Balanced Portfolio with High US Exposure and Moderate Diversification Needs Optimization for Better Risk-Return Balance

Report created on Nov 24, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

3/5
Moderately Diversified
Less diversification More diversification

Positions

The portfolio is primarily composed of ETFs, with a heavy concentration in the Vanguard S&P 500 ETF at 75%. This suggests a strong reliance on large-cap US equities. The Invesco QQQ Trust and the Vanguard Total International Stock Index Fund ETF Shares each account for 10% of the portfolio, while the Vanguard Total Stock Market Index Fund ETF Shares makes up the remaining 5%. This composition indicates a preference for broad market exposure, but with a notable bias towards the US market. While ETFs offer diversification, the current allocation could be more balanced to mitigate risks associated with market fluctuations.

Growth Info

Historically, the portfolio has performed well, with a compound annual growth rate (CAGR) of 13.71%. However, it has also experienced significant volatility, as evidenced by a maximum drawdown of -33.2%. This indicates that while the portfolio has the potential for strong returns, it is also susceptible to substantial losses during market downturns. The high concentration in US equities contributes to this volatility. To maintain strong performance while reducing risk, diversification across different asset classes and geographic regions could be beneficial.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's future performance was projected. The simulation suggests a wide range of potential outcomes, with a 5th percentile end value of 60.7% and a 67th percentile end value of 589.85%. The median outcome is a 388.94% increase, indicating strong potential returns. However, the high variability in outcomes underscores the importance of diversification to manage risk. By spreading investments across different asset classes and regions, the portfolio can achieve a more stable performance over time.

Asset classes Info

  • Stocks
    100%

The portfolio is heavily weighted towards stocks, with 99.77% of assets in this class. This high concentration in equities suggests a focus on growth, but it also exposes the portfolio to market volatility. While stocks can offer high returns, they can also lead to significant losses during downturns. To achieve a more balanced risk-return profile, incorporating other asset classes such as bonds or real estate could provide stability and reduce overall portfolio risk. This would help cushion the impact of stock market fluctuations on the portfolio's performance.

Sectors Info

  • Technology
    33%
  • Financials
    12%
  • Consumer Discretionary
    11%
  • Health Care
    10%
  • Telecommunications
    9%
  • Industrials
    8%
  • Consumer Staples
    6%
  • Energy
    3%
  • Utilities
    3%
  • Basic Materials
    2%
  • Real Estate
    2%

The sector allocation is dominated by technology at 32.71%, followed by financial services and consumer cyclicals. This concentration in a few sectors increases the portfolio's vulnerability to sector-specific risks. While these sectors have shown strong performance in recent years, they can also be volatile. Diversifying across a broader range of sectors can reduce risk and enhance returns. By spreading investments across various sectors, the portfolio can better withstand downturns in any single sector and take advantage of growth opportunities in others.

Regions Info

  • North America
    90%
  • Europe Developed
    4%
  • Asia Emerging
    2%
  • Japan
    2%
  • Asia Developed
    1%
  • Australasia
    1%

Geographically, the portfolio is heavily concentrated in North America, with 90.06% of assets allocated to this region. This strong US bias exposes the portfolio to risks associated with the US economy and market fluctuations. While the US market has been a strong performer, diversifying into other regions can provide access to different economic cycles and growth opportunities. Expanding exposure to emerging markets and developed regions outside of North America can enhance the portfolio's resilience and potential for long-term growth.

Redundant positions Info

  • Vanguard S&P 500 ETF
    Invesco QQQ Trust
    Vanguard Total Stock Market Index Fund ETF Shares
    High correlation

The portfolio exhibits a high degree of correlation among its assets, particularly between the Vanguard S&P 500 ETF, Invesco QQQ Trust, and Vanguard Total Stock Market Index Fund ETF Shares. This lack of diversification means that the portfolio's performance is heavily influenced by the same market factors. Reducing correlation by incorporating assets with different risk-return profiles can improve diversification and potentially enhance returns. By selecting investments that do not move in tandem, the portfolio can achieve a more stable performance over time.

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's optimization chart suggests that before making any changes, the focus should be on reducing overlapping assets that do not provide diversification benefits. By minimizing these highly correlated assets, the portfolio can achieve a more efficient risk-return balance. Moving along the efficient frontier, the investor can adjust the portfolio towards a riskier or more conservative profile. For a riskier approach, increasing exposure to equities or high-growth sectors may be considered, while a more conservative strategy could involve adding bonds or other income-generating assets.

Dividends Info

  • Invesco QQQ Trust 0.60%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total Stock Market Index Fund ETF Shares 1.30%
  • Vanguard Total International Stock Index Fund ETF Shares 3.00%
  • Weighted yield (per year) 1.32%

The portfolio's dividend yield is moderate at 1.32%, with contributions from each ETF. The Vanguard Total International Stock Index Fund ETF Shares offers the highest yield at 3.0%, providing a steady income stream. While dividends can enhance total returns, the focus on growth-oriented ETFs suggests that income generation is not the primary objective. For investors seeking higher income, increasing exposure to dividend-paying stocks or funds could be beneficial. This would help balance the portfolio's growth and income objectives.

Ongoing product costs Info

  • Invesco QQQ Trust 0.20%
  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Total Stock Market Index Fund ETF Shares 0.03%
  • Vanguard Total International Stock Index Fund ETF Shares 0.08%
  • Weighted costs total (per year) 0.05%

The portfolio's total expense ratio (TER) is low at 0.05%, indicating cost-effective management. The individual ETFs have varying expense ratios, with the Vanguard S&P 500 ETF and Vanguard Total Stock Market Index Fund ETF Shares being the most cost-efficient at 0.03%. Low costs are advantageous as they enhance net returns over time. To maintain this cost efficiency, it is important to regularly review and compare expense ratios of similar investment options. Keeping costs low while optimizing for diversification can significantly improve overall portfolio performance.

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