Portfolio: Right Composition (True Diversified)
Date: 30th April 2013
At SAFE Trade we studied 20 years growth pattern of NIFTY and found in the last twenty years (1993-2013) NIFTY has given an average of 12% compound interest to investors and in the last 10 years close to 20%. See our other article WhySafe for details. At the same time, in our informal survey we found 8 out of 10 folks have lost money in equity market. 12-20% compound interest is any day very appealing ROI for most of the investors but 80% failure is a big NO. We worked on finding the missing link of these two contrary ends.
NIFTY is representation of large caps (highly liquid) and it also represent all leading sectors of the Indian economy. As Indian economy has not shown any negative growth in the known past then we should not have ideally lost at all our investments linked to the economy.
We have online tool Portfolio Builder which guides users to create portfolio on the same philosophy as NIFTY. Portfolio builder only provides options to select liquid stocks (from top 500 stocks) and frame them through Group based concept to distribute your money in leading sectors close to same ratio as they represent in the Indian economy. This tool is open for anybody to try out and we record all such data at our website. The analysis of portfolios built using the tool shows average returns of 14% compound interest in last five years (if they would have bought those stocks 5 years back and just held for 5 years. We call it Spot investment). Lowest recorded figure is 5.5%, almost equivalent to 8% interest in fixed deposit (considering 30% tax on fixed deposit interest). 80% of folks who created portfolios have got 9-19% returns.
Yearly Compound Interest Earned by Percentage of Spot Investors
We further analyzed the return under condition Rule-X. Under Rule-X we suggest to get out of a falling stock and ride only the rising one. Same set of portfolios which we analyzed above for Spot investors after applying Rule-X (we call APS investor) the results improved further and the average return was around 21%. Lowest recorded return is 11%. Almost 80% folks were in the range of 15-26% return.
Yearly Compound Interest Earned by Percentage of APS Investors
Conclusion: If we compose a portfolio with liquid stocks and select from all leading sectors in proportion to their weightage in the economy then we not only avoid the chance of making loss in the stock market but the returns are very good in long term (say 5 years)
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