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Balanced Portfolio with Broad Diversification and Solid Historical Performance but Consider Asset Correlations

Report created on Jul 8, 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 is composed of five ETFs, with a significant focus on equities, accounting for nearly all of the asset allocation. The Vanguard Total Stock Market Index Fund ETF holds the largest share at 40%, providing broad exposure to the U.S. stock market. The inclusion of small cap and international ETFs suggests a strategy aimed at capturing growth opportunities beyond large-cap U.S. stocks. The Schwab U.S. Dividend Equity ETF adds a dividend-focused component, which can provide income stability. This composition is broadly diversified across sectors and geographies, reducing the risk of overexposure to any single market segment.

Growth Info

Historically, the portfolio has delivered an impressive compound annual growth rate (CAGR) of 19.46%, indicating strong past performance. However, it also experienced a maximum drawdown of -23.11%, reflecting potential volatility. The fact that 90% of returns were generated on just 29 days highlights the importance of staying invested during volatile periods. This performance suggests that while the portfolio has been lucrative, it is also subject to market swings. Investors should be prepared for such fluctuations and maintain a long-term perspective to benefit from the growth potential.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's future performance was projected based on a hypothetical initial investment. The simulation provides a range of possible outcomes, with the 5th percentile indicating a 276.53% return, and the median (50th percentile) projecting a 1,093.68% return. The 67th percentile shows a potential return of 1,601.68%. All simulations resulted in positive returns, with an average annualized return of 20.91%. This suggests a strong potential for growth, but it's important to recognize that these are probabilistic estimates and actual outcomes may vary.

Asset classes Info

  • Stocks
    100%

The portfolio is predominantly invested in stocks, with a small allocation to cash and negligible amounts in bonds and other asset classes. This heavy equity allocation aligns with a growth-focused strategy, which can offer substantial returns over the long term. However, it also increases exposure to market volatility. A more balanced approach might include a greater allocation to bonds or other asset classes to provide stability and reduce risk. Investors should consider their risk tolerance and investment horizon when evaluating this asset class distribution.

Sectors Info

  • Financials
    19%
  • Technology
    17%
  • Industrials
    14%
  • Consumer Discretionary
    12%
  • Health Care
    9%
  • Energy
    8%
  • Consumer Staples
    6%
  • Basic Materials
    5%
  • Telecommunications
    5%
  • Real Estate
    2%
  • Utilities
    2%

The sector allocation is well-diversified, with significant exposure to financial services, technology, and industrials. These sectors are known for their growth potential and have historically driven market performance. The presence of consumer cyclicals and healthcare adds a defensive element, while energy and consumer defensive sectors offer diversification benefits. This broad sector coverage helps mitigate risks associated with sector-specific downturns. Investors should regularly review sector allocations to ensure alignment with market trends and personal investment goals, while avoiding overconcentration in any single sector.

Regions Info

  • North America
    73%
  • Europe Developed
    15%
  • Japan
    8%
  • Australasia
    2%
  • Asia Developed
    1%
  • Africa/Middle East
    1%

Geographically, the portfolio is heavily weighted towards North America, with 72.92% exposure, reflecting a strong focus on the U.S. market. Developed Europe and Japan are the next largest allocations, providing international diversification. The presence of Australasia, Asia Developed, and other regions adds further global exposure. While this geographic distribution offers some protection against regional downturns, it also means the portfolio is susceptible to U.S. market fluctuations. Investors should consider diversifying further into emerging markets for potential growth opportunities and to reduce reliance on any single geographic region.

Redundant positions Info

  • BNY Mellon International Equity ETF
    Avantis® International Small Cap Value ETF
    High correlation

The portfolio exhibits high correlations between certain assets, notably between the BNY Mellon International Equity ETF and the Avantis® International Small Cap Value ETF. This suggests that these assets tend to move in the same direction, which could increase risk during market downturns. While diversification generally reduces risk, highly correlated assets can diminish these benefits. Investors should assess the impact of these correlations on the portfolio's overall risk profile and consider rebalancing to reduce overlap and enhance diversification.

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.

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Portfolio optimization involves aligning investments along the efficient frontier, which represents the best possible risk-return trade-off. Currently, the portfolio is not fully optimized due to high correlations between certain assets. This overlap can limit diversification benefits and increase risk. While the portfolio is broadly diversified, investors should consider reducing correlations by rebalancing or selecting less correlated assets. Efficient frontier analysis can help identify potential adjustments to improve the portfolio's risk-return profile. However, maintaining a balanced approach is crucial to achieving long-term financial goals.

Dividends Info

  • Avantis® International Small Cap Value ETF 3.10%
  • Avantis® U.S. Small Cap Value ETF 1.50%
  • BNY Mellon International Equity ETF 2.90%
  • Schwab U.S. Dividend Equity ETF 3.40%
  • Vanguard Total Stock Market Index Fund ETF Shares 1.30%
  • Weighted yield (per year) 2.05%

The portfolio's total dividend yield stands at 2.05%, with the Schwab U.S. Dividend Equity ETF and Avantis® International Small Cap Value ETF contributing significantly to this income stream. Dividends provide a steady income, which can be particularly beneficial during periods of market volatility. A focus on dividend-paying stocks can also indicate a preference for companies with stable cash flows and strong financial health. Investors should consider reinvesting dividends to capitalize on compounding returns, or use them as a source of income, depending on their financial goals.

Ongoing product costs Info

  • Avantis® International Small Cap Value ETF 0.36%
  • Avantis® U.S. Small Cap Value ETF 0.25%
  • BNY Mellon International Equity ETF 0.04%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • Vanguard Total Stock Market Index Fund ETF Shares 0.03%
  • Weighted costs total (per year) 0.11%

The portfolio's total expense ratio (TER) is 0.11%, which is relatively low and aligns with a cost-effective investment strategy. Lower costs can significantly enhance long-term returns, as they reduce the drag on portfolio performance. Each ETF in the portfolio has a reasonable expense ratio, with the Vanguard Total Stock Market Index Fund ETF being the most cost-effective. Investors should continue to prioritize low-cost investments to maximize net returns. Regularly reviewing and comparing expense ratios can help ensure that the portfolio remains cost-efficient.

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