Growth-Driven Portfolio with Low Diversification and High Correlation in U.S. Equities

Report created on Nov 27, 2024

Risk profile Info

5/7
Growth
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

The portfolio is composed primarily of four ETFs, with a significant 40% allocation to the Schwab U.S. Dividend Equity ETF. The remaining holdings are evenly split among Avantis® U.S. Small Cap Value ETF, Schwab U.S. Large-Cap Growth ETF, and SPDR® Portfolio S&P 500 ETF, each at 20%. This composition indicates a strong focus on U.S. equities, with a preference for dividend-paying, small-cap value, large-cap growth, and broad market exposure. The portfolio's risk classification is growth-oriented, suggesting an appetite for higher returns, albeit with increased volatility. However, the low diversification score suggests a concentration risk that could impact performance.

Growth Info

Historically, the portfolio has delivered an impressive compound annual growth rate (CAGR) of 17.95%, showcasing strong returns. However, it has also experienced a significant maximum drawdown of -35.46%, indicating vulnerability during market downturns. The fact that 90% of returns are generated in just 18 days highlights the portfolio's reliance on a few high-performing days, which can be risky. This historical performance underscores the importance of diversification to mitigate potential losses and stabilize returns over time.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's future performance was projected. This method uses random sampling to estimate potential outcomes, providing a range of possible returns. The results show a 5th percentile outcome of 123.99% and a median (50th percentile) outcome of 892.28%, with a high 67th percentile of 1,367.99%. With 995 simulations showing positive returns, the portfolio's annualized return across scenarios is 20.76%. While promising, these projections highlight the need for diversification to manage risks and capture more consistent returns.

Asset classes Info

  • Stocks
    100%

The portfolio is heavily weighted towards stocks, with an allocation of 99.91% and a negligible cash position of 0.09%. This asset class concentration aligns with the growth risk profile, aiming for capital appreciation. However, such a skewed allocation increases vulnerability to stock market fluctuations. Diversifying into other asset classes like bonds or real estate could potentially reduce risk and provide more balanced growth. This would help in stabilizing returns, especially during volatile market periods, and align the asset allocation with a more diversified investment strategy.

Sectors Info

  • Technology
    22%
  • Financials
    18%
  • Consumer Discretionary
    12%
  • Health Care
    11%
  • Industrials
    11%
  • Energy
    9%
  • Consumer Staples
    8%
  • Telecommunications
    6%
  • Basic Materials
    3%
  • Utilities
    1%
  • Real Estate
    1%

The portfolio is diversified across several sectors, with a notable allocation to technology (21.85%), financial services (17.93%), and consumer cyclicals (12.15%). While these sectors offer growth potential, the concentration in technology may expose the portfolio to sector-specific risks. Other sectors like healthcare, industrials, and energy also have significant representation, but there are minimal allocations in utilities and real estate. To enhance diversification, consider balancing sector allocations to mitigate the impact of sector downturns and capitalize on broader market opportunities.

Regions Info

  • North America
    99%

Geographically, the portfolio is heavily concentrated in North America, accounting for 99.16% of the allocation. This focus on the U.S. market provides exposure to a stable and mature economy but limits the portfolio's potential to benefit from growth in other regions. Minimal allocations in Europe, Latin America, and Asia suggest missed opportunities for international diversification. Introducing more geographic diversity could reduce regional risks and tap into emerging market growth, offering a more balanced global investment approach.

Redundant positions Info

  • Schwab U.S. Large-Cap Growth ETF
    SPDR® Portfolio S&P 500 ETF
    High correlation

The portfolio shows high correlation between the Schwab U.S. Large-Cap Growth ETF and the SPDR® Portfolio S&P 500 ETF, indicating overlapping exposure. This correlation suggests that these assets tend to move in the same direction, offering limited diversification benefits. To enhance portfolio resilience, consider reducing exposure to highly correlated assets and incorporating investments with lower correlations. This approach can help smooth out returns and reduce the impact of market volatility, leading to a more robust and efficient portfolio.

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.

The portfolio optimization chart suggests focusing on reducing overlapping assets before considering optimization. By removing highly correlated investments, the portfolio can achieve better diversification and risk management. Moving along the efficient frontier, an investor can adjust the risk-return profile by either increasing exposure to higher-risk assets for potentially higher returns or shifting towards more conservative options for stability. This strategic adjustment can help align the portfolio with desired risk levels and financial objectives, enhancing overall performance.

Dividends Info

  • Avantis® U.S. Small Cap Value ETF 1.50%
  • Schwab U.S. Dividend Equity ETF 3.30%
  • Schwab U.S. Large-Cap Growth ETF 0.40%
  • SPDR® Portfolio S&P 500 ETF 1.20%
  • Weighted yield (per year) 1.94%

The portfolio generates a total dividend yield of 1.94%, with the Schwab U.S. Dividend Equity ETF contributing the highest yield at 3.3%. This focus on dividend-paying stocks provides a steady income stream, which can be reinvested to enhance growth. While the yield is modest, it aligns with the growth-oriented nature of the portfolio. To increase income potential, consider exploring additional dividend-focused investments or funds that offer higher yields. This strategy could complement capital appreciation goals and provide a buffer during market downturns.

Ongoing product costs Info

  • Avantis® U.S. Small Cap Value ETF 0.25%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • Schwab U.S. Large-Cap Growth ETF 0.04%
  • SPDR® Portfolio S&P 500 ETF 0.02%
  • Weighted costs total (per year) 0.09%

The total expense ratio (TER) of the portfolio is 0.09%, reflecting a cost-effective structure. The SPDR® Portfolio S&P 500 ETF has the lowest cost at 0.02%, while the Avantis® U.S. Small Cap Value ETF has the highest at 0.25%. Keeping costs low is crucial for maximizing net returns over time. Although the current costs are competitive, regularly reviewing and comparing fees across similar investment options can ensure continued cost efficiency. This vigilance helps maintain the portfolio's profitability and supports long-term financial goals.

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