Portfolio with High Growth Potential but Low Diversification and Increased Risk Due to Single ETF Allocation
Report created on Nov 18, 2024Risk profile
5/7
Diversification profile
2/5
Positions
-
VB Vanguard Small-Cap Index Fund ETF Shares
VB - US9229087518 100.00%
The portfolio consists entirely of the Vanguard Small-Cap Index Fund ETF Shares, making up 100% of the allocation. This means there's a heavy reliance on a single investment vehicle, which could limit diversification benefits. While this ETF provides exposure to a broad range of small-cap stocks, the lack of other asset classes or funds can lead to increased risk. To enhance portfolio resilience, consider diversifying into additional asset classes or funds. This could help mitigate the risks associated with economic downturns or sector-specific challenges.
Growth
Historically, the portfolio has performed well with a CAGR of 11.6%, indicating strong growth over time. However, the max drawdown of -42.04% highlights the potential for significant losses during market downturns. This volatility is typical for small-cap investments, which can be more sensitive to market fluctuations. While the growth potential is attractive, it's crucial to be prepared for the possibility of substantial short-term losses. A balanced approach with a mix of assets could help smooth out the ride and reduce the impact of market downturns on overall returns.
Projection
A Monte Carlo simulation, using 1,000 scenarios, provides a range of potential future outcomes for the portfolio. With a hypothetical initial investment, the 50th percentile projects a 296.28% return, while the 5th percentile shows a 6.81% return. This illustrates the uncertainty and range of possible outcomes, with an annualized return across simulations of 12.08%. While the potential for high returns is evident, the variability underscores the importance of diversification. By spreading investments across different asset classes, one can reduce the portfolio's reliance on a single fund's performance.
Asset classes
- Stocks 99%
- Cash 1%
The portfolio is heavily weighted in stocks, with a minor allocation to cash. This concentration in equities is typical for a growth-oriented portfolio, aiming for high returns. However, the lack of bonds or other asset classes can increase volatility and risk. Including a mix of asset classes can help balance the portfolio's risk-return profile, providing more stability during market fluctuations. Consider incorporating bonds or alternative investments to diversify and reduce overall portfolio risk while still aiming for growth.
Sectors
- Industrials 19%
- Technology 16%
- Consumer Discretionary 14%
- Financials 14%
- Health Care 11%
- Real Estate 8%
- Basic Materials 4%
- Energy 4%
- Consumer Staples 4%
- Utilities 3%
- Telecommunications 3%
The sector allocation within the ETF covers a wide range, with significant exposure to Industrials, Technology, Consumer Cyclicals, and Financial Services. While this diversification within sectors is beneficial, it's important to remember that all sectors are part of the same asset class. This can lead to correlated risks during economic downturns. To enhance sector diversification, consider adding funds or assets that cover different sectors or industries not represented within the current ETF, which could offer protection against sector-specific downturns.
Regions
- North America 99%
- Europe Developed 1%
The geographic composition is predominantly focused on North America, with minimal exposure to other regions like Europe, Latin America, and Asia. This concentration can lead to regional risk, where economic or political events in North America could significantly impact the portfolio. Expanding geographic diversification can help mitigate these risks. By incorporating investments from other regions, the portfolio can benefit from different economic cycles and reduce the reliance on the performance of North American markets.
Dividends
- Vanguard Small-Cap Index Fund ETF Shares 1.30%
- Weighted yield (per year) 1.30%
The portfolio's dividend yield stands at 1.3%, which is relatively modest. While dividends can provide a steady income stream, the focus of this portfolio is clearly on capital appreciation through small-cap growth. Investors seeking income might consider adding higher-yielding investments to balance growth with income. However, for those prioritizing growth, this yield is consistent with the strategy. It's important to assess whether the current income level aligns with financial goals and adjust the portfolio if income needs change over time.
Ongoing product costs
- Vanguard Small-Cap Index Fund ETF Shares 0.05%
- Weighted costs total (per year) 0.05%
The portfolio benefits from a low total expense ratio of 0.05%, which is advantageous for long-term growth. Lower costs mean more of the investment returns are retained, enhancing compounding over time. This cost efficiency is a strength of the current portfolio setup, allowing more capital to be invested in growth opportunities. Continually monitoring and minimizing investment costs is crucial for maximizing returns. While the current cost structure is favorable, it's always wise to review and compare with other investment options periodically.
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