HYP1 is 22 - thread discussing income and capital diversification

[moorfield]

And if the future, because of that unnecessary concentration, leads to a halving of income were one (or more) of those holdings to fail, would you be labelling that outcome one of resounding success?

Easy enough to what-if or stress test. Had RIO and PSN both halved their dividends this year then overall income is £8,397. Doris's initial £3,451 adjusted for RPI is £7,211 (using HLs calculator). That looks successful to me. No I don't like the concentration either, but there is headroom against her income needs there.

[Bubblesofearth]

And if the future, because of that unnecessary concentration, leads to a halving of income were one (or more) of those holdings to fail, would you be labelling that outcome one of resounding success?

Why run the risk?

It seems difficult to justify a rules based system when the minor inconvenience of an additional simple rule to avoid such concentration through infrequent rebalancing would remove such an elementary and obvious flaw.

A simpler, and cheaper, additional rule would be to start with more shares. Bogle advises 30-70 and I'm inclined to agree. My own portfolio echoes this.

Rebalancing incurs costs and runs the (less obvious) risk of continually shunting you into poor performers. Consider a simple World where only 2 shares exist, A and B. If there is mean reversion then rebalancing works, in fact it would have you outperforming buy and hold. However if there is long-run outperformance of either A or B then rebalancing will underperform buy and hold. In the extreme case where either A or B fail or, like the banks recently, effectively fail, then rebalancing will offer slow portfolio death.

You also have to consider whether, with rebalancing, you would have got to the level of wealth that buy-and-hold produces. Is concentration risk at £2000 better than perfectly balanced at £1000?

Like your argument for rebalancing these are theoretical considerations whose validity only further research could uncover. I guess the point I'm trying to make here is that what is an 'elementary and obvious flaw' from one perspective may not be so from another.

BoE

[Itsallaguess]

And if the future, because of that unnecessary concentration, leads to a halving of income were one (or more) of those holdings to fail, would you be labelling that outcome one of resounding success?

Why run the risk?

It seems difficult to justify a rules based system when the minor inconvenience of an additional simple rule to avoid such concentration through infrequent rebalancing would remove such an elementary and obvious flaw.

A simpler, and cheaper, additional rule would be to start with more shares.

Bogle advises 30-70 and I'm inclined to agree. My own portfolio echoes this

As does mine, but unfortunately the HYP strategy painted itself into a bit of a corner by declaring a completely single-share, FTSE-focussed approach, which puts some strain on that proposal and might actually force lower-quality FTSE holdings into the portfolio as a result, which might then not deliver the improved outcomes that might be intended by widening the number of holdings...

With that said, increasing the number of holdings whilst also removing those additional restraints, thus enabling things like income-oriented Investment Trusts into the mix, and as such then opening up more geographically-diverse investment markets at the same time, which often deliver a layer of income with accompanying growth factors that are often difficult to find in the upper regions of the FTSE, feels like a sensible allowance that might well go hand-in-hand with your proposal for a more diverse set of holdings, and perhaps remove any need to pick from a potentially dwindling FTSE-facing selection if those twin-improvements were to be implemented.

I've thought for many years now that HYP was an investment proposal for it's time, but time moves on and I struggle to imagine someone currently looking to develop an income-strategy with the cheap, global options now available to them, where they'd still then actively choose to self-restrict themselves by not taking advantage of some of those much broader income-investment choices.

Cheers,

Itsallaguess

[Itsallaguess]

It is an idea for those with not quite enough capital to retire on comfortably.

More or less the position I was in: 4-5% income would meet the bills. Much lower wouldn't..

I personally think that gets to the heart of the issue though Arb, because once we start looking up the yield-curve, it's often difficult to know where to stop...

The idea that additional income could easily be found, with little consideration for real underlying risk, simply by focussing on higher and higher yields is so appealing, that I suspect the normal checks and balances that really should accompany such searches can often become less and less important...

4-5% will meet the bills...
5-6% will meet the bills and leave some margin...
6-7% will meet the bills and allow me to have some holidays...

Enticing, isn't it...

Cheers,

Itsallaguess

[tjh290633]

A simpler, and cheaper, additional rule would be to start with more shares.

Bogle advises 30-70 and I'm inclined to agree. My own portfolio echoes this

As does mine, but unfortunately the HYP strategy painted itself into a bit of a corner by declaring a completely single-share, FTSE-focussed approach, which puts some strain on that proposal and might actually force lower-quality FTSE holdings into the portfolio as a result, which might then not deliver the improved outcomes that might be intended by widening the number of holdings...
.....
I've thought for many years now that HYP was an investment proposal for it's time, but time moves on and I struggle to imagine someone currently looking to develop an income-strategy with the cheap, global options now available to them, where they'd still then actively choose to self-restrict themselves by not taking advantage of some of those much broader income-investment choices.

Cheers,

Itsallaguess

There is a point to consider, which is that not all, if any, HYP followers started with a 15-share portfolio, bought simultaneously, and drew the income 100%. Most will have built their way up to a sensible size, probably in the 20-30 share range, and will have been able to rebalance by a combination of reinvestment of dividends and adding new money.

Likewise it is improbabable that, faced with a take-over of an overweight holding, they would have put all the proceeds into a single share. Most would more likely have bought a replacement share at the median or average weight and used the rest to do a modicum of rebalancing, or perhaps even to buy an additional holding.

Incidentally, in almost every case of rebalancing by trimming an overweight holding, I have put the proceeds into a share or shares with a higher yield than that trimmed. This ratchets up the income faster than the trimmed share increases it.

In the past my point of view has been, if you want to buy ITs or ETFs, all well and good, but keep them in a separate pot rather than mix them in with an all-individual shares portfolio. That way you can tell which is doing better.

Regarding your final paragraph above, are "cheap global options" always the way to the best outcome? I have my doubts.

TJH

[Itsallaguess]

I've thought for many years now that HYP was an investment proposal for it's time, but time moves on and I struggle to imagine someone currently looking to develop an income-strategy with the cheap, global options now available to them, where they'd still then actively choose to self-restrict themselves by not taking advantage of some of those much broader income-investment choices.

Regarding your final paragraph above, are "cheap global options" always the way to the best outcome?

I have my doubts.

I don't think anyone's actually suggesting that they might 'always be the way to the best outcome' - but simply that they might sometimes offer a useful alternative to an otherwise highly self-restricting approach...

Cheers,

Itsallaguess

[dealtn]

There is a point to consider, which is that not all, if any, HYP followers started with a 15-share portfolio, bought simultaneously, and drew the income 100%. Most will have built their way up to a sensible size, probably in the 20-30 share range, and will have been able to rebalance by a combination of reinvestment of dividends and adding new money.

Agreed. But this thread is specifically about HYP1, and its resulting (over) concentration. Many appear to, instead of acknowledging this, and acting as you describe, prefer to defend this specific portfolio as a proof of HYP concept success, and see no issue with the concentration risk seemingly on the basis it has worked out ok (so far).

For an investment strategy purposely designed for those unable (or unwilling) to monitor portfolios and market risk - with specific intention at inception to diversify away elements of risk - I find it bizarre that ongoing lack of diversification risk is ignored, or considered ok.

[IanTHughes]

As does mine, but unfortunately the HYP strategy painted itself into a bit of a corner by declaring a completely single-share, FTSE-focussed approach, which puts some strain on that proposal and might actually force lower-quality FTSE holdings into the portfolio as a result, which might then not deliver the improved outcomes that might be intended by widening the number of holdings...

With that said, increasing the number of holdings whilst also removing those additional restraints, thus enabling things like income-oriented Investment Trusts into the mix, and as such then opening up more geographically-diverse investment markets at the same time, which often deliver a layer of income with accompanying growth factors that are often difficult to find in the upper regions of the FTSE, feels like a sensible allowance that might well go hand-in-hand with your proposal for a more diverse set of holdings, and perhaps remove any need to pick from a potentially dwindling FTSE-facing selection if those twin-improvements were to be implemented.

One slight fly in your improvement ointment is that there are no "income-oriented Investment Trusts" that I can find that have outstripped HYP1 for total income over the past 22 years. Furthermore, the income from HYP1, starting from a relatiely high yield, has increased by an avergae of 5.99% per year, a level of success that ""income-oriented Investment Trusts", even starting from a lower yield, have manifestly failed to achieve. Despite this, you continue to recommend what appears to me to be the "Lower Income" alternative.

I've thought for many years now that HYP was an investment proposal for it's time, but time moves on and I struggle to imagine someone currently looking to develop an income-strategy with the cheap, global options now available to them, where they'd still then actively choose to self-restrict themselves by not taking advantage of some of those much broader income-investment choices.

Without going down the route of making a full selection, I suspect that, following the High Yield Portfolio (HYP) strategy, I could right now create a portfolio with a current yield of over 5.00%, maybe even as much as 6.00%. I cannot find a selection of "income-oriented Investment Trusts" that would produce a better starting yield, can you?

And why do you believe that a selection of "income-oriented Investment Trusts", while holding many of the same shares as an HYP but perhaps in higher concentrations would, over the following 10+ years, overcome what I suspect would be an intial yield disadvantage?

It is time that you explained the reasoning behind your recommendations. Your opposition to HYP as a strategy, unsubstantiated by any evidence, is no reason at all. Simply making it all up on the fly and expecting no-one to question your muddled thinking, is not acceptable!

Enjoy!


Ian

[NotSure]

It is time that you explained the reasoning behind your recommendations. Your opposition to HYP as a strategy, unsubstantiated by any evidence, is no reason at all. Simply making it all up on the fly and expecting no-one to question your muddled thinking, is not acceptable!

Enjoy!

I cannot, of course, speak for IAAG, but for some of us, investing is about balancing risk and reward. Obviously, if you take on more risk, you stand the chance of greater rewards, but also more chance of disaster. We are talking about life savings and retirement income here.

Looking at HYP1, the main earner is Rio, in a very cyclical sector. Next is Persimmon, a share that is down 50% YTD. Is the current 20% yield likely to be sustainable? Maybe it is, but that portfolio would keep most people up at night, not ideal for the source of one's retirement income. It would take something very dramatic for the remaining "earners" in HYP1, each providing just a two or three hundred a year each, to step into the breach should Rio, Persimmon or BAT hit a bump in the road.

There are ITs that have long records of increasing dividend's. To achieve this, they simply cannot take the sort of risks that HYP1 does. (And even quality bonds currently yield 4 - 6%. In the short term, you can get 4% on cash, with no risk to capital at all.)

I personally have no problem with HYP as a strategy - not for me, but whatever floats your boat. But to state that HYP1 performance proves anything much is a stretch IMHO.

[BullDog]

It is an idea for those with not quite enough capital to retire on comfortably.

More or less the position I was in: 4-5% income would meet the bills. Much lower wouldn't..

I personally think that gets to the heart of the issue though Arb, because once we start looking up the yield-curve, it's often difficult to know where to stop...

The idea that additional income could easily be found, with little consideration for real underlying risk, simply by focussing on higher and higher yields is so appealing, that I suspect the normal checks and balances that really should accompany such searches can often become less and less important...

4-5% will meet the bills...
5-6% will meet the bills and leave some margin...
6-7% will meet the bills and allow me to have some holidays...

Enticing, isn't it...

Cheers,

Itsallaguess

I think Arb almost hit the nail squarely on the head. In the final analysis anyone who finds themselves in the position of having to over reach for yield simply doesn't yet have enough capital. Despite one or two protestations, I think overwhelmingly the population here sensibly acknowledges that selecting the highest possible stock yields is not without cranking up the risk to wealth.

[moorfield]

I cannot find a selection of "income-oriented Investment Trusts" that would produce a better starting yield, can you?

Not too difficult to do. For example a portfolio of the below which is reasonably diversified across the AIC sectors and regions would give you a starting yield of ~7.2% today.

EAT
NCYF
HFEL
SMIF
CSH
APAX
AEI
CHI
HHI
THRL
FSFL
JLEN
SOI
MYI

[IanTHughes]

It is time that you explained the reasoning behind your recommendations. Your opposition to HYP as a strategy, unsubstantiated by any evidence, is no reason at all. Simply making it all up on the fly and expecting no-one to question your muddled thinking, is not acceptable!

I cannot, of course, speak for IAAG, but for some of us, investing is about balancing risk and reward. Obviously, if you take on more risk, you stand the chance of greater rewards, but also more chance of disaster. We are talking about life savings and retirement income here.

Looking at HYP1, the main earner is Rio, in a very cyclical sector. Next is Persimmon, a share that is down 50% YTD. Is the current 20% yield likely to be sustainable? Maybe it is, but that portfolio would keep most people up at night, not ideal for the source of one's retirement income. It would take something very dramatic for the remaining "earners" in HYP1, each providing just a two or three hundred a year each, to step into the breach should Rio, Persimmon or BAT hit a bump in the road.

There are ITs that have long records of increasing dividend's. To achieve this, they simply cannot take the sort of risks that HYP1 does. (And even quality bonds currently yield 4 - 6%. In the short term, you can get 4% on cash, with no risk to capital at all.)

I personally have no problem with HYP as a strategy - not for me, but whatever floats your boat. But to state that HYP1 performance proves anything much is a stretch IMHO.

Yes, we all know that investing in equities is a risk, and we all know that an improved return is normally only achieved as a result of taking on more risk. So the High Yield Portfolio (HYP) strategy means taking risks, more stating the "bleedin' obvious" in my view, tell us something we do not know! Even Itsallaguess appears to have worked that one out!

And sure, HYP may not float your boat, but that does not detract from the results that have been achieved by HYP1. No, on its own it cannot prove anything concrete about the strategy as a whole. But so far, risk taken, reward achieved!

Enjoy!


Ian

[IanTHughes]

In November 2021, pyad reported HYP1 as follows:

https://www.lemonfool.co.uk/viewtopic.p ... 21#p458793

From this we can extract the following:

Nov-21 | Value      | Income    | % of Total Income
PSN    | 28,793.00  | 3,223.85  |            28.43%
RIO    | 23,629.00  | 3,581.31  |            31.59%
       |            |           |                  
Total  | 52,422.00  | 6,805.16  |            60.02%

In November 2022, pyad reported HYP1 as follows:

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=36806

From this we can extract the following:

Nov-22 | Value      | Income    | % of Total Income
PSN    | 14,322.00  | 2,483.95  |            22.33%
RIO    | 27,846.00  | 2,967.32  |            26.68%
       |            |           |                  
Total  | 42,168.00  | 5,451.27  |            49.01%

Those who suggest re-balancing are of course rather slow to come up with any such strategy, I mean they are hardly solution-oriented persons but, assuming that each of these overweight 2021 holdings was reduced such that the % age of portfolio income was no more than 10%, the income from each of these two holdings during 2022, would have been reduced by two thirds.

The capital released in November 2021 would have been £34,944.51 and, assuming that it could have been invested at a yield of 6.00%, the income from this can be calculated as £2,096.67.

From this we can calculate the consequences of such an action as follows:

Nov-22 | Value      | Income   
PSN    |  4,774.00  |   827.98 
RIO    |  9,282.00  |   989.11 
NEW    | 34,944.51  | 2,096.67 
       |            |          
Total  | 49,000.51  | 3,913.76 

A reduction in income from what actually happened of 1,537.51 - a decrease of 13.56%!

Dod1010 and Itsallaguess would no doubt point to the enhanced income diversification and claim a successful year. However, anyone measuring the success or otherwise of HYP1 based on its sole remit of achieving a high and increasing income, would correctly point to the income reduction as a failure!

Enjoy!


Ian

[Dod101]

There is a point to consider, which is that not all, if any, HYP followers started with a 15-share portfolio, bought simultaneously, and drew the income 100%. Most will have built their way up to a sensible size, probably in the 20-30 share range, and will have been able to rebalance by a combination of reinvestment of dividends and adding new money.

Agreed. But this thread is specifically about HYP1, and its resulting (over) concentration. Many appear to, instead of acknowledging this, and acting as you describe, prefer to defend this specific portfolio as a proof of HYP concept success, and see no issue with the concentration risk seemingly on the basis it has worked out ok (so far).

For an investment strategy purposely designed for those unable (or unwilling) to monitor portfolios and market risk - with specific intention at inception to diversify away elements of risk - I find it bizarre that ongoing lack of diversification risk is ignored, or considered ok.

And that is why I have stopped contributing to this thread. HYP1 has failed in the test to be suitable for any Doris. End of.

Dod

[dealtn]

Dod1010 and Itsallaguess would no doubt point to the enhanced income diversification and claim a successful year. However, anyone measuring the success or otherwise of HYP1 based on its sole remit of achieving a high and increasing income, would correctly point to the income reduction as a failure!

Enjoy!


Ian

Indeed. If the sole measure of the success or otherwise of HYP1 was on a remit of achieving a high and increasing income can I pose a question?

If the dividend outcome for 2023 for Persimmon is a reduction from 235p to 124p and that of RIO Tinto a reduction from 685p to 442p as analysts predict (source Stockopedia) will that decline therefore mean, based solely on that remit you refer to, HYP1 will have failed?

[IanTHughes]

Agreed. But this thread is specifically about HYP1, and its resulting (over) concentration. Many appear to, instead of acknowledging this, and acting as you describe, prefer to defend this specific portfolio as a proof of HYP concept success, and see no issue with the concentration risk seemingly on the basis it has worked out ok (so far).

For an investment strategy purposely designed for those unable (or unwilling) to monitor portfolios and market risk - with specific intention at inception to diversify away elements of risk - I find it bizarre that ongoing lack of diversification risk is ignored, or considered ok.

And that is why I have stopped contributing to this thread. HYP1 has failed in the test to be suitable for any Doris. End of.

If only you would stop contributing, and not just to this thread! You obviously never look at any results before making your unsubstantiated claims! In other words, you apparently have nothing to offer! End of!

According to you, a total annual return over the 22 years, as measured by XIRR, of 8.11%, together with an annual increase in income, from a high start mind you, of 5.99%, is a failure!

Please do explain what result you would require in order to claim HYP1 was not a failure!

Enjoy!


Ian

[IanTHughes]

Dod1010 and Itsallaguess would no doubt point to the enhanced income diversification and claim a successful year. However, anyone measuring the success or otherwise of HYP1 based on its sole remit of achieving a high and increasing income, would correctly point to the income reduction as a failure!

Indeed. If the sole measure of the success or otherwise of HYP1 was on a remit of achieving a high and increasing income can I pose a question?

If the dividend outcome for 2023 for Persimmon is a reduction from 235p to 124p and that of RIO Tinto a reduction from 685p to 442p as analysts predict (source Stockopedia) will that decline therefore mean, based solely on that remit you refer to, HYP1 will have failed?

Only if the overall income return over what will then be 23 years, falls below what might have been achieved by other "buy-and-forget" strategies. By my calculations, that is unlikely.

Using your above expected decreases, and assuming no increases elsewhere, the overall Income result from HYP1, over 23 years, would still far outstrip many alternative "buy-and-forget" strategies. Indeed, the single total income figure for next year would still be higher than achieved by many!


ian

[Darka]

How many people who are actually retired live entirely off the income from a HYP?
I suspect the answer is not very many at all; I can't think of any off the top of my head.

Most people running a HYP on the lemon fool it seems are either not yet retired, or don't necessarily need the income as they have income from other sources, or even worse only run a hypothetical one (or rely on the results of someone else's).

Having a little (or no) skin in the game is very different from it being your only game, especially when you no longer earn a salary.

When I was within a couple of years of my early retirement, I realised that I was very nervous about living off essentially a handful of shares, whether that was 15 or 30, it's still only a tiny proportion of the market.

The last thing you need in retirement is a huge amount of stress worrying about whether the HYP idea works or not; and I do not agree that HYP 1 has worked, the reliance on so few shares for the majority of its income is a recipe for disaster even if you can't see that or admit it.

I sold a lot of individual shares and instead bought Investment Trusts (income and growth) and even though I still have a few individual shares I will eventually get rid of those too.

I have never regretted buying IT's and not only is my income much more stable it also makes it far simpler to manage should I die, when my wife has to take over the portfolio as she'll have to do nothing, apart from live off the income.

Yes, I might be able to get a better return doing another strategy, but I just don't care - I already won the game, I retired over a year ago and have enough income even without my SIPP which becomes available in 2024 - there is no need to take unnecessary risks and I'd be a fool to do so.

Good Diversification, a stable income and zero time worrying about my portfolio gives me immense piece of mind and lets me sleep easily at night.

As we get older it becomes much harder to make decisions, and the thoughts of having to sell down my portfolio to provide income (and hope you don't run out) or living off the income from a very small select strategy is not, to me at least a relaxing proposition.

regards,
Darka

[tjh290633]

Moderator Message:
Things are getting a little overheated. Can we please make our comments polite and respectful of others views, as this topic is in danger of degenerating into a slanging match. By all means make robust comments, but keep it polite.

TJH

[dealtn]

Indeed. If the sole measure of the success or otherwise of HYP1 was on a remit of achieving a high and increasing income can I pose a question?

If the dividend outcome for 2023 for Persimmon is a reduction from 235p to 124p and that of RIO Tinto a reduction from 685p to 442p as analysts predict (source Stockopedia) will that decline therefore mean, based solely on that remit you refer to, HYP1 will have failed?

Only if the overall income return over what will then be 23 years, falls below what might have been achieved by other "buy-and-forget" strategies. By my calculations, that is unlikely.

Using your above expected decreases, and assuming no increases elsewhere, the overall Income result from HYP1, over 23 years, would still far outstrip many alternative "buy-and-forget" strategies. Indeed, the single total income figure for next year would still be higher than achieved by many!


ian

An interesting interpretation of the undefined "high and increasing income" remit. But thank you for your view.