Updated on: June 18, 2021 ; Investments
Background:
If you have been following my last few posts, then you would be aware that we have covered 8 investment portfolio strategies so far. All of them have been one time investments with or without rebalancing. Today we are going to explore the scenarios with regular investments in an equal-weighted portfolio of stocks.
Portfolio selection:
This is exactly the same logic that we applied in the first three articles. Please click here to understand the portfolio selection criteria.
Methodology for regular investments in equal-weighted portfolio:
We will directly go into explaining the regular investment methodology. For detailed literature on the scenarios and concept of equal weights please read here.
We shortlist the same set of stocks as we did in the first case. Scenario 9a will have the first 5 stocks and scenario 9b will have all the 8 stocks.
- Reliance Industries
- Hindustan Unilever
- ITC
- Nestle India
- Tata Motors
- Hindalco
- Tata Steel
- Larsen & Toubro
In the regular investments in an equal-weighted portfolio, we invest 100,000 rupees every year at the end of March for 18 years. The investment starts in march 2003 and continues till March 2020. This makes the total investments = 18 lakhs. We finally evaluate the value of the investments in march 2021.
As this is a regular investment strategy in an equal-weighted portfolio, we invest equal corpus into each stock annually, irrespective of the stock price that year.
So in scenario 9a, we invest 20,000 rupees into each of the five stocks, and in scenario 9b, we invest 12,500 rupees into each of the eight stocks. There are no withdrawals or balancing of the portfolio during the whole investment period.
As, usual, we compare these two scenarios with the Sensex, where we invest 100,000 rupees at March end annually.
Let’s look at the numbers now.
Comparative study:
The three tables below show the final investment value of the amount invested in Sensex and the two scenarios.
The scenario tables also provide the stock wise break up of investment values.
The Sensex returned 4 times the investment value, which amounts to a CAGR of 13.29%
Scenario 9a gave 9 times the investment value in returns which means a staggering CAGR of 20.42%
Even scenario 9b, gave an impressive return of 7.3 times at a CAGR of 18.58%.
You can see for yourself how some stocks increased the value of your investments, whereas some others pulled it down.
But at an overall level, both the scenarios did well over the 18 years investment period. The 5 stock scenarios had done better than the 8 stocks at the end of 18 years. Let’s see if it has consistently been this way throughout these 18 years.
For the first 6 years, there was not much of a difference between the performance of the three portfolios. All three were equal contenders for the top spot till the end of 2009. The two scenarios take a significant lead over the Sensex only after this period.
Consequently, it is only after the start of 2011 that scenario 9a takes a consistent lead over scenario 9b.
So, regular investments in an equal-weighted portfolio have their merits over a long investment time horizon. But the results will vary significantly based on the composition, investment time horizon, and point of evaluation.
Final remarks:
Like all the equal-weighted portfolios studied so far, this one also seems to have an edge over Sensex or Index.
Again, the choice of stocks matters the most. This approach is similar to the SIP approach (annual investments instead of popular monthly investments). So, it will have all the usual risks associated with SIPs.
You will have to study different strategies and alter them based on your preferences and market conditions. These studies are just cursors and guides to show you the different styles. They will help you to choose your own.
Adapt your style !!!