Balanced Diversification with High US Exposure and Overlapping Asset Correlation

Report created on Jun 10, 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 three ETFs, with the Vanguard S&P 500 ETF holding the largest allocation at 40%. The Vanguard Total Stock Market Index Fund ETF Shares and the Vanguard Total International Stock Index Fund ETF Shares follow with 30% each. This composition leans heavily towards equities, offering broad exposure to both domestic and international markets. The portfolio is classified as balanced, indicating a moderate risk level. This setup is well-diversified across numerous sectors and regions, which should help mitigate risk. However, the significant overlap in US equities could be streamlined for better efficiency.

Growth Info

Historically, the portfolio has demonstrated a strong performance, with a compound annual growth rate (CAGR) of 11.57%. This indicates robust growth potential over the years, although the maximum drawdown of -34.2% highlights the potential for significant volatility. The portfolio's returns are concentrated, with 90% of them occurring over just 28 days. This suggests that while the portfolio has performed well, its success is dependent on key market periods. It would be beneficial to consider strategies that could help reduce drawdown impacts and stabilize returns.

Projection Info

Using a Monte Carlo simulation, which models potential future outcomes based on historical data, the portfolio shows promising forward projections. With a hypothetical initial investment, the 50th percentile returns suggest an impressive growth of 313.63%, while the 5th percentile indicates a more conservative increase of 28.13%. The annualized return across simulations is 12.22%, pointing to a favorable outlook. Despite these optimistic projections, it's important to remain aware of market uncertainties and potential fluctuations, which can impact future performance.

Asset classes Info

  • Stocks
    99%
  • Cash
    1%

The portfolio is heavily weighted towards stocks, accounting for 99.45% of the total allocation. This concentration in equities suggests a focus on growth, which aligns with the balanced risk profile. While the equity dominance can drive returns, it also increases exposure to market volatility. To enhance stability, it might be worthwhile to consider incorporating a small allocation to other asset classes, such as bonds, which can provide diversification benefits and reduce overall risk.

Sectors Info

  • Technology
    26%
  • Financials
    15%
  • Health Care
    11%
  • Consumer Discretionary
    11%
  • Industrials
    10%
  • Telecommunications
    8%
  • Consumer Staples
    6%
  • Energy
    4%
  • Basic Materials
    4%
  • Utilities
    3%
  • Real Estate
    3%

The portfolio's sector allocation is diverse, with the technology sector leading at 26.34%. Financial services and healthcare also hold significant portions. This sector distribution provides exposure to various economic drivers, which is beneficial for risk management. However, the concentration in technology could introduce sector-specific risks. Balancing sector allocations can help mitigate these risks and ensure that the portfolio isn't overly reliant on the performance of any single sector.

Regions Info

  • North America
    72%
  • Europe Developed
    12%
  • Asia Emerging
    5%
  • Japan
    5%
  • Asia Developed
    3%
  • Australasia
    2%
  • Africa/Middle East
    1%
  • Latin America
    1%

Geographically, the portfolio is predominantly focused on North America, which makes up 71.95% of the allocation. This strong emphasis on the US market can be advantageous due to its economic strength, but it also limits exposure to growth opportunities in other regions. Diversifying further into emerging markets or other developed regions could enhance global exposure and reduce geographic concentration risk. This strategic move could potentially improve the portfolio's resilience against regional economic downturns.

Redundant positions Info

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

The portfolio shows a high correlation between the Vanguard S&P 500 ETF and the Vanguard Total Stock Market Index Fund ETF Shares. This correlation indicates that these assets tend to move in the same direction, reducing the diversification benefits within the portfolio. While both funds provide broad market exposure, their overlap might not contribute to risk reduction. Exploring options to diversify away from highly correlated assets could improve the portfolio's efficiency and risk management.

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, it's crucial to address the high correlation between certain assets. Streamlining these overlapping holdings can enhance diversification and improve risk management. Once this is achieved, moving along the efficient frontier can help adjust the portfolio's risk profile. To pursue higher returns, consider a riskier allocation by increasing exposure to growth-oriented assets. Conversely, for a more conservative approach, allocate more to stable, income-generating investments. This strategic adjustment can align the portfolio with specific financial goals and risk preferences.

Dividends Info

  • 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) 1.77%

The portfolio's dividend yield stands at 1.77%, with the Vanguard Total International Stock Index Fund ETF Shares contributing the highest yield at 3.0%. This moderate yield provides a steady income stream, which can be appealing for those seeking regular cash flow. While the yield is not the primary focus of this equity-heavy portfolio, maintaining or slightly increasing the dividend yield could enhance total returns and provide a buffer during market downturns.

Ongoing product costs Info

  • 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) 0.04%

The portfolio's total expense ratio (TER) is impressively low at 0.04%, reflecting the cost-efficiency of Vanguard's ETFs. This low-cost structure supports higher net returns over time, as investment costs can significantly erode gains. Keeping costs minimal is a key advantage, and it's important to continue monitoring and managing expenses to ensure that the portfolio remains cost-effective. This approach will help maximize the portfolio's performance and align with long-term financial goals.

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