Balanced Portfolio with Low Diversity and High Correlation Needs Optimization for Better Risk Management

Report created on Dec 5, 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 weighted towards the Vanguard Total Stock Market Index Fund ETF Shares, which makes up over 91% of the total holdings. This concentration suggests a focus on broad market exposure, primarily through U.S. equities. While this can be beneficial for capturing overall market growth, it also means the portfolio lacks diversity, as it is predominantly invested in a single fund. To enhance diversification and reduce risk, consider reallocating some assets into different funds or asset classes that offer varied exposure and can help balance the portfolio.

Growth Info

Historically, the portfolio has performed well, with a compound annual growth rate (CAGR) of 15.64%. This indicates strong growth over time, although it has experienced a maximum drawdown of -25.62%, reflecting potential volatility. The performance is driven by the strong returns of U.S. equities, which have been favorable in recent years. However, relying heavily on past performance can be misleading. It's crucial to consider potential risks and ensure the portfolio is structured to withstand future market fluctuations, possibly by diversifying further.

Projection Info

Using a Monte Carlo simulation with 1,000 iterations, the portfolio's future performance was projected. This statistical method models potential outcomes by simulating random market conditions. Results show a wide range of possible returns, with the 5th percentile at 158.26% and the 67th at 1,168.45%, highlighting both risk and opportunity. The median outcome suggests significant growth potential, but the variance indicates uncertainty. To mitigate this, consider strategies that balance risk and return, such as diversifying into less correlated assets or including more defensive investments.

Asset classes Info

  • Stocks
    100%

The portfolio is almost entirely composed of stocks, at 99.79%, with a minimal cash allocation. This heavy stock emphasis can lead to high returns during a bull market but also increases exposure to market downturns. For a more balanced risk profile, it might be beneficial to include other asset classes, such as bonds or real estate. These can provide stability and income, especially during volatile periods, and help smooth out returns over time. Adjusting the asset class mix could improve the portfolio's resilience against economic uncertainties.

Sectors Info

  • Technology
    33%
  • Financials
    13%
  • Health Care
    11%
  • Consumer Discretionary
    10%
  • Industrials
    9%
  • Telecommunications
    8%
  • Consumer Staples
    5%
  • Energy
    3%
  • Real Estate
    3%
  • Utilities
    3%
  • Basic Materials
    2%

Technology dominates the portfolio sector allocation with 32.68%, followed by financial services and healthcare. While these sectors have shown strong performance, overexposure could lead to increased vulnerability if these sectors face downturns. The portfolio's sector allocation lacks balance, with minimal exposure to other sectors like utilities and basic materials. To mitigate sector-specific risks, consider redistributing some investments into underrepresented sectors, which can provide diversification benefits and reduce overall portfolio volatility.

Regions Info

  • North America
    99%

Geographically, the portfolio is predominantly invested in North America, with 99.48% exposure. This concentration in a single region limits potential growth opportunities from other global markets. While the U.S. has been a strong performer, diversifying geographically can reduce risk and capture growth from emerging and developed markets outside North America. Consider allocating a portion of the portfolio to international funds or ETFs, which can offer exposure to different economic cycles and potentially enhance overall returns.

Redundant positions Info

  • Vanguard Information Technology Index Fund ETF Shares
    Invesco NASDAQ 100 ETF
    High correlation
  • Vanguard S&P 500 ETF
    Schwab U.S. Large-Cap ETF
    Vanguard Total Stock Market Index Fund ETF Shares
    High correlation

The portfolio contains highly correlated assets, particularly among the Vanguard Information Technology Index Fund ETF Shares and Invesco NASDAQ 100 ETF, as well as the Vanguard S&P 500 ETF, Schwab U.S. Large-Cap ETF, and Vanguard Total Stock Market Index Fund ETF Shares. These correlations suggest overlapping exposure, which does not contribute to diversification. Reducing these overlaps by selecting funds with different investment focuses or asset classes can improve diversification and reduce the portfolio's overall risk profile.

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 overlapping assets that do not add diversification benefits. By adjusting the portfolio along the efficient frontier, an investor can achieve a riskier or more conservative profile. Moving towards a more balanced asset allocation can help manage risk and enhance returns. Consider incorporating a mix of asset classes and sectors to improve diversification. This approach provides a smoother return experience and aligns with long-term financial objectives. Once diversification is addressed, optimization can further refine the portfolio's efficiency.

Dividends Info

  • Invesco NASDAQ 100 ETF 0.60%
  • Schwab U.S. Large-Cap ETF 2.30%
  • Vanguard Information Technology Index Fund ETF Shares 0.60%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total Stock Market Index Fund ETF Shares 1.20%
  • Weighted yield (per year) 1.20%

The portfolio's dividend yield is 1.2%, with contributions from various ETFs. While dividends provide a steady income stream, the current yield is relatively modest. Increasing the focus on dividend-paying investments can enhance income, especially in volatile markets. Consider incorporating high-dividend ETFs or funds that focus on income-generating assets. This approach can bolster returns through regular payouts and provide a cushion during market downturns, contributing to a more balanced and resilient portfolio.

Ongoing product costs Info

  • Invesco NASDAQ 100 ETF 0.15%
  • Schwab U.S. Large-Cap ETF 0.03%
  • Vanguard Information Technology Index Fund ETF Shares 0.10%
  • Vanguard S&P 500 ETF 0.03%
  • Vanguard Total Stock Market Index Fund ETF Shares 0.03%
  • Weighted costs total (per year) 0.03%

The portfolio's total expense ratio is low at 0.03%, which is advantageous as it minimizes costs and maximizes net returns. Low fees are a critical component of long-term investment success, as they compound over time and can significantly impact overall performance. Maintaining a focus on cost-efficient investments is crucial. Regularly review the fee structure of current holdings and consider switching to lower-cost alternatives if available. This strategy will help keep expenses in check and support better portfolio performance.

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