Updated on: June 23, 2021 ; Investments
Background:
We have covered 10 investment portfolio strategies so far. In the last two articles, we covered regular investments in an equal weighted and marketcap portfolio of stocks. We will cover regular investments in an equal weighted portfolio of stocks again. But with a different set of stocks. We will use the stocks that we used in the 4th study.
So the construct of this article will remain the same as previous ones.
Portfolio selection:
This is exactly the same logic that we applied in the 4th, 5th and 6th 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 4th case. Scenario 11a will have the first 5 stocks and scenario 11b will have all the 8 stocks.
- ONGC
- Reliance Industries
- Hindustan Unilever
- Wipro Limited
- Infosys Technologies
- Indian Oil Corporation
- ITC
- State Bank of India
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 11a, we invest 20,000 rupees into each of the five stocks, and in scenario 11b, 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 11a gave 6.7 times the investment value in returns which means a good CAGR of 17.90%
Even scenario 11b, gave a return of 5.5 times at a CAGR of 16.16%
You can see for yourself how some stocks increased the value of your investments, whereas some others pulled it down. The biggest wealth destroyer, in this case, was ONGC.
When compared to the previous study of an equal-weighted portfolio, this strategy has performed worse, but still, it has given very good returns over the index. We have seen before in the lumpsum investment strategy
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 13 long 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 early 2016. In fact, scenario 11a performed below Sensex till mid-2017.
It is only in the last few years that scenario 11a takes a lead over scenario 11b.
So, regular investments in an equal-weighted portfolio with this portfolio selection is not a very lucrative solution.
Final remarks:
This equal weighted portfolio doesn’t seem to have an edge over the Sensex as other ones studied so far.
Time and again, we have seen that this portfolio selection of stocks has performed poorly under different strategies. So, this is not a recommended approach for stock selection.
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.
Keep exploring !!!