Growth-Oriented Portfolio with Moderate Diversification and High US Exposure Needs Better Asset Correlation Management

Report created on Dec 4, 2024

Risk profile Info

5/7
Growth
Less risk More risk

Diversification profile Info

3/5
Moderately Diversified
Less diversification More diversification

Positions

The portfolio is composed of a mix of ETFs and a single common stock, with a significant tilt towards equities. The largest holding is the Vanguard Total Stock Market Index Fund ETF, which accounts for nearly 45% of the portfolio, followed by the Vanguard S&P 500 ETF at around 19.6%. This indicates a strong preference for broad market exposure. The inclusion of the Vanguard Total Bond Market Index Fund ETF provides some fixed-income exposure, though it remains relatively minor. This composition suggests a growth-oriented approach, aiming for higher returns with a moderate level of risk.

Growth Info

Historically, the portfolio has shown impressive performance with a compound annual growth rate (CAGR) of 17%. However, it has also experienced a significant maximum drawdown of 29.25%, indicating vulnerability during market downturns. The fact that 90% of returns are concentrated in just 16 days highlights the importance of timing in this portfolio's success. While the high growth potential is attractive, the volatility and reliance on a few key days for returns suggest that investors should be prepared for fluctuations and consider strategies to mitigate risk during market downturns.

Projection Info

Using a Monte Carlo simulation, which models potential future performance based on historical data, the portfolio shows a wide range of possible outcomes. With a hypothetical initial investment, the 5th percentile suggests a potential loss of 81.5%, while the median outcome forecasts a gain of 210.5%. The 67th percentile projects an impressive 611.91% increase. With 743 out of 1,000 simulations yielding positive returns, the annualized return of 20.81% is promising. However, the variability in outcomes underscores the importance of diversification and risk management to navigate potential market volatility.

Asset classes Info

  • Stocks
    90%
  • Bonds
    10%

The portfolio is heavily weighted towards stocks, making up over 90% of the total allocation, with bonds constituting just under 10%. This asset class distribution aligns with a growth-focused strategy, aiming for higher returns through equity exposure. While this can be beneficial in a bullish market, it also increases susceptibility to equity market downturns. To balance risk and reward, investors might consider adjusting the allocation to include more fixed-income assets, which can provide stability and income during periods of market volatility, thereby enhancing the portfolio's resilience.

Sectors Info

  • Technology
    32%
  • Financials
    12%
  • Health Care
    9%
  • Consumer Discretionary
    9%
  • Industrials
    8%
  • Telecommunications
    7%
  • Consumer Staples
    5%
  • Energy
    3%
  • Real Estate
    2%
  • Utilities
    2%
  • Basic Materials
    2%

The portfolio's sector allocation shows a strong emphasis on technology, which constitutes over 31% of the investments. Other significant sectors include financial services and healthcare. This concentration in technology reflects a bet on high-growth potential, but it also introduces sector-specific risks. The presence of other sectors like consumer cyclicals and industrials provides some diversification. To further mitigate risk, investors should consider diversifying across more sectors to reduce dependency on the performance of the technology sector, which can be volatile and subject to rapid changes in market conditions.

Regions Info

  • North America
    82%
  • Europe Developed
    4%
  • Japan
    1%
  • Asia Emerging
    1%
  • Asia Developed
    1%

Geographically, the portfolio is predominantly focused on North America, with over 82% of the assets allocated there. This heavy concentration suggests a reliance on the US market's performance. While this focus can be advantageous given the US's robust market infrastructure, it also limits exposure to international growth opportunities. The minimal allocation to regions like Europe and Asia indicates a potential area for improvement. Diversifying geographically could help capture growth in emerging markets and reduce the risk associated with being overly reliant on a single region's economic conditions.

Redundant positions Info

  • Vanguard S&P 500 ETF
    iShares MSCI USA Quality Factor ETF
    iShares Core S&P 500 ETF
    Vanguard Total Stock Market Index Fund ETF Shares
    High correlation

The portfolio contains several highly correlated assets, particularly among the US-focused ETFs like the Vanguard S&P 500 ETF and iShares Core S&P 500 ETF. These overlapping assets do not provide significant diversification benefits, as they tend to move in the same direction. While such correlations can amplify gains in a rising market, they also increase risk during downturns. To enhance diversification, investors should consider reducing exposure to redundant assets and exploring investments with lower correlations, which can help smooth out returns and reduce overall portfolio 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 assets is essential. Reducing exposure to highly correlated ETFs can enhance diversification and improve risk-adjusted returns. Once this is achieved, investors can explore the efficient frontier to adjust their risk profile. Moving along the frontier allows for a shift towards either a riskier or more conservative stance, depending on individual preferences. By balancing asset classes and sectors, investors can tailor the portfolio to better align with their risk appetite and financial objectives, optimizing for both growth and stability.

Dividends Info

  • Vanguard Total Bond Market Index Fund ETF Shares 3.60%
  • iShares Core S&P 500 ETF 1.20%
  • iShares MSCI USA Quality Factor ETF 1.00%
  • Invesco S&P 500® Momentum ETF 0.40%
  • Vanguard FTSE Developed Markets Index Fund ETF Shares 3.00%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total Stock Market Index Fund ETF Shares 1.20%
  • Vanguard FTSE Emerging Markets Index Fund ETF Shares 2.60%
  • Weighted yield (per year) 1.48%

The portfolio's dividend yield stands at 1.48%, with contributions from various ETFs. The Vanguard Total Bond Market Index Fund ETF offers the highest yield at 3.6%, providing a steady income stream. While dividend income is not the primary focus of this growth-oriented portfolio, it does offer some level of cash flow. Investors might consider reinvesting dividends to capitalize on compounding returns or allocating a portion of the portfolio to higher-yielding assets if income generation becomes a more significant objective in the future.

Ongoing product costs Info

  • Vanguard Total Bond Market Index Fund ETF Shares 0.03%
  • iShares Core S&P 500 ETF 0.03%
  • iShares MSCI USA Quality Factor ETF 0.15%
  • Invesco S&P 500® Momentum ETF 0.13%
  • Vanguard FTSE Developed Markets Index Fund ETF Shares 0.05%
  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Total Stock Market Index Fund ETF Shares 0.03%
  • Vanguard FTSE Emerging Markets Index Fund ETF Shares 0.08%
  • Weighted costs total (per year) 0.03%

The portfolio's costs are relatively low, with an average total expense ratio of 0.03%. This is a positive aspect, as lower costs mean more of the returns are retained by the investor. The Vanguard and iShares ETFs are known for their cost-effectiveness, making them attractive options for long-term investors. Keeping investment costs low is crucial for maximizing returns over time. While the current expense ratios are favorable, investors should continue to monitor any changes in fund fees and consider cost-efficient alternatives if necessary to maintain a lean portfolio.

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