Balanced Growth Portfolio with Strong U.S. Focus but High Correlation Among Assets May Limit Diversification Benefits

Report created on Dec 5, 2024

Risk profile Info

5/7
Growth
Less risk More risk

Diversification profile Info

3/5
Moderately Diversified
Less diversification More diversification

Positions

The portfolio is evenly split among four Vanguard ETFs, each making up 25% of the total. This includes small-cap, mid-cap, and S&P 500 index funds, alongside a global stock index fund. This setup provides a solid base with exposure to different market segments, while maintaining simplicity. The inclusion of a global index fund is a positive step towards diversification. However, the heavy weighting towards U.S. equities may limit the benefits of international diversification. A more diversified approach could better protect against market volatility and regional economic downturns.

Growth Info

Historically, the portfolio has performed well, with a compound annual growth rate (CAGR) of 12.13%. Although impressive, it experienced a significant maximum drawdown of -37.29%, highlighting potential volatility. The fact that 90% of the returns were generated in just 27 days indicates the importance of staying invested for the long term. This performance suggests a growth-oriented portfolio with the potential for high returns, albeit with substantial risk. To mitigate this, consider maintaining a long-term perspective and possibly diversifying further to reduce volatility.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's future performance shows a range of outcomes. The 5th percentile projects a growth of 32.26%, while the median (50th percentile) suggests a 351.73% increase. The 67th percentile indicates a potential 529.58% growth. These scenarios assume a hypothetical initial investment and highlight the portfolio's growth potential. However, the variability in outcomes emphasizes the importance of understanding risk tolerance. To enhance potential returns and manage risk, regularly review and adjust the portfolio in line with evolving financial goals.

Asset classes Info

  • Stocks
    99%
  • Cash
    1%

The portfolio is heavily weighted towards stocks, with nearly 99.43% allocated to equities. This concentration implies a high-risk, high-reward strategy, suitable for investors with a strong risk appetite. The minimal cash and other asset allocations suggest limited liquidity and diversification. While equities offer growth potential, they also come with volatility. Consider incorporating other asset classes like bonds or real estate to balance risk and reward, providing a cushion during market downturns. A more diverse asset allocation can enhance stability and reduce overall portfolio risk.

Sectors Info

  • Technology
    23%
  • Financials
    14%
  • Industrials
    14%
  • Consumer Discretionary
    11%
  • Health Care
    11%
  • Telecommunications
    6%
  • Real Estate
    5%
  • Consumer Staples
    5%
  • Utilities
    4%
  • Energy
    4%
  • Basic Materials
    4%

Sector allocation is diverse, with technology, financial services, and industrials leading the way. This spread across multiple sectors helps mitigate sector-specific risks, although technology's dominance might expose the portfolio to tech-related volatility. A balanced sector approach can capitalize on various economic cycles, but overexposure to one sector can increase risk. To ensure resilience, regularly assess sector weights and adjust as needed to maintain a balanced exposure. This will help capture opportunities across different industries while minimizing concentration risk.

Regions Info

  • North America
    90%
  • Europe Developed
    4%
  • Asia Emerging
    2%
  • Japan
    1%
  • Asia Developed
    1%

Geographically, the portfolio is heavily concentrated in North America, accounting for over 90% of the allocation. This focus on U.S. markets limits exposure to international growth opportunities and may increase vulnerability to U.S.-specific economic risks. While the U.S. market is a strong performer, diversification across geographies can provide stability and access to emerging markets' potential. Consider increasing exposure to other regions to benefit from global economic growth and reduce dependency on a single market. A more balanced geographic allocation can enhance long-term returns and risk management.

Redundant positions Info

  • Vanguard Mid-Cap Index Fund ETF Shares
    Vanguard S&P 500 ETF
    Vanguard Small-Cap Index Fund ETF Shares
    Vanguard Total World Stock Index Fund ETF Shares
    High correlation

The portfolio's assets are highly correlated, particularly among the Vanguard ETFs. This high correlation means the assets tend to move in the same direction, reducing diversification benefits. While correlated assets can streamline management, they can also amplify losses during market downturns. To improve diversification, consider reducing overlapping positions and adding assets with lower correlations. This can help smooth out returns and reduce portfolio volatility. A diversified portfolio with low correlations can better withstand market fluctuations and enhance risk-adjusted 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, focus on reducing asset overlap, as high correlation limits diversification benefits. Once streamlined, explore the efficient frontier to balance risk and return. Moving along the frontier can help achieve a riskier or more conservative portfolio. For a riskier portfolio, increase equity exposure; for a conservative one, consider bonds or cash. Evaluate risk tolerance and financial goals to guide these adjustments. A well-optimized portfolio aligns with personal objectives, maximizing potential returns while managing risk effectively. Prioritize diversification and cost management for long-term success.

Dividends Info

  • Vanguard Small-Cap Index Fund ETF Shares 1.30%
  • Vanguard Mid-Cap Index Fund ETF Shares 1.80%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total World Stock Index Fund ETF Shares 1.80%
  • Weighted yield (per year) 1.52%

The portfolio offers a modest dividend yield of 1.52%, with individual yields from the Vanguard ETFs ranging from 1.2% to 1.8%. While dividends provide a steady income stream, the focus on growth stocks means the yield is relatively low. This is typical for a growth-oriented portfolio, where capital appreciation is prioritized over income generation. To boost income, consider incorporating higher-yielding assets or dividend-focused funds. Balancing growth and income can provide a more stable return profile, catering to both short-term income needs and long-term growth objectives.

Ongoing product costs Info

  • Vanguard Small-Cap Index Fund ETF Shares 0.05%
  • Vanguard Mid-Cap Index Fund ETF Shares 0.04%
  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Total World Stock Index Fund ETF Shares 0.07%
  • Weighted costs total (per year) 0.05%

The portfolio's total expense ratio (TER) is 0.05%, which is impressively low. This cost efficiency is a major advantage, as lower fees enhance net returns over time. The individual ETF expense ratios range from 0.03% to 0.07%, reflecting Vanguard's reputation for cost-effective investment products. Keeping costs low is crucial for maximizing investment returns, especially in a growth-focused portfolio. Continue to monitor and manage expenses, ensuring that the portfolio remains cost-effective. Consider exploring other low-cost options if changes are made to the portfolio's composition.

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