Portfolio with Growth Potential but Limited Diversification and High Correlation Among Major Holdings

Report created on Jul 4, 2024

Risk profile Info

5/7
Growth
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

The portfolio is primarily composed of four ETFs, with a significant emphasis on large-cap U.S. equities. The Schwab U.S. Large-Cap ETF holds the largest share at 50%, followed by Vanguard S&P 500 ETF at 25%. The remaining allocations are equally divided between Fidelity MSCI Energy and Information Technology Index ETFs, each at 12.5%. This composition results in a low diversification score, reflecting a concentrated focus on specific sectors and asset classes. This allocation can be beneficial for growth in bullish markets but may expose the portfolio to higher volatility during downturns.

Growth Info

Historically, the portfolio has performed well, with a compound annual growth rate (CAGR) of 15.16%. However, it has experienced a substantial maximum drawdown of -34.93%, indicating potential vulnerability during market declines. The portfolio's returns are concentrated, with 90% of gains occurring in just 35 days, suggesting a reliance on market timing. While the past performance is promising, it's important to recognize the associated risks and the potential for significant fluctuations in returns.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's future performance was projected. This method models potential outcomes by simulating random variables, providing a range of possible results. The median outcome suggests a substantial growth of 519.96%, with a 67th percentile reaching 766.44%. Despite the optimistic projections, the simulation also indicates a 5th percentile outcome of just 54.92%, underscoring the inherent uncertainty and risk involved. This highlights the importance of considering both potential gains and losses when evaluating future performance.

Asset classes Info

  • Stocks
    100%

The portfolio is heavily weighted towards stocks, with an overwhelming 99.92% allocation, leaving a minimal 0.08% in cash. This aggressive stance aligns with a growth-oriented strategy, aiming to capitalize on equity market gains. While this approach can offer substantial returns, it also increases exposure to market volatility. To mitigate risk, consider introducing a more balanced mix of asset classes, such as bonds or other fixed-income securities, which could provide stability and reduce overall portfolio risk during market downturns.

Sectors Info

  • Technology
    37%
  • Energy
    15%
  • Financials
    10%
  • Health Care
    8%
  • Consumer Discretionary
    8%
  • Telecommunications
    7%
  • Industrials
    6%
  • Consumer Staples
    4%
  • Utilities
    2%
  • Real Estate
    2%
  • Basic Materials
    1%

The sector allocation is dominated by technology, which comprises 37.1% of the portfolio, followed by energy at 15.1%. Other sectors like financial services, healthcare, and consumer cyclicals have smaller representations. This concentration in technology and energy suggests a bet on their continued growth, but it also exposes the portfolio to sector-specific risks. Diversifying across a broader range of sectors can enhance stability and reduce the impact of sector downturns. A more balanced sector allocation would help manage risk and improve resilience against market fluctuations.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

Geographically, the portfolio is overwhelmingly concentrated in North America, with 99.38% of assets allocated there. This focus on the U.S. market reflects confidence in its economic prospects but also limits exposure to global opportunities. While the U.S. market has been strong, diversifying geographically could provide access to growth in other regions and reduce the portfolio's vulnerability to domestic market volatility. Expanding the geographic allocation to include more international markets can enhance diversification and potentially improve risk-adjusted returns.

Redundant positions Info

  • Vanguard S&P 500 ETF
    Fidelity® MSCI Information Technology Index ETF
    Schwab U.S. Large-Cap ETF
    High correlation

The portfolio exhibits high correlation among its major holdings, particularly between the Vanguard S&P 500 ETF, Fidelity MSCI Information Technology Index ETF, and Schwab U.S. Large-Cap ETF. This correlation suggests that these assets tend to move in tandem, reducing the diversification benefits within the portfolio. While correlated assets can amplify gains in rising markets, they also increase the risk of significant losses during downturns. To enhance diversification, consider incorporating assets with lower correlations, which can help offset losses and stabilize returns.

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, it's crucial to address the high correlation among assets, as it limits diversification benefits. By reducing overlapping holdings, diversification can be improved, potentially enhancing risk-adjusted returns. The current portfolio's expected return is below the more efficient portfolio's potential of 21.35%, which maintains the same risk level. To achieve a riskier or more conservative portfolio, consider moving along the efficient frontier. This involves adjusting the asset allocation to balance risk and return, aligning with personal risk tolerance and investment goals.

Dividends Info

  • Fidelity® MSCI Energy Index ETF 2.90%
  • Fidelity® MSCI Information Technology Index ETF 0.60%
  • Schwab U.S. Large-Cap ETF 1.20%
  • Vanguard S&P 500 ETF 1.20%
  • Weighted yield (per year) 1.34%

The portfolio's dividend yield stands at a modest 1.34%, with contributions from all four ETFs. The Fidelity MSCI Energy Index ETF offers the highest yield at 2.9%, while the others provide around 1.2%. While dividends can provide a steady income stream, the portfolio's focus on growth-oriented sectors may limit yield potential. For those seeking higher income, exploring dividend-focused investments could be beneficial. However, it's essential to balance the pursuit of yield with growth objectives and ensure that the portfolio aligns with overall investment goals.

Ongoing product costs Info

  • Fidelity® MSCI Energy Index ETF 0.08%
  • Fidelity® MSCI Information Technology Index ETF 0.08%
  • Schwab U.S. Large-Cap ETF 0.03%
  • Vanguard S&P 500 ETF 0.03%
  • Weighted costs total (per year) 0.04%

The portfolio's costs are impressively low, with a total expense ratio (TER) of just 0.04%. This cost efficiency is a significant advantage, as lower fees can enhance overall returns by reducing the drag on performance. The ETFs within the portfolio have expense ratios ranging from 0.03% to 0.08%, reflecting a cost-conscious approach. Maintaining low costs is crucial for maximizing net returns, especially over the long term. While the current cost structure is favorable, ongoing monitoring is essential to ensure that fees remain competitive and aligned with investment objectives.

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