A balanced portfolio with high correlation and strong historical performance but limited geographic diversity

Report created on Nov 14, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

4/5
Broadly Diversified
Less diversification More diversification

Positions

The portfolio consists of two main ETFs: Vanguard S&P 500 ETF and Vanguard Total World Stock Index Fund ETF Shares, each making up 50% of the portfolio. This composition results in a broadly diversified equity portfolio that aligns with a balanced risk profile. While it provides exposure to a wide range of stocks, it heavily leans on equities, leaving minimal allocation to cash or other asset classes. This setup may suit investors seeking equity-focused growth, but it could benefit from additional asset class diversification to better manage risk.

Growth Info

The portfolio has shown a strong historic performance with a Compound Annual Growth Rate (CAGR) of 12.49% and a maximum drawdown of -34%. This indicates that while the portfolio has delivered impressive returns, it also experienced significant downturns, which is typical for equity-heavy investments. Comparing this to a benchmark like the S&P 500, the performance is competitive. However, it's crucial to remember that past performance does not guarantee future results, and the portfolio's risk level should be considered in light of potential market volatility.

Projection Info

The Monte Carlo simulation, which uses historical data to predict future outcomes, suggests a median return of 397.8% over the investment horizon. While 994 out of 1,000 simulations show positive returns, it's important to note that simulations can’t predict exact future performance but rather provide a range of possible outcomes. This tool helps investors understand potential risks and rewards, but decisions should also consider current market conditions and personal risk tolerance.

Asset classes Info

  • Stocks
    99%
  • Cash
    1%

The portfolio is heavily weighted towards stocks, comprising 99% of the total allocation, with only 1% in cash. While this equity focus can drive growth, it also increases exposure to market volatility. Compared to typical benchmarks, this allocation lacks diversification across asset classes like bonds or real estate, which could provide more stability. Incorporating a broader range of asset classes could reduce risk and enhance long-term returns, particularly in volatile market conditions.

Sectors Info

  • Technology
    29%
  • Financials
    15%
  • Consumer Discretionary
    11%
  • Health Care
    10%
  • Industrials
    9%
  • Telecommunications
    8%
  • Consumer Staples
    6%
  • Energy
    4%
  • Basic Materials
    3%
  • Utilities
    3%
  • Real Estate
    3%

Sector allocation shows a significant concentration in technology (29%), followed by financial services (15%) and consumer cyclicals (11%). This mirrors common indices like the S&P 500, providing a diversified sector exposure. However, the tech-heavy focus may lead to increased volatility, especially during periods of interest rate changes. Balancing sector allocation by increasing exposure to traditionally stable sectors, such as utilities or consumer defensive, could mitigate some risks while maintaining growth potential.

Regions Info

  • North America
    83%
  • Europe Developed
    7%
  • Asia Emerging
    3%
  • Japan
    3%
  • Asia Developed
    2%
  • Australasia
    1%
  • Africa/Middle East
    1%

The portfolio's geographic allocation is heavily skewed towards North America (83%), with limited exposure to other regions. This bias may limit the benefits of international diversification, which can reduce risk by spreading investments across different economic environments. Adding more exposure to emerging markets or underrepresented regions could enhance diversification and potentially capture growth opportunities in various global markets.

Market capitalization Info

  • Mega-cap
    44%
  • Large-cap
    33%
  • Mid-cap
    18%
  • Small-cap
    3%

The portfolio has a strong preference for large-cap stocks, with 44% in mega-cap and 33% in big-cap companies. This focus on larger companies can provide stability and steady returns but may limit exposure to the growth potential of smaller firms. Diversifying across market capitalizations by including more small and medium-sized companies could enhance the portfolio's growth prospects and provide better risk-adjusted returns.

Redundant positions Info

  • Vanguard Total World Stock 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 market conditions. This high correlation can limit diversification benefits, as similar assets may not provide a buffer during downturns. Diversifying with assets that have lower correlation, such as bonds or alternative investments, could enhance risk management and improve the portfolio's resilience against market fluctuations.

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.

The portfolio could potentially be optimized by adjusting the asset allocation to achieve a better risk-return balance on the Efficient Frontier, which represents the best possible risk-return ratio. However, the current high correlation between assets suggests that diversification could be improved before optimization. Reducing overlap and adding less correlated assets could enhance efficiency and potentially improve risk-adjusted returns.

Dividends Info

  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total World Stock Index Fund ETF Shares 1.90%
  • Weighted yield (per year) 1.55%

The portfolio offers a moderate dividend yield of 1.55%, combining yields from the Vanguard S&P 500 ETF and Vanguard Total World Stock Index Fund ETF Shares. Dividends can provide a steady income stream, which is beneficial for investors seeking regular cash flow. However, the focus on growth-oriented equities may mean dividends are not the primary return driver. Investors could consider higher-yielding assets if income generation is a key objective.

Ongoing product costs Info

  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Total World Stock Index Fund ETF Shares 0.07%
  • Weighted costs total (per year) 0.05%

The portfolio benefits from low costs, with a total expense ratio (TER) of 0.05%. This low cost is advantageous for long-term investors, as it allows more of the investment returns to be retained rather than eroded by fees. Compared to industry averages, these costs are impressively low, supporting better long-term performance. Maintaining this cost advantage is crucial for maximizing net returns over time.

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