Balanced Portfolio with Low Diversification and High Correlation Among Asset Classes Needs Optimization

Report created on Nov 26, 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 consists of four ETFs, with Schwab U.S. Dividend Equity ETF taking the largest share at 45%. The SPDR® Portfolio S&P 500 ETF follows with 30%, Schwab U.S. Large-Cap Growth ETF at 15%, and JPMorgan Nasdaq Equity Premium Income ETF at 10%. This composition indicates a strong focus on U.S. equities, particularly dividend and growth stocks. The low diversification score suggests a need for broader exposure across different asset classes. To enhance stability, consider diversifying into other asset classes like bonds or international equities, which can help mitigate risks associated with market volatility.

Growth Info

A hypothetical initial investment in this portfolio would have experienced a CAGR of 13.89%, with a maximum drawdown of -15.74%. These figures suggest a robust performance, with significant growth potential tempered by moderate risk. The concentration of returns in just 12 days highlights the portfolio's reliance on specific market movements. While the performance is commendable, it's crucial to ensure that the portfolio is not overly reliant on short-term market trends. Consider strategies to smooth out returns and reduce dependency on a few high-performing days.

Projection Info

Using a Monte Carlo simulation, which models potential future outcomes, the portfolio shows promising projections. With 1,000 simulations, the 5th percentile stands at 162.7%, while the median is 741.8%, and the 67th percentile reaches 998.59%. An annualized return of 17.48% across simulations indicates potential growth. However, the reliance on U.S.-centric assets may limit upside potential in volatile markets. Diversifying into other regions and asset classes could provide a more balanced risk-reward profile, enhancing the portfolio's resilience against unforeseen market shifts.

Asset classes Info

  • Stocks
    98%
  • No data
    2%

The portfolio is heavily skewed towards stocks, with 98.22% allocation, leaving minimal room for other asset classes. This concentration can lead to heightened risk during market downturns. While equities offer growth potential, a well-rounded portfolio should include bonds or alternative investments to cushion against volatility. Introducing a modest allocation to fixed-income securities could provide stability and income, reducing overall risk. A balanced approach can help achieve a smoother ride through market fluctuations, aligning with a more conservative risk profile.

Sectors Info

  • Technology
    27%
  • Financials
    14%
  • Health Care
    12%
  • Consumer Discretionary
    12%
  • Consumer Staples
    8%
  • Industrials
    8%
  • Telecommunications
    8%
  • Energy
    7%
  • Basic Materials
    2%
  • Utilities
    1%
  • Real Estate
    1%

The portfolio's sector allocation is dominated by technology at 27.06%, followed by financial services, healthcare, and consumer cyclicals. While these sectors offer growth potential, the concentration in technology could expose the portfolio to sector-specific risks. A more even distribution across sectors can reduce vulnerability to downturns in a single industry. Consider reallocating some assets to underrepresented sectors like utilities or real estate, which traditionally offer stability and income, to achieve a more balanced sector exposure.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

Geographically, the portfolio is heavily concentrated in North America, with 99.26% allocation. This focus on the U.S. market limits exposure to international growth opportunities and increases vulnerability to domestic economic changes. Diversifying into developed and emerging markets can provide access to different growth dynamics and reduce country-specific risks. A more global approach can enhance the portfolio's resilience and potential for returns, capturing opportunities in diverse economic environments outside the U.S.

Redundant positions Info

  • JPMorgan Nasdaq Equity Premium Income ETF
    Schwab U.S. Large-Cap Growth ETF
    SPDR® Portfolio S&P 500 ETF
    High correlation

The portfolio exhibits high correlation among assets, with significant overlap in holdings. This lack of diversification can amplify risk, as correlated assets tend to move in the same direction during market shifts. To optimize the portfolio, it's essential to reduce these overlaps and introduce uncorrelated assets that can provide diversification benefits. Consider reallocating some investments into asset classes or regions that historically show low correlation with current holdings, thereby enhancing the portfolio's robustness against 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, focus on reducing asset overlap to achieve true diversification. The efficient frontier concept can guide adjustments for risk levels. Moving towards more bonds can create a conservative portfolio, while increasing stock exposure can make it riskier. By addressing correlation issues first, the portfolio can be better positioned to optimize along the efficient frontier, balancing risk and reward. This strategic adjustment will help in realizing a more resilient and potentially rewarding investment approach.

Dividends Info

  • JPMorgan Nasdaq Equity Premium Income ETF 9.30%
  • Schwab U.S. Dividend Equity ETF 3.30%
  • Schwab U.S. Large-Cap Growth ETF 0.40%
  • SPDR® Portfolio S&P 500 ETF 1.20%
  • Weighted yield (per year) 2.84%

With a total yield of 2.84%, the portfolio provides a moderate income stream, primarily driven by the JPMorgan Nasdaq Equity Premium Income ETF's 9.3% yield. While dividends can offer a steady income, relying heavily on high-yield assets might expose the portfolio to increased risk. Balancing high-yield investments with stable, lower-yielding ones can provide a more consistent income flow. Diversifying dividend sources can also help mitigate the impact of dividend cuts or market downturns on income generation.

Ongoing product costs Info

  • JPMorgan Nasdaq Equity Premium Income ETF 0.35%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • Schwab U.S. Large-Cap Growth ETF 0.04%
  • SPDR® Portfolio S&P 500 ETF 0.02%
  • Weighted costs total (per year) 0.07%

The portfolio's total expense ratio (TER) is a low 0.07%, indicating cost-efficiency. The SPDR® Portfolio S&P 500 ETF and Schwab U.S. Large-Cap Growth ETF contribute to this with minimal costs. Keeping costs low is crucial for maximizing returns, as high fees can erode gains over time. While the current cost structure is favorable, it's important to regularly review and compare expense ratios to ensure continued cost-effectiveness. Consider reallocating to lower-cost options if necessary, without compromising on diversification and performance.

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