Balanced Portfolio with Strong US Focus and Low Diversity Needs Better Diversification to Optimize Returns

Report created on Nov 23, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

The portfolio is heavily concentrated in U.S. equities, with 50% in the Vanguard S&P 500 ETF and 30% in the Schwab U.S. Dividend Equity ETF. The remaining 20% is split equally between Apple and Microsoft stocks. This composition reflects a low diversification score, mainly focused on large-cap U.S. stocks. While it provides exposure to established companies, the lack of diversity could lead to increased risk if the U.S. market faces downturns. To improve, consider incorporating more varied asset classes or regions to balance the risk.

Growth Info

Historically, this portfolio has performed well, with a compound annual growth rate (CAGR) of 16.0% and a maximum drawdown of -31.91%. This indicates the portfolio has captured significant growth but also experienced notable declines during market downturns. The concentrated nature means it relies heavily on the performance of a few key sectors and companies. To build resilience against future volatility, diversifying into different sectors or asset classes could help stabilize returns while maintaining growth potential.

Projection Info

Using a Monte Carlo simulation with 1,000 scenarios, the portfolio's potential future performance was assessed. This method estimates the probability of different outcomes by simulating random variables, assuming a hypothetical initial investment. The results show a wide range of possible returns, with a 5th percentile outcome of 184.03% and a 67th percentile of 1,566.95%. The high annualized return of 21.68% across simulations suggests strong potential. However, diversifying the portfolio can help mitigate risks and increase the likelihood of achieving favorable outcomes.

Asset classes Info

  • Stocks
    100%

The portfolio is almost entirely composed of stocks, with a negligible cash position. This heavy reliance on equities can drive higher returns but also increases risk, especially during market downturns. A more balanced approach might include fixed-income securities or alternative investments to provide stability and reduce volatility. Adding different asset classes could help achieve a more consistent performance over time and align with a balanced risk profile.

Sectors Info

  • Technology
    40%
  • Financials
    12%
  • Health Care
    10%
  • Consumer Discretionary
    8%
  • Industrials
    7%
  • Consumer Staples
    7%
  • Telecommunications
    6%
  • Energy
    6%
  • Basic Materials
    1%
  • Utilities
    1%
  • Real Estate
    1%

The portfolio's sector allocation is dominated by technology at nearly 40%, followed by financial services and healthcare. This concentration in a few sectors can lead to heightened risk if any of these industries face challenges. A more evenly distributed sector allocation could improve resilience against sector-specific downturns. By diversifying across a broader range of industries, the portfolio can better capture opportunities and reduce dependence on the technology sector's performance.

Regions Info

  • North America
    100%

Geographically, the portfolio is overwhelmingly centered on North America, with minimal exposure to other regions. This focus limits potential gains from global market opportunities and increases vulnerability to U.S. economic fluctuations. Expanding geographic diversity by including international equities or funds could introduce exposure to different economic cycles and growth prospects. This approach can enhance overall portfolio resilience and tap into emerging markets or regions with strong growth potential.

Redundant positions Info

  • Vanguard S&P 500 ETF
    Schwab U.S. Dividend Equity ETF
    High correlation

The assets within the portfolio show high correlation, particularly between the Vanguard S&P 500 ETF and the Schwab U.S. Dividend Equity ETF. This means they tend to move in the same direction, reducing diversification benefits. To mitigate this, consider replacing or complementing these holdings with less correlated assets. Introducing investments that perform differently in various market conditions can help smooth out returns and decrease overall portfolio risk.

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, focus on eliminating overlapping, highly correlated assets that provide little diversification benefit. Moving along the efficient frontier can help achieve a riskier or more conservative portfolio by adjusting asset allocation. To reduce risk, consider increasing exposure to fixed-income assets or less volatile sectors. Conversely, to pursue higher returns, incorporate more growth-oriented investments. Balancing diversification and risk tolerance is key to optimizing the portfolio's performance.

Dividends Info

  • Apple Inc 0.40%
  • Microsoft Corporation 0.50%
  • Schwab U.S. Dividend Equity ETF 3.40%
  • Vanguard S&P 500 ETF 1.20%
  • Weighted yield (per year) 1.71%

The portfolio offers a moderate dividend yield of 1.71%, primarily driven by the Schwab U.S. Dividend Equity ETF. While dividends can provide a steady income stream, the current yield is relatively low compared to other income-focused portfolios. To enhance income potential, consider adding higher-yielding assets or funds that focus on dividend growth. This strategy can increase cash flow and provide a buffer against market volatility, aligning with a balanced investment approach.

Ongoing product costs Info

  • Schwab U.S. Dividend Equity ETF 0.06%
  • Vanguard S&P 500 ETF 0.03%
  • Weighted costs total (per year) 0.03%

With an overall Total Expense Ratio (TER) of 0.03%, the portfolio maintains low costs, which is advantageous for long-term growth. The minimal fees associated with the Vanguard and Schwab ETFs ensure more of the returns are retained by the investor. Keeping costs low is crucial, as high fees can erode returns over time. Continuously monitoring and managing expenses while seeking cost-effective investment options will support the portfolio's growth objectives.

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