Model Portfolio #1: “All-In Tech or 100% Technology Sector”

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Diversification  48%   D

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First let’s consider a portfolio that is clearly not diversified - a portfolio that is 100% invested in the technology sector via SPDR's Technology or “XLK.” Whether it is e-commerce, artificial intelligence, or robotics, this sector focuses on companies in the rapidly growing technology ecosystem. A tech sector portfolio offers exposure to market leaders like Nvidia, Apple, Microsoft and Google. Holding a tech-heavy portfolio is appealing to investors with a high risk or speculative risk profile. 
 

Benefits:

• Tech has been driving market performance, fueled by innovation in areas like AI, cloud computing, and software.

• Includes companies that are global leaders at the forefront of digital transformation.

 

Risks:

• Heavy focus on one sector increases vulnerability to tech-specific risks like regulatory changes or market corrections.

• Tech stocks often trade at high valuations and are sensitive to interest rates and market sentiment.

 

While a tech portfolio offers strong growth potential, it lacks diversification and is more exposed to volatility compared to a broader market index. As a result, the Wealthscope Diversification analysis predictably gives a Technology Sector Portfolio a score of 48% or “D” grade.

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Model Portfolio #2: “US Equity Index”

 

Diversification  60%   C

 

​Next, we are going to take a theoretically much more diversified portfolio that represents - the S&P500 index, represented by SSGA’s S&P500 Trust (ticker: SPY). This is a portfolio of 500 of the largest stocks by market capitalization in the United States, and it is diversified across multiple sectors. The S&P500 is also a market-cap-weighted index, where individual companies are weighted according to their size in the portfolio.

Benefits:

• Simplicity and cost effectiveness due to less frequent rebalancing.

• Can outperform during periods when dominant sectors like technology lead the market.

• Reflects the real distribution of capital across the economy.

Risks:

• Potential for significant sector concentration risk, since a few large sectors can dominate the index due to market cap weighting, making the portfolio less structurally diversified.

• Vulnerability to sector specific bubbles or corrections (e.g., the dot com crash), which can create greater downside risk. 

• Smaller or undervalued sectors often get minimal representation.

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The rapid growth of artificial intelligence, along with the dominance of a few large tech stocks, has been a major driver of the S&P 500's performance. As a result, the tech sector's weighting has become disproportionately high compared to other sectors. In line with these secular market conditions, an analysis of SPY using Wealthscope shows a Diversification Score of 60%, giving it a low “C” grade.

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Model Portfolio #3: “Equal Weight US Equity Sectors”

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Diversification  70%   B

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A simple way to remedy the problem of sector concentration is to create a portfolio that equally weights the 10 major GICS sectors, including Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, and Utilities, represented by 10 SPDR sector ETFs. [1] Note that we are deliberately excluding Real Estate, which includes REITs (Real Estate Investment Trusts), which was separated from Financials in 2016 and is the 11th sector in the GICS classifications. Historically, REITs were part of the Financials sector and some investors still consider them to be a subset of financial assets. If an equal sector weight portfolio includes a Financials allocation, adding REITs separately could be seen as double-counting exposure to real estate and real estate financing.

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Benefits:

• Reduces concentration risk (e.g., the tech-heavy focus of major indices like the S&P 500).

• Gives smaller, traditionally underrepresented sectors more influence in the portfolio.

• Can protect against sector-specific downturns or bubbles.

Risks:

• May underperform during periods when certain sectors dominate market returns.

• More frequent rebalancing is needed to maintain equal sector weights.

 

On balance, the difference in the long run performance between a market cap weight and an equal weight sector portfolio is likely to be small. However,  at times it can be large during bubble periods when one sector is overvalued and the broad index is likely to outperform, and especially after a bubble bursts when an equal weight sector portfolio is more likely to outperform. But there is little to dispute that an equal weight sector portfolio is more diversified. As a result, the Wealthscope Diversification score is a 70% or a low “B”, which is slightly better than the S&P500's. 

Model Portfolio #4: “Equal Weight Global Equity Sectors”
 

Diversification  74%   B

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The next logical step to improve upon a US Equal Weight Sector is to use Global Sectors that hold the biggest companies in each sector from different countries around the world. The same major sectors used for US Equity Sectors are used to be consistent. The Global Sectors are derived using GICs classification on the S&P Global 1200 of the largest 70% of market cap stocks in North America, Europe, Asia-Pacific, and emerging markets. To proxy the global sectors we will use the corresponding iShares global sector ETFs. [2]

Benefits:

• Investing globally reduces exposure to risks tied to a single country's economy or market cycles, providing a buffer during periods of domestic downturns.

• Allows participation in emerging markets and international industries that may outperform domestic sectors at different times, enhancing growth potential.

• A global portfolio reduces home bias, mitigates over-reliance on any one market, ensuring better balance across sectors and economies.

 

Risks:

• Inconsistent performance relative to domestic equity benchmark indices due to differences in currency and country performance from various constituent stocks.

 

By combining global sectors, this strategy offers superior diversification, reducing concentration risks and potentially capturing higher growth opportunities from international markets. When we plug this Global Sector Equal Weight portfolio into Wealthscope we get a material increase in the overall Diversification score from 70% (for Domestic Sectors) to 74% or a “B.” A grade of B means that we have decent diversification but are not capturing the full spectrum of opportunities. To do so we are going to have to branch out beyond equities.
 

Model Portfolio #5: “Equal Weight Global Equity Sectors with Bonds”
 

Diversification  82%   A​

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Incorporating bonds into a global sector equal weight portfolio enhances stability and risk management. We add a small 10% position in the Aggregate US Bond Universe using iShares' AGG, to boost diversification while maintaining the general higher risk profile of the portfolio.

Benefits:

• Bonds generally experience less price fluctuation than stocks.

• Bonds usually have a low or negative correlation with equities, helping to reduce portfolio risk.

• Bonds provide a reliable income stream.

• Bonds can perform well in falling interest rate environments, offering additional upside potential when economic conditions shift.

 

Risks:

• Higher allocations to bonds can lower expected portfolio returns.

• Bonds can become more positively correlated with equities during inflationary periods, as we witnessed in 2022.
   

By adding bonds, you create a more balanced portfolio that combines the growth potential of global equities with the stability and income generation of fixed-income assets, leading to improved risk-adjusted returns. Just adding a small allocation to bonds boosts the Wealthscope Diversification Score to 82% with our first “A” grade. 
 

Model Portfolio #6: “Equal Weight Global Sector Equity with Bonds, Gold, and Alternatives”

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Diversification  92%   A

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To further diversify our portfolio, we add two alternative assets, gold and managed futures. We choose Gold (represented by SPDR Gold, ticker GLD) because it has a lower correlation to traditional asset classes and it also helps to protect against inflation. Adding another alternative asset class such as hedge funds can further diversify a traditional portfolio. Managed futures is a popular hedge fund strategy that have low correlations to equities and bonds. A good proxy for managed futures is the SG Commodity Trading Advisors (CTA) Index, where the primary strategy is “trend following". This strategy seeks to capture trends in a broad range of different markets such as commodities, currencies, equities and bonds, by going long when the trend is rising and short when the trend is falling. We allocate 12.5% each to bonds and gold, and 5% to the actively managed iMGP DBi Managed Futures Strategy ETF (DBMF).

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Benefits:

• Gold can help protect purchasing power during inflationary periods.

• Managed Futures can potentially provide downside protection during market corrections.

• Gold and Managed Futures strategies are both great diversifiers with a low correlation with equities and bonds.

 

Risks:

• Long-term returns are generally lower than equities.

• Managed Futures may have long periods of underperformance while conventional assets are doing well. Trend reversals and sideways markets can lead to losses.

• Managed Futures strategies are complex and harder to grasp compared to traditional investments.

 

​The Wealthscope Diversification Score of this portfolio is an impressive 92% with a grade of “A”, indicating that we have achieved substantial diversification benefits through our portfolio construction process.

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Below is a chart that summarizes the scores across the six portfolios:

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