Investing in the ASX Top 20 Yields Better Returns


By Dale Gillham | Published 09 November 2019


In this week's Australian Stock Market Report, Dale discusses why investing in the ASX top 20 yields better returns for traders and investors and what to expect in the Australian market over the coming weeks.

The goal of every trader and investor is to achieve good solid returns, but when striving to manage their own portfolio, the opposite often occurs. I believe there are two main reasons for this: firstly, the overwhelming majority want to be in control of their investments, and secondly investors want to rely on their own research.

Achieving solid returns investing in the ASX top 20 stocks

The challenge with this is that the majority of investors lack the knowledge required to invest correctly, with many searching for that illusive stock that will provide the returns they are seeking. Unfortunately, it is this desire to be in control (without the right knowledge) that is costing investors dearly in terms of lost time and returns.

Based on my own research on the top 20 stocks in the Australian stock market, it is possible to outperform the index using a few simple rules. That said, many believe that the top 20 stocks are too expensive and prefer to gamble on the penny dreadful stocks, although this does explain why most investors achieve returns well below their expectations.

We only need to look at the performance of the All Ordinaries Index this calendar year to prove my point of why investing in the top stocks will yield the returns investors are seeking. From 1 January this year, the market has risen approximately 19 per cent.

So, if an investor had held all top 20 shares over the same period, their portfolio would have achieved capital growth of 16 per cent plus dividends. With the average dividend yield paying around 4 per cent, investors would have achieved a total return of 20 per cent. Not bad when you consider that most investors are happy achieving a return of around 8 to 9 per cent per annum (as per the latest ASX Investor Study in 2017).

Of the top 20 stocks CSL has achieved the biggest growth with 41 per cent while the only stock showing a negative return in the top 20 is S32 down, which is down around 19 percent. Currently, nine of the top 20 stocks have achieved capital growth of over 20 per cent.

While I don’t espouse to the philosophy of buy and hold or to over diversifying a portfolio, what this does demonstrate is that it is easy to achieve good returns without too much effort or knowledge. That said, if investors want to achieve returns above this level, then it pays to get a good education that will enable them to do this.

The top and bottom performing sectors in Australia last week

Interestingly, Materials topped the list rising over 3 per cent, while Consumer Staples and Information Technology were both up over 1 per cent. The worst performing sectors have been Communication Services, Utilities and Industrials, all of which have been flat.

Looking at the top 100 stocks, surprisingly Pendal Group rose over 9 per cent on Wednesday despite announcing a profit downgrade and was up over 11 per cent for the week. CSR was also up over 9 per cent, while S32 is up over 7 per cent.

The worst performers last week include Medibank down over 6 per cent, Flight Centre down over 4 per cent after warning of a profit downgrade, and Atlas Arteria, which is down over 3 per cent.

What's next for the Australian stock market?

The Australian market is once again displaying a lot of indecision as it continues to trade sideways with the market rising just over 2 per cent since 1 July this year. In that time, the All Ordinaries Index has achieved a new all-time high before falling nearly 7 percent only to rise up over 6 percent before, once again, falling another 4 per cent only to rise back up where it started for the financial year.

Given the continued volatility and uncertainty, it’s no wonder investors are getting frustrated with the market. However, right now it’s important for investors to be patient as the market will decide on a direction soon, with it more than likely rising over the next few months. But to confirm this, we need to see the All Ordinaries rise above 6,900 points. That said, it is still possible that the market will fall away over the next week or so into my earlier target of below 6,400 points before turning to rise up.

Let’s get into this week’s stocks of interest. Watch the video to find out more.

Good luck and good trading!

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online.


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