Balanced Portfolio with Moderate Diversification and High Correlation Among MSCI World ETFs

Risk profile

  • Secure
    Speculative

The risk profile, derived from past market volatility, reflects the level of risk the portfolio is exposed to. This assessment helps align your investments with your financial goals and comfort with market fluctuations.

Diversification profile

  • Focused
    Diversified

The diversification assessment evaluates the spread of investments across asset classes, regions, and sectors. This ensures a balanced mix, reducing risk and maximizing returns by not concentrating in any single area.

What type of investor this portfolio is suitable for

Balanced Investors

This portfolio is suitable for balanced investors seeking moderate risk and global equity exposure. These investors typically have a medium-term investment horizon and are comfortable with some market volatility. Their primary goal is capital appreciation with a secondary focus on income generation. They value diversification but may not require extensive exposure to alternative asset classes. This investor type appreciates a straightforward portfolio structure with manageable costs and is willing to accept potential drawdowns in pursuit of growth.

Positions

  • iShares Core MSCI World UCITS ETF USD (Acc)
    EUNL - IE00B4L5Y983
    25.00%
  • HSBC MSCI World UCITS ETF
    H4ZJ - IE00B4X9L533
    25.00%
  • iShares MSCI World UCITS ETF USD (Dist) EUR
    IQQW - IE00B0M62Q58
    25.00%
  • db x-trackers MSCI World Index UCITS DR 1C
    XDWD - IE00BJ0KDQ92
    25.00%

The portfolio is composed entirely of four MSCI World ETFs, each making up 25% of the total. This setup provides a broad exposure to the global stock market, but also results in a high degree of overlap. While this can simplify management, it limits diversification benefits. Diversification is important to reduce risk and ensure smoother returns over time. To enhance diversification, consider incorporating different asset types or ETFs with distinct focuses. This would provide exposure to a wider range of market opportunities and potentially reduce risk.

Growth

Historically, the portfolio has shown strong performance with a compound annual growth rate (CAGR) of 12.63%. This indicates robust growth potential, but it's important to note the maximum drawdown of -33.63%, which signifies the potential for significant losses during market downturns. Understanding these metrics helps investors gauge the risk-return profile. To mitigate potential drawdowns, consider strategies such as diversifying into less volatile assets or maintaining a cash reserve. This approach can help smooth out returns and protect against market volatility.

Projection

Using a Monte-Carlo simulation, which models potential future performance based on historical data, the portfolio shows an annualized return of 13.5% across 1,000 simulations. The median outcome suggests a potential growth of 417.81% for a hypothetical initial investment. While this provides a positive outlook, it's crucial to remember that simulations are based on past trends and not guarantees. To better align with future goals, periodically review the portfolio's performance and risk profile. This ensures the investment strategy remains relevant and effective over time.

Asset classes

  • Stocks
    75%
  • Cash
    0%
  • Other
    0%
  • Bonds
    0%

The portfolio is heavily weighted towards stocks, with 74.78% of assets in equities. This concentration in a single asset class increases exposure to market fluctuations. While stocks offer growth potential, balancing with bonds or other asset classes can help reduce volatility. Diversification across asset classes can provide a buffer during downturns and contribute to more stable returns. Consider exploring options such as bonds, real estate, or alternative investments to achieve a more balanced risk-return profile.

Sectors

  • Technology
    20%
  • Financials
    12%
  • Health Care
    8%
  • Consumer Discretionary
    8%
  • Industrials
    8%
  • Telecommunications
    6%
  • Consumer Staples
    5%
  • Energy
    3%
  • Basic Materials
    2%
  • Utilities
    2%
  • Real Estate
    2%

The sector allocation is concentrated, with technology leading at 20.01%, followed by financial services and healthcare. This concentration can lead to sector-specific risks, especially if certain industries underperform. A diversified sector allocation can help mitigate these risks and capture opportunities across different economic cycles. To achieve better balance, consider including underrepresented sectors, which may offer growth potential and reduce reliance on a few industries. This approach can enhance the portfolio's resilience to sector-specific downturns.

Regions

  • North America
    57%
  • Europe Developed
    12%
  • Japan
    4%
  • Australasia
    1%
  • Asia Developed
    1%
  • Africa/Middle East
    0%
  • Latin America
    0%
  • Asia Emerging
    0%
  • Europe Emerging
    0%

Geographically, the portfolio is heavily skewed towards North America, accounting for 57.20% of the allocation. This bias may expose the portfolio to regional economic risks. A more geographically diverse portfolio can help mitigate these risks by capturing growth opportunities in other regions. Consider increasing exposure to emerging markets or other underrepresented areas to achieve better geographic diversification. This can provide a hedge against regional downturns and enhance long-term growth potential.

Redundant positions

  • db x-trackers MSCI World Index UCITS DR 1C
    iShares Core MSCI World UCITS ETF USD (Acc)
    iShares MSCI World UCITS ETF USD (Dist) EUR
    HSBC MSCI World UCITS ETF
    High correlation

The portfolio exhibits high correlation among its assets, as all positions track the MSCI World Index. This means the assets tend to move in the same direction, reducing diversification benefits. High correlation can lead to increased volatility during market swings. To improve diversification, consider incorporating assets with lower correlation to global equities. This could involve adding fixed income, commodities, or alternative investments that behave differently in various market conditions. This strategy can help stabilize returns and reduce risk.

Dividends

  • HSBC MSCI World UCITS ETF 0.70%
  • iShares MSCI World UCITS ETF USD (Dist) EUR 1.10%
  • Weighted yield (per year) 0.45%

The portfolio's dividend yield is relatively modest at 0.45%, with contributions primarily from the HSBC MSCI World UCITS ETF and the iShares MSCI World UCITS ETF USD (Dist) EUR. Dividends can provide a steady income stream and enhance total returns, especially in low-growth environments. To boost dividend income, consider incorporating higher-yielding assets or funds focused on dividend-paying stocks. This approach can enhance income generation and provide a cushion during periods of market volatility.

Ongoing product costs

  • iShares Core MSCI World UCITS ETF USD (Acc) 0.20%
  • HSBC MSCI World UCITS ETF 0.15%
  • iShares MSCI World UCITS ETF USD (Dist) EUR 0.50%
  • db x-trackers MSCI World Index UCITS DR 1C 0.17%
  • Weighted costs total (per year) 0.26%

The portfolio's total expense ratio (TER) is 0.26%, which is relatively low and helps keep investment costs down. Lower costs can significantly impact net returns over time, making cost efficiency a crucial consideration. While the current TER is favorable, always be on the lookout for opportunities to reduce fees further. This could involve comparing similar funds or negotiating lower fees with service providers. Maintaining a focus on cost efficiency can enhance long-term returns and contribute to overall investment success.

Risk vs. return

This chart displays the Efficient Frontier, showing the best balance between risk and return for your portfolio based on historical data. It calculates the most efficient asset allocations. If your portfolio is below the curve, it can be optimized for higher returns or lower risk. Portfolios on the curve are the most efficient.

The portfolio's current configuration is not optimal due to high correlation among its assets. The efficient frontier concept suggests that an optimal portfolio offers the highest expected return for a given level of risk. In this case, the portfolio could benefit from incorporating assets with lower correlation to the MSCI World Index. This would enhance diversification and potentially improve risk-adjusted returns. Regularly reassessing asset allocation and exploring new investment opportunities can help maintain an efficient and effective portfolio.

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