Balanced Portfolio with Low Diversity and High Correlation Needs Optimization for Better Risk Management
Report created on Nov 23, 2024Risk profile
4/7
Diversification profile
2/5
Positions
-
VO Vanguard S&P 500 ETF
VOO - US9229083632 39.79% -
SC Schwab U.S. Dividend Equity ETF
SCHD - US8085247976 27.93% -
VT Vanguard Total Stock Market Index Fund ETF Shares
VTI - US9229087690 27.93% -
BR Berkshire Hathaway Inc
BRK-B - US0846707026 4.35%
The portfolio is heavily composed of ETFs, with Vanguard S&P 500 ETF making up the largest portion at 39.79%. Other significant holdings include Schwab U.S. Dividend Equity ETF and Vanguard Total Stock Market Index Fund ETF Shares, each contributing 27.93%. A small allocation to Berkshire Hathaway Inc accounts for 4.35%. The portfolio is classified as balanced but lacks diversity, focusing mainly on U.S. equities. This composition indicates a strong preference for large-cap U.S. stocks, which may limit exposure to other growth opportunities.
Growth
Historically, the portfolio has shown a strong performance, with a compound annual growth rate (CAGR) of 13.42%. However, it has experienced a significant maximum drawdown of -33.79%, indicating vulnerability during market downturns. The portfolio's returns are concentrated over a few days, with 90% of returns occurring in just 31 days. This suggests that while the portfolio can deliver impressive returns, it is also susceptible to periods of volatility, which could impact long-term growth.
Projection
A Monte Carlo simulation, which uses random sampling to predict future outcomes, shows promising results for the portfolio. With a hypothetical initial investment, the median outcome projects a 465.9% return, while the 5th percentile indicates a 93.08% return. An annualized return of 14.38% across simulations suggests potential for growth. However, the high degree of correlation among assets could lead to increased risk in adverse market conditions. Diversifying to include less correlated assets may improve the portfolio's resilience.
Asset classes
- Stocks 100%
The portfolio is heavily weighted towards stocks, with 99.88% in equities and a negligible 0.12% in cash. This concentration in a single asset class increases exposure to market volatility. While equities can offer substantial returns, they also carry higher risk. Balancing the portfolio with fixed-income securities such as bonds could provide stability and reduce overall risk. Incorporating other asset classes could also help cushion against market downturns and enhance long-term performance.
Sectors
- Technology 25%
- Financials 19%
- Health Care 12%
- Consumer Discretionary 10%
- Industrials 9%
- Consumer Staples 8%
- Telecommunications 7%
- Energy 6%
- Utilities 2%
- Basic Materials 2%
- Real Estate 2%
Sector allocation is skewed towards technology, which comprises 24.71% of the portfolio, followed by financial services and healthcare. While these sectors have shown robust growth, over-reliance on specific sectors can increase vulnerability to industry-specific risks. A more balanced sector allocation could mitigate these risks and provide exposure to a broader range of economic cycles. By diversifying across sectors, the portfolio could achieve more consistent performance and reduce the impact of sector-specific downturns.
Regions
- North America 99%
The portfolio is predominantly focused on North America, with 99.45% allocated to this region. This geographic concentration may limit exposure to global growth opportunities and increase risk if the U.S. market underperforms. A more globally diversified portfolio could capture growth in emerging markets and other developed regions. By expanding geographic exposure, the portfolio could benefit from different economic cycles and reduce reliance on the U.S. market, potentially enhancing overall returns.
Redundant positions
-
High correlationVanguard Total Stock Market Index Fund ETF SharesSchwab U.S. Dividend Equity ETFVanguard S&P 500 ETF
The portfolio exhibits high correlation among its major holdings, particularly between the Vanguard Total Stock Market Index Fund ETF Shares, Schwab U.S. Dividend Equity ETF, and Vanguard S&P 500 ETF. This correlation suggests that these assets tend to move in tandem, which could amplify risk during market downturns. Reducing correlation by introducing assets that behave differently in varying market conditions could enhance diversification and improve risk-adjusted returns, providing a more resilient investment strategy.
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 demonstrates strong historical performance, its high correlation and low diversity indicate room for optimization. The efficient frontier concept suggests that an optimal portfolio maximizes returns for a given level of risk. Currently, the portfolio's overlapping assets may not fully align with this principle. Introducing less correlated assets and diversifying across sectors and geographies could enhance risk-adjusted returns. By aligning the portfolio with the efficient frontier, investors can achieve a more balanced risk-reward profile.
Dividends
- Schwab U.S. Dividend Equity ETF 3.40%
- Vanguard S&P 500 ETF 1.20%
- Vanguard Total Stock Market Index Fund ETF Shares 1.30%
- Weighted yield (per year) 1.79%
The portfolio's dividend yield stands at 1.79%, with the Schwab U.S. Dividend Equity ETF contributing the highest yield at 3.4%. While dividends can provide a steady income stream, the overall yield is relatively modest. Increasing exposure to higher-yielding assets could boost income, particularly in low-interest-rate environments. However, it's essential to balance the pursuit of yield with the potential for capital appreciation. A diversified approach to income generation could enhance the portfolio's overall return profile.
Ongoing product costs
- Schwab U.S. Dividend Equity ETF 0.06%
- Vanguard S&P 500 ETF 0.03%
- Vanguard Total Stock Market Index Fund ETF Shares 0.03%
- Weighted costs total (per year) 0.04%
The portfolio benefits from low costs, with a total expense ratio (TER) of 0.04%. This cost-efficiency is primarily due to the low fees associated with the ETFs, such as the Vanguard S&P 500 ETF and Vanguard Total Stock Market Index Fund ETF Shares, both at 0.03%. Keeping investment costs low is crucial for maximizing net returns over time. While the current cost structure is favorable, it's essential to regularly review fees to ensure they remain competitive and do not erode potential gains.
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