Balanced Portfolio with Low Diversity and High Correlation in U.S. Equities

Report created on Dec 3, 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 four ETFs making up the entirety of the investments. The Vanguard Total Stock Market Index Fund ETF dominates, comprising over 83% of the portfolio. The remaining positions are in the Vanguard S&P 500 ETF, Schwab U.S. Dividend Equity ETF, and Vanguard Mega Cap Growth Index Fund ETF Shares. This composition indicates a strong focus on broad market exposure, with a slight emphasis on dividends and growth. However, the lack of diversity could expose the portfolio to significant market volatility, which might not align with a balanced risk profile.

Growth Info

Historically, the portfolio has delivered a robust compound annual growth rate of 13.88%, reflecting strong performance in U.S. equity markets. However, it has experienced a maximum drawdown of -34.7%, illustrating vulnerability during market downturns. The performance is largely driven by a small number of days, with 90% of returns concentrated in just 32 days. This highlights the importance of staying invested during volatile periods to capture these critical market movements, albeit at the cost of experiencing significant drawdowns.

Projection Info

A Monte Carlo simulation, which uses random sampling to predict future performance, suggests a promising outlook with a median return of 547.85% for a hypothetical initial investment. The simulation indicates a high probability of positive returns, with 994 out of 1,000 simulations yielding gains. However, the potential for extreme outcomes exists, as shown by the wide range between the 5th and 67th percentiles. This suggests that while the portfolio may perform well, there's also a risk of underperformance in adverse market conditions.

Asset classes Info

  • Stocks
    100%

The portfolio's asset class allocation is overwhelmingly in stocks, with a negligible portion in cash. This high equity exposure aligns with a growth-oriented strategy, but it also increases susceptibility to market volatility. Given the portfolio's balanced risk classification, incorporating other asset classes such as bonds could help mitigate risk and provide a more stable return profile. Diversifying across different asset classes can enhance the portfolio's resilience to market fluctuations and align better with a balanced investment approach.

Sectors Info

  • Technology
    31%
  • Financials
    13%
  • Health Care
    11%
  • Consumer Discretionary
    10%
  • Industrials
    9%
  • Telecommunications
    8%
  • Consumer Staples
    6%
  • Energy
    4%
  • Real Estate
    3%
  • Utilities
    2%
  • Basic Materials
    2%

Sector allocation is concentrated, with technology making up over 30% of the portfolio, followed by financial services and healthcare. This concentration in a few sectors increases the portfolio's dependency on the performance of these industries. While technology has been a strong performer, this sector-specific risk could lead to significant volatility. To achieve a more balanced sector allocation, consider diversifying into sectors that are less represented, which can help reduce risk and enhance the portfolio's stability over time.

Regions Info

  • North America
    100%

Geographically, the portfolio is almost entirely focused on North America, with minimal exposure to other regions. This lack of geographic diversification might limit the portfolio's ability to capitalize on growth opportunities in international markets. While the U.S. market has been a strong performer, diversifying into other regions can provide exposure to different economic cycles and potentially reduce overall portfolio risk. Exploring options for international diversification could enhance the portfolio's growth potential and resilience.

Redundant positions Info

  • Vanguard Total Stock Market Index Fund ETF Shares
    Vanguard S&P 500 ETF
    High correlation

The portfolio exhibits high correlation among its assets, particularly between the Vanguard Total Stock Market Index Fund ETF and the Vanguard S&P 500 ETF. This high correlation suggests that these assets tend to move in the same direction, offering limited diversification benefits. Reducing overlap between highly correlated assets can help achieve a more diversified portfolio. By selecting investments that have lower correlations, the portfolio can potentially reduce risk and improve its overall performance during market fluctuations.

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's optimization chart suggests focusing on reducing asset overlap before considering further optimization strategies. By addressing the high correlation between assets, the portfolio can be better aligned with the efficient frontier, optimizing the risk-return trade-off. To achieve a riskier portfolio, increase exposure to growth-oriented assets, while a more conservative approach would involve incorporating fixed-income securities. Prioritizing diversification and reducing redundancy can enhance the portfolio's performance and align it more closely with the investor's risk tolerance.

Dividends Info

  • Vanguard Mega Cap Growth Index Fund ETF Shares 0.40%
  • Schwab U.S. Dividend Equity ETF 3.30%
  • Vanguard S&P 500 ETF 1.20%
  • Vanguard Total Stock Market Index Fund ETF Shares 1.20%
  • Weighted yield (per year) 1.26%

The portfolio's dividend yield stands at 1.26%, driven by contributions from the Schwab U.S. Dividend Equity ETF, which offers a higher yield of 3.3%. This dividend income can provide a steady cash flow, which is beneficial for investors seeking income alongside capital appreciation. However, the overall yield is relatively modest, suggesting a focus on growth over income. To enhance income potential, consider increasing exposure to dividend-focused investments, while maintaining a balance with growth-oriented assets to achieve a well-rounded portfolio.

Ongoing product costs Info

  • Vanguard Mega Cap Growth Index Fund ETF Shares 0.07%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • 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 costs are impressively low, with an overall expense ratio of just 0.03%, largely due to the low-cost Vanguard ETFs. This cost efficiency is a significant advantage, as it allows more of the portfolio's returns to be retained by the investor. Keeping costs low is crucial for long-term investment success, as high fees can erode returns over time. Maintaining a focus on low-cost investment options will continue to benefit the portfolio, ensuring that expenses do not detract from its overall performance.

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