Balanced Portfolio with High Correlation and Low Geographic Diversity
Report created on Nov 26, 2024Risk profile
4/7
Diversification profile
2/5
Positions
-
SC Schwab U.S. Dividend Equity ETF
SCHD - US8085247976 20.00% -
VG Vanguard Information Technology Index Fund ETF Shares
VGT - US92204A7028 20.00% -
VI Vanguard Dividend Appreciation Index Fund ETF Shares
VIG - US9219088443 20.00% -
VO Vanguard S&P 500 ETF
VOO - US9229083632 20.00% -
VY Vanguard High Dividend Yield Index Fund ETF Shares
VYM - US9219464065 20.00%
The portfolio is composed entirely of ETFs, each holding 20% of the total. This results in a balanced allocation across five different funds. While ETFs offer a diversified approach within their own structure, the selection here shows low diversity due to the overlapping nature of the funds. This means that the portfolio may not be fully utilizing the potential benefits of diversification. To improve, consider adding different types of assets or funds that don't overlap as much, which could enhance the portfolio's overall risk-return profile.
Growth
With a hypothetical initial investment, the portfolio has shown a strong historical performance, boasting a CAGR of 14.38%. However, it has experienced a significant max drawdown of -32.84%, indicating vulnerability during market downturns. The concentration of returns in just 35 days suggests that missing out on these key days could impact overall performance. While past performance isn't a guarantee of future results, understanding these metrics can help in evaluating risk-taking capacity. To mitigate risk, consider incorporating assets that may perform differently in various market conditions.
Projection
Using a Monte Carlo simulation with 1,000 runs, the portfolio's future performance was projected with a hypothetical initial investment. The results show a promising annualized return of 15.45%, with most simulations yielding positive returns. However, the wide range between the 5th percentile (93.08%) and the 67th percentile (780.11%) highlights potential volatility. Monte Carlo simulations help visualize the range of possible outcomes, but they also underscore the need to prepare for both best- and worst-case scenarios. Improving diversification could help stabilize potential returns.
Asset classes
- Stocks 100%
The portfolio is heavily skewed towards stocks, comprising 99.78% of the total allocation, with a small cash component. This allocation suggests a strong preference for growth-oriented investments, which can lead to higher returns but also increased volatility. A more balanced approach could involve incorporating other asset classes such as bonds or real estate, which can provide stability and income. Diversifying across asset classes can help reduce risk and improve the portfolio's resilience in different market environments.
Sectors
- Technology 36%
- Financials 15%
- Health Care 11%
- Consumer Staples 9%
- Industrials 8%
- Consumer Discretionary 7%
- Energy 6%
- Telecommunications 4%
- Utilities 2%
- Basic Materials 2%
Sector allocation is concentrated, with technology making up 36.06% of the portfolio, followed by financial services and healthcare. This concentration can lead to higher volatility, especially if one sector underperforms. While focusing on high-growth sectors can boost returns, it also increases exposure to sector-specific risks. To achieve better risk management, diversify sector exposure by including funds or assets from underrepresented sectors. This can help cushion the portfolio against sector downturns and contribute to more stable long-term performance.
Regions
- North America 99%
- Europe Developed 1%
Geographically, the portfolio is overwhelmingly focused on North America, with 99.11% of assets in this region. This lack of geographic diversity exposes the portfolio to regional market risks and limits potential growth opportunities elsewhere. While North American markets have historically performed well, diversifying into other regions can provide access to different economic cycles and growth prospects. Consider adding international funds or assets to the mix, which can help spread risk and tap into global market potential.
Redundant positions
-
High correlationVanguard S&P 500 ETFSchwab U.S. Dividend Equity ETFVanguard Information Technology Index Fund ETF SharesVanguard Dividend Appreciation Index Fund ETF SharesVanguard High Dividend Yield Index Fund ETF Shares
The portfolio's assets are highly correlated, meaning they tend to move in the same direction. This lack of diversification can amplify risk during market downturns, as all assets may decline simultaneously. High correlation reduces the benefits of diversification, which is meant to smooth out returns by having assets that perform differently. To reduce correlation, consider including assets that have historically shown low correlation with the current holdings. This can enhance the portfolio's ability to weather market volatility.
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 should address its high correlation among assets, which limits diversification benefits. By reducing overlap, the portfolio could better utilize the efficient frontier, achieving a more optimal risk-return balance. Moving along the efficient frontier allows for adjustments towards either a riskier or more conservative portfolio, depending on personal goals and risk appetite. Consider diversifying across uncorrelated assets to improve resilience against market volatility and enhance potential returns.
Dividends
- Schwab U.S. Dividend Equity ETF 3.30%
- Vanguard Information Technology Index Fund ETF Shares 0.60%
- Vanguard Dividend Appreciation Index Fund ETF Shares 1.70%
- Vanguard S&P 500 ETF 1.20%
- Vanguard High Dividend Yield Index Fund ETF Shares 2.70%
- Weighted yield (per year) 1.90%
The portfolio has a total dividend yield of 1.9%, with contributions from various ETFs. Dividend-paying assets can provide a steady income stream, which is especially valuable during volatile market conditions. However, the yield is relatively modest, suggesting that the focus is more on capital appreciation than income generation. To increase income potential, consider adding higher-yielding assets or funds, but be mindful of the associated risks. Balancing growth and income can help achieve a more well-rounded portfolio.
Ongoing product costs
- Schwab U.S. Dividend Equity ETF 0.06%
- Vanguard Information Technology Index Fund ETF Shares 0.10%
- Vanguard Dividend Appreciation Index Fund ETF Shares 0.06%
- Vanguard S&P 500 ETF 0.03%
- Vanguard High Dividend Yield Index Fund ETF Shares 0.06%
- Weighted costs total (per year) 0.06%
The portfolio's total expense ratio (TER) is 0.06%, which is quite low and indicates cost-efficient management. Low costs are beneficial as they help maximize net returns over time. While keeping expenses minimal is advantageous, it's also important to ensure that the low-cost funds align with overall investment goals and risk tolerance. Regularly review the cost structure to ensure it remains competitive and supports the desired investment strategy. Consider the value provided by each fund relative to its cost.
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