financial services (14.73%), and healthcare (11.21%). While these sectors offer growth opportunities, their dominance increases sector-specific risk. A downturn in any of these sectors could significantly impact portfolio performance. To mitigate this risk, consider diversifying into sectors with lower current allocations, such as utilities or basic materials, which may offer defensive qualities. Balancing sector exposure can help manage risk and improve resilience against sector-specific downturns.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

Geographically, the portfolio is overwhelmingly focused on North America, with 99.26% of assets allocated there. This concentration leaves the portfolio vulnerable to regional economic downturns. Expanding into international markets could provide diversification benefits and exposure to different economic cycles. While the current geographic allocation supports a U.S.-centric investment strategy, exploring opportunities in developed and emerging markets could enhance growth potential and reduce regional risk. Balancing geographic exposure can help mitigate the impact of localized economic challenges.

Redundant positions Info

  • Schwab U.S. Dividend Equity ETF
    Schwab U.S. Large-Cap Value ETF
    High correlation
  • Vanguard S&P 500 ETF
    Schwab U.S. Large-Cap Growth ETF
    High correlation

The portfolio contains highly correlated assets, particularly between the Schwab U.S. Dividend Equity ETF and Schwab U.S. Large-Cap Value ETF, as well as the Vanguard S&P 500 ETF and Schwab U.S. Large-Cap Growth ETF. High correlations indicate that these assets tend to move in the same direction, offering limited diversification benefits. Reducing overlap by selecting assets with lower correlations can enhance diversification and reduce risk. Consider adjusting the portfolio to minimize correlated positions, thereby improving its ability to withstand market volatility.

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, addressing the issue of overlapping, highly correlated assets is crucial. Reducing redundancy can improve diversification benefits and enhance risk management. Once this is achieved, the portfolio can be adjusted along the efficient frontier to align with desired risk and return profiles. For a riskier portfolio, increasing exposure to growth-oriented assets may be appropriate. Conversely, for a more conservative approach, incorporating defensive assets or increasing bond allocations can reduce volatility. This strategy can help tailor the portfolio to specific financial goals and risk preferences.

Dividends Info

  • Schwab U.S. Dividend Equity ETF 3.30%
  • Schwab U.S. Large-Cap Growth ETF 0.40%
  • Schwab U.S. Large-Cap Value ETF 3.20%
  • Vanguard Small-Cap Value Index Fund ETF Shares 1.90%
  • Vanguard S&P 500 ETF 1.20%
  • Weighted yield (per year) 1.66%

The portfolio's dividend yield stands at 1.66%, with the Schwab U.S. Dividend Equity ETF contributing the highest yield at 3.3%. This provides a moderate income stream, which can be attractive for investors seeking regular cash flow. While dividend income can offer stability, it's essential to balance yield with growth potential. Focusing solely on high-yield assets may limit capital appreciation opportunities. To optimize income and growth, consider a balanced approach that incorporates both dividend-paying and growth-oriented assets, ensuring alignment with income needs and investment goals.

Ongoing product costs Info

  • Schwab U.S. Dividend Equity ETF 0.06%
  • Schwab U.S. Large-Cap Growth ETF 0.04%
  • Schwab U.S. Large-Cap Value ETF 0.04%
  • Vanguard Small-Cap Value Index Fund ETF Shares 0.07%
  • Vanguard S&P 500 ETF 0.03%
  • Weighted costs total (per year) 0.04%

The portfolio's total expense ratio (TER) is impressively low at 0.04%, reflecting cost-effective investment choices. Low costs can significantly enhance net returns over time, making this a strength of the portfolio. Maintaining a focus on minimizing costs is crucial for long-term success, as high fees can erode returns. While the current cost structure is favorable, regularly reviewing expense ratios and exploring opportunities to reduce costs further can support overall performance. Consider leveraging low-cost investment options to maximize returns and achieve financial objectives efficiently.

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