Updated on: June 23, 2021 ; Investments
Background:
We have covered 11 investment portfolio strategies so far. In the last article, we covered regular investments in an equal-weighted portfolio of stocks. We will cover regular investments in a marketcap weighted portfolio of stocks using the same 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 marketcap 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 12a will have the first 5 stocks and scenario 12b 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 a marketcap-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 a marketcap-weighted portfolio, we divide 100,000 based on the investment value of each stock in the portoflio, at the end of March each year. This proportionate amount is then invested into each stock.
So in scenario 12a, we distribute 100,000 rupees across five stocks, and in scenario 12b, we do the same across eight stocks. There are no withdrawals or balancing of the portfolio during the whole investment period. So each stock gets a different investment amount each year depending on its investment value.
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 12a gave ~6 times the investment value in returns which means a CAGR of 16.68%
And scenario 12b, gave a return of 5.2 times at a CAGR of 15.66%
You can see for yourself how some stocks increased the value of your investments, whereas some others pulled it down.
At an overall level, both the scenarios did well over the 18 years investment period. But, when compared to other studies done, they performed poorly. This strategy, with this stock selection, does not seem to be a suitable strategy against the others discussed so far.
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 12a performed below Sensex till mid-2017.
It is only in the last few years that scenario 12a takes a lead over scenario 12b.
So, regular investments in a marketcap weighted portfolio with this portfolio selection is not a very lucrative solution.
Final remarks:
This market 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.
Design the right strategy for yourself !!!