Investing $100 000 in 10 Random ASX200 stocks-Tangency vs an Equal Weighted Portfolio- Experiment

**Disclaimer- this is not financial advice please but merely a theoretical discussion. I am not a financial advisor. Please consult with a registered Financial Consultant should you require advice.

Choosing an asset should be based on performance, and this is based on certain measurements. As an example property prices vary based on: amount of bedrooms and bathrooms, views, the size and the location. Properties in Sydney would demand higher values than Townsville. Factors such as sales, cash flows and the ownership of assets and other factors determine the value of a company. But as Sydney's property values fluctuate options to purchase properties in different cities help diversify your investment. Having a property in say Brisbane and Sydney or in London may ensure there is less risk during a downturn in property prices. London may have a lower correlation to Sydney than Brisbane thus creating a more diverse investment. Spreading risk by creating a portfolio of properties, applies to share investments. The more diverse a group of shares, the more the opportunity to decrease risks by ensuring they are not all correlated and moving in the same direction, particularly if there is a sell off in the market. Investing solely in oil or Tech may not be wise. As the saying goes: Let's not keep all our eggs in one basket.

Most of us would have more than one investment asset. This is known as a portfolio of assets. A few examples could be: property, cash, antiques, artwork and shares. Many investors decide to invest in property and avoid shares.

Some risk averse investors think shares are a bad investment, but inadvertently invest in them through their Super/ Retirement funds. Using blue chip companies or top performing companies we can lower risk by investing in more than one share- this is known as a portfolio. But how do we calculate the ratio of what shares to buy?

We could simply divide the total by the amount of shares we choose or we could choose based on Modern Portfolio Theory. Portfolio theory was introduced by Harry Markowitz. Two questions are key to this: 1.) How volatile is the portfolio? 2.) What is the co-variance of the different shares that you have invested? This means that the relationships between the shares and whether they correlate and their actual performance is taken into account ensuring the risk versus returns are optimal for the combination of shares invested.

So I decided to test this theory. I will invest in an optimal Portfolio---- using $100 000 (theoretically). This article is not about choosing the top 10 stocks but rather to prove Tangency Portfolio's outperform an equal weighted investment- Non Tangency portfolio (Equal Weighted Portfolio).

Using Portfolio Theory and a R programming script (with live Yahoo data between 1 January 2015 and 29 November 2019) enables the construction of a graph providing information on different ratios to be invested. This is known as Tangency portfolio which obtains the point of the efficient frontier of the Sharpe Ratio. Lowering risk and increasing returns based on different weightings of the shares.

My Shares and information:

I choose the following 10 ASX 200 stocks from https://www.asx200list.com :

Company Name

Fortescue Metals Group - FMG

Ooh!Media Limited - OML

National Storage FP Ordinary/Units Stapled Securities - NSR

Ausnet Services Limited - AST

Nanosonics Limited - NAN

Northern Star - NST

Western Areas Limited - WSA

Abacus Property Group - ABP

Fisher & Paykel H Foreign Exempt NZK - FPH

Premier Investments - PMV

I decided to randomize my selection using a random selector. In future articles I may provide a mix of top investments, but I wanted to demonstrate the Tangency concept. The following graph shows how best to invest in the above combination of Shares.

I decided to invest a theoretical $100 000, using the ASX watchlist and Yahoo Finance. I used two portfolios called "Tangency" and "Non Tangency"based on the ratios in the table below:

For each time period below, the difference will be updated.

The results (cumulative difference) :

1 hour- Tangency Non- Tangency

-$81 -$202

16h00 29 November 2019 (Sydney Time)

In 1 hour it has shown a difference in the portfolio.

1 day- 2-12-2019

1 week-

1 month- 8-01-2020 (25 days)

This was a bit off the planned day. Tangency has started to outperform Non Tangency, after a month of lagging behind.

When compared with bank interest rates, the Tangency and Non Tangency will outperform banks. With a 4% per month interest (assuming it maintains this each month) we could earn $60 103 versus the highest banks $2500 return.

Tangency Portfolio

Non Tangency Portfolio

Accessed: www.finder.com.au

3 months-

6 months-