HYP1 is 22 - thread discussing income and capital diversification

[Itsallaguess]

I've already provided you with links that show some 90+% of risk relative to the market is removed by a 15 share portfolio.

How do you square such a small uplift in risk with the huge jump in the return from HYP1 relative to the FTSE100?

Because HYP1 really quite rapidly moved away from that broader level of diversification, and into the very highly focussed situation that we've seen for quite some time now -

https://i.imgur.com/DLlaZiB.png

Cheers,

Itsallaguess

[Arborbridge]

Yes, it may have worked, but you are using survivorship bias to make that judgement, what you are today observing is the survived portfolio to this time and place.

As your portfolio ages and as it narrows regarding source of income and value into fewer holdings representing more value (which there does, from my observation of clients over the years ,seem to be a tendency towards with portfolios if non tinkeredy/balanced - stockmarket entropy) , whilst the chance of a black swan event to your magic 3 or 4 holdings may be limited (3 or 4 out of say FTSE100) the impact would become over time more and more horrific if such an event occurs- think of large meteor striking earth, unlikely, perhaps, but knocks out the dinosaurs if it happens.

I would normally agree with all your posts, but there is something here not quite right. The HYP1 portfolio does a bit of "self tinkering" and would probably never reduce to the point you are suggesting. Over the years, "market trading" will give opportunities to bring in new shares, and as we've seen the "big hitters" do vary over the years.

However, I agree absolutely with your main point: that of risk. A black swan event could indeed zap one of the big hitters for a year or three. It did that with my BP holding years back, and I remember what it felt like losing only a few percent of my income - since then I have limited my holding size. A lesson learnt on the field of battle.

But back to a former point I made: let's all remember that HYP1 is fundamentally a demo portfolio in real time, and we can take from it what each of us needs. That's the reason for running a demo, which I guess is a moment of agreement everyone here can have.

Arb.

[IanTHughes]

So, what you are saying is that an investor should have accepted a lower income than might have been achieved by HYP1?

You keep banging on about the "dangers" of HYP and yet so far, HYP1 has produced more income than many possible alternatives. HYP1 has also achieved a Total Return (XIRR) over the past 22 years of 8.11%, and an annualised increase in the income generated, from a high start mind you, of 5.99%. Could you please point to a similar investment strategy, simple enough for a relative novice to implement, that would have achieved the same or better results?

That is not the whole the whole story. I could just as well say, "you should have gone all in on Amazon in about 2003. Massive returns. Every other strategy is clearly nonsense."

While all in on Amazon would have turned out well, the "strategy" of going all in on a single share with your retirement pot is ludicrous. Need to assess risk as well as gain. Need N>>1.

Or in other words, since HYP1 has performed very well, based on that and that alone, would you recommend that every 65-year old should buy 15 HY UK large cap shares tomorrow and throw-away the password to their SIPP and just watch the income roll in?

Your ability to use 22 years of hindsight to choose Amazon is truly remarkable, but irrelevant to the issue under discussion, whether HYP1 has succeeded in its primary goal of income generation. With regard to the Risk of buyiing an HYP Portfolio of only 15 shares, this has alredy been dealt with, but to assist your education, please read this excellent post and its attachments

https://www.lemonfool.co.uk/viewtopic.p ... 16#p549031

Finally, with regard to your question as to whether I would recommend HYP to a retiree, clearly you know very little about Investments or the Investment Industry.

Such advice can only be given with a complete picture of the financial situation and aims of the individual concerned. Your cavalier attitude that every 65 year-old retiree is in need of the same advice is absurd and rather dangerous, but understandable from an investment amateur.

Even if I were persuaded that a particular individual might benefit from an HYP, I would ensure that such an individual was aware of pyad's warning

I wish to stress, though, that anybody considering this approach must be made aware that there are risks. Neither the income nor the capital is guaranteed. If you cannot live with that then, clearly, don't do it.

I do recommend that you should think about that warning as well, you may find it helpful.


Ian

[Charlottesquare]

Yes, it may have worked, but you are using survivorship bias to make that judgement, what you are today observing is the survived portfolio to this time and place.

As your portfolio ages and as it narrows regarding source of income and value into fewer holdings representing more value (which there does, from my observation of clients over the years ,seem to be a tendency towards with portfolios if non tinkeredy/balanced - stockmarket entropy) , whilst the chance of a black swan event to your magic 3 or 4 holdings may be limited (3 or 4 out of say FTSE100) the impact would become over time more and more horrific if such an event occurs- think of large meteor striking earth, unlikely, perhaps, but knocks out the dinosaurs if it happens.

I would normally agree with all your posts, but there is something here not quite right. The HYP1 portfolio does a bit of "self tinkering" and would probably never reduce to the point you are suggesting. Over the years, "market trading" will give opportunities to bring in new shares, and as we've seen the "big hitters" do vary over the years.

However, I agree absolutely with your main point: that of risk. A black swan event could indeed zap one of the big hitters for a year or three. It did that with my BP holding years back, and I remember what it felt like losing only a few percent of my income - since then I have limited my holding size. A lesson learnt on the field of battle.

But back to a former point I made: let's all remember that HYP1 is fundamentally a demo portfolio in real time, and we can take from it what each of us needs. That's the reason for running a demo, which I guess is a moment of agreement everyone here can have.

Arb.

My issue is at 22 years old it may have only reached a bit over half time and of course by the time it does reach full time most of the readers here may be no more. It is an experiment, as you say ,but imho it still has a long way to go until fully road tested.

If bought at say 60 by Doris she is now 82 so she could have a fair few more years and imho the concentration of income is not looking great (Say Chinese economy implodes, what hope for the two miners and their dividends) and as my MIL is 93 and going strong and my GF lived to 98 and my GM 96 there could well be a need for a further say 18 years.

[Arborbridge]

People here love advancing Straw Man arguments. Here's another one today:

" I could just as well say, "you should have gone all in on Amazon in about 2003. Massive returns. Every other strategy is clearly nonsense."

While all in on Amazon would have turned out well, the "strategy" of going all in on a single share with your retirement pot is ludicrous. Need to assess risk as well as gain. Need N>>1."

A Straw Man argument: " is a form of argument and an informal fallacy of having the impression of refuting an argument, whereas the real subject of the argument was not addressed or refuted, but instead replaced with a false one".

In other words, proposing something which sounds like the original and which is easy to defeat , whereas it is not the same as the original argument.

Arb.

[NotSure]

Your ability to use 22 years of hindsight to choose Amazon is truly remarkable

Finally, with regard to your question as to whether I would recommend HYP to a retiree, clearly you know very little about Investments or the Investment Industry.

Such advice can only be given with a complete picture of the financial situation and aims of the individual concerned. Your cavalier attitude that every 65 year-old retiree is in need of the same advice is absurd and rather dangerous, but understandable from an investment amateur.

OK. I suspect you know what I meant, but let me rephrase. Would you advise any 65-year old in 2022 to buy 16 UK large cap HY shares and then forget about it (corporate actions aside)?

Even if I were persuaded that a particular individual might benefit from an HYP, I would ensure that such an individual was aware of pyad's warning

I wish to stress, though, that anybody considering this approach must be made aware that there are risks. Neither the income nor the capital is guaranteed. If you cannot live with that then, clearly, don't do it.

I do recommend that you should think about that warning as well, you may find it helpful.

Thank you for your concern, but as I was specifically pointing out the risks, it is unwarranted.

[NotSure]

People here love advancing Straw Man arguments. Here's another one today:

" I could just as well say, "you should have gone all in on Amazon in about 2003. Massive returns. Every other strategy is clearly nonsense."

While all in on Amazon would have turned out well, the "strategy" of going all in on a single share with your retirement pot is ludicrous. Need to assess risk as well as gain. Need N>>1."

A Straw Man argument: " is a form of argument and an informal fallacy of having the impression of refuting an argument, whereas the real subject of the argument was not addressed or refuted, but instead replaced with a false one".

In other words, proposing something which sounds like the original and which is easy to defeat , whereas it is not the same as the original argument.

Arb.

More reductio ad absurdum than straw man, but that was the point. IMHO, proposing that HYP1 supports any "strategy" suitable for one's life savings is also absurd.

[Arborbridge]

My issue is at 22 years old it may have only reached a bit over half time and of course by the time it does reach full time most of the readers here may be no more. It is an experiment, as you say ,but imho it still has a long way to go until fully road tested.

If bought at say 60 by Doris she is now 82 so she could have a fair few more years and imho the concentration of income is not looking great (Say Chinese economy implodes, what hope for the two miners and their dividends) and as my MIL is 93 and going strong and my GF lived to 98 and my GM 96 there could well be a need for a further say 18 years.

Thanks for cheering me up. I'm 77 and thinking I am definitely in the end game.

[moorfield]

But all this surely misses the point; Doris never looks at her portfolio, and is quite happy that the dividends have continued to roll in.

If Doris had looked at her portfolio she might well have rebalanced it so, conceivably, HYP1 and this thread might never have been spawned. C.

That suggests to me Doris has never needed much of that income and/or has other sources of (as do many here uiam), and that HYP is a rich persons hobby, something I have long suspected.

[dealtn]

I wish to stress, though, that anybody considering this approach must be made aware that there are risks. Neither the income nor the capital is guaranteed. If you cannot live with that then, clearly, don't do it.

I do recommend that you should think about that warning as well, you may find it helpful.


Ian

I also think those that espouse the view that the performance of a single, and admittedly (I think) first, portfolio of that strategy in action, with the associated survivor and hindsight biases, should recognise the existence of a single event, or experiment, can not be extrapolated to claims such as the strategy, or concept, has, or does work.

Which other scientist, or branch of science, would make such strong claims around a single event whose author even goes so far to describe it as having risk attached?

How would followers of this particular niche strategy be arguing were there to be a single surviving, and first, portfolio on a Growth or Value Board, were it also to demonstrate remarkable returns? Is it possible some of its detractors might point to the luck in selecting an Amazon equivalent - even were it among an initial portfolio where 50% turned out to be duds? Is it possible those detractors might be pointing out that initial luck in selection, or now pointing out the practical concern of having, say 2-3 shares, making up over 50% of this conceptually proven experimental successful portfolio.

Did Leicester winning the Premier League make them the best domestic team, and provide justification for that claim in future years? Did the Wanderers winning 5 of the first 7 FA Cup Finals highlight there ongoing success (or not) in that competition? Did Notts County appearing as the first team outside the top division in 1900/01 guarantee further successes either in the FA Cup or as one of the top tier teams? (clearly not as 1 time winners and now not even in the Football League). What about Tottenham just 7 years later in the same position (almost the complete opposite having been rarely out of the top flight and winning each of their next 7 cup finals).

Single example experiments rarely prove anything.

As for pyad claiming he would relish seeing 100% of the income (seemingly regardless of its size) delivered by a single share from an initial 15 share portfolio, demonstrates to me the contempt he holds for this place generally, and sadly too, his followers. Seeing such a high attrition rate, and likely income hit in an income strategy he knows real people have put real money behind is not far short of scandalous and certainly irresponsible in my opinion.

[Arborbridge]

More reductio ad absurdum than straw man, but that was the point. IMHO, proposing that HYP1 supports any "strategy" suitable for one's life savings is also absurd.

Absurd, it might be - but the return on this absurd idea does speak for itself. It is perfoming considerably better than most demo portfolios, and until some it is a real time example, not just some backtested nonsense.
As investors, we have all doubtless taken a composite view, maybe changing over time, but as an example of what can be done it is a valuable contribution.

And I still reckon putting up Amazon and knocking it down is a straw man, since HYP1 is nothing like that.

Since 'nuff said, I think.

[Arborbridge]

If Doris had looked at her portfolio she might well have rebalanced it so, conceivably, HYP1 and this thread might never have been spawned. C.

That suggests to me Doris has never needed much of that income and/or has other sources of (as do many here uiam), and that HYP is a rich persons hobby, something I have long suspected.

No - I take the opposite view. 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.

The rich man's hobby is investing in low yields or gilts. If you have a spare £5 million you don't need to invest at high yields.

[moorfield]

OK. I suspect you know what I meant, but let me rephrase. Would you advise any 65-year old in 2022 to buy 16 UK large cap HY shares and then forget about it (corporate actions aside)?

And part 2 of that question, which I think is more interesting (and pyad sidestepped completely back in 2000):

Would you advise any 65-year old in 2022 to buy 16 HY investment trusts and then forget about it (corporate actions aside)?

[IanTHughes]

Just for the record, I am not convinced that "regular" tinkering such as is done by tjh290633 is effective in producing a better income result. I mean there must be a risk of selling off what would otherwise have gone on to be a bigger holding in a dividend winner, cutting the income down in its prime. How much income would have been sacrificed if the dividend winners of HYP1 had been regularly cut back? What I should really like to see is an "untinkered" version of tjh290633's portfolio for comparison, but I do appreciate that is asking a bit much!

See my post immediately after yours, Ian.

Yes, I do see it although I am struggling to understand it! Can I assume that UKX is in fact the FTSE100 Index? Also, taking your start date of 5 April 2000, 22 years is up on 5 April 2022, not the 23 Nov 2022.

Am I missing something here?

If you want to play with an untinkered version, here are the constituents as at 31 Dec 2000, together with their values as a percentage and the income from each as a percentage of the total.

-----------
-----------

Note that the bottom 6 were in a nascent ISA and had not yet been brought up to weight, a process which would take 2 more years of ISA subscriptions. Lattice had just been demerged from BG Group. 9 (*) of those 26 shares have been taken over since that date.

Many thanks for that but, oh my god!

2 historical years of ISA Subscriptions, 22 years of Dividends, Special Dividends and Returns of Capital. And then one would have to know the full details of each takeover as well as a selection as to what was high yield at the time, and suitable as a replacement holding!

Sorry no can do!

Mind you, I might be able to separate out the Drawdown version of pyad's 2019 selections. It is only 3 years old of course, but who knows, it might tell us something in 22 years


Ian

[Charlottesquare]

OK. I suspect you know what I meant, but let me rephrase. Would you advise any 65-year old in 2022 to buy 16 UK large cap HY shares and then forget about it (corporate actions aside)?

And part 2 of that question, which I think is more interesting (and pyad sidestepped completely back in 2000):

Would you advise any 65-year old in 2022 to buy 16 HY investment trusts and then forget about it (corporate actions aside)?

ITs to me are likely the way to go, readily targeted international exposure and, as one ages and wants to spend less time dealing with finance ,a buy and check the divs arrive approach with little risk of div cuts (as long as you do not buy too many in niches (property) or small companies (illiquid) etc.)

I enjoyed trading when in my 40s, won some/lost some, I did not mind the 15 single share HY approach initially (though never stuck at 15) , I do like IT higher yield holdings (though I mix some higher with some no yields to get close to 5%) , but I just cannot run with no tinker, the idea of looking at a portfolio shaped in such a way that I would never have actually purchased it in such skewed weightings I find really scary. (I obviously absorbed the eggs basket proverb as a child or maybe it is my inbuilt accountant's caution)

[IanTHughes]

People here love advancing Straw Man arguments. Here's another one today:

" I could just as well say, "you should have gone all in on Amazon in about 2003. Massive returns. Every other strategy is clearly nonsense."

While all in on Amazon would have turned out well, the "strategy" of going all in on a single share with your retirement pot is ludicrous. Need to assess risk as well as gain. Need N>>1."

A Straw Man argument: " is a form of argument and an informal fallacy of having the impression of refuting an argument, whereas the real subject of the argument was not addressed or refuted, but instead replaced with a false one".

In other words, proposing something which sounds like the original and which is easy to defeat , whereas it is not the same as the original argument.

More reductio ad absurdum than straw man, but that was the point. IMHO, proposing that HYP1 supports any "strategy" suitable for one's life savings is also absurd.

No-one has proposed that "HYP1 supports any "strategy" suitable for one's life savings" except you! It is of course absurd, which begs the question as to why you proposed it


Ian

[NotSure]

OK. I suspect you know what I meant, but let me rephrase. Would you advise any 65-year old in 2022 to buy 16 UK large cap HY shares and then forget about it (corporate actions aside)?

And part 2 of that question, which I think is more interesting (and pyad sidestepped completely back in 2000):

Would you advise any 65-year old in 2022 to buy 16 HY investment trusts and then forget about it (corporate actions aside)?

Not personally as I am woefully under-qualified to give any financial advice whatsoever, let alone what someone should do with their life savings in order to secure their retirement income.

But I personally, for myself, would very much prefer global ITs (or ETFs/trackers for that matter) to a handful of FTSE100 high yielders. Of course diversification brings average returns, but lack of diversification can bring anything from disaster to triumph and in-between. Way to risky for me, personally, FWVLIW.

[NotSure]

No-one has proposed that "HYP1 supports any "strategy" suitable for one's life savings" except you! It is of course absurd, which begs the question as to why you proposed it


Ian

If you read the thread, you will find examples. Things along the lines of those below. A visitor to this site could easily construe that some are pushing this as a retirement strategy (I did). The aim of HYP is "to provide a strong a rising income in retirement". Doesn't say "on paper. Don't try this at home".

Absurd, it might be - but the return on this absurd idea does speak for itself. It is perfoming considerably better than most demo portfolios, and until some it is a real time example, not just some backtested nonsense.

Assuming one accepts the foregoing then yes, High Yield Portfolio (HYP) is indeed as simple to follow and implement a "buy and forget" strategy" as one can find.

Furthermore, the progress of HYP1 shows thet is can work, and work well too!

Enjoy!


Ian

Anyway, as someone said earlier - "nuff sed". If no-one actually thinks HYP is a viable idea based on HYP1, then fine! But that's not the impression I got.

[Bubblesofearth]

Because HYP1 really quite rapidly moved away from that broader level of diversification, and into the very highly focussed situation that we've seen for quite some time now -

https://i.imgur.com/DLlaZiB.png

Cheers,

Itsallaguess

But that's exactly what the studies measure and what the quoted risk reductions are referring to!

I'm not aware of any studies that have looked at the risk of rebalanced/tinkered portfolios.

BoE

[1nvest]

Over the years, HYP1 has developed in a way that relies on a really quite small subset of holdings to deliver the bulk of its income and capital performance

Fractal ...

Over the years the World stock index has developed in a way where it relies on really quite a small subset of holdings to deliver the bulk of its income and capital performance. 62% weighted US, of which 25% of earnings of the S&P500 are sourced from the 10 largest holdings (many of which are techie's).

Some (such as Jack Bogle, John Mauldin) have noted that buying a diverse bunch of holdings initially in equal measure and just letting that ride has tended to yield the better overall outcomes. Let winners run, such that at the end date you average more in the stock(s) that performed the best.

Counter to that however is concentration risk, which is a major risk factor. Japan suffered after the techies did fantastically well in the 1970's/1980's where the likes of Sony, Yamaha etc rose to become global household names. Those giants faltered in the 1990's but even still after halving or more remained big/giants, in effect held/pulled down their entire stock market. Somewhat similar occurred for the FT100/UK where big banks that were heavily weighted as part of the UK index faltered and held/pulled down the entire stock index. You might set a limit to where if one element rises to being more than a third/whatever then to de-risk such concentration risk, maybe reset and restart with 15 stocks all over again. But that is timing and for instance US LEXCX has done fine without resetting since 1935 and still is giving the S&P500 a run for its money despite being near 50% weighted into a single stock (Union Pacific (railroads)).