Beginners HYP: selling shares

[Gengulphus]

By the way, that is similar to the approach I took at the beginning of September 2021 where I sold shares that had recently stopped their dividend: ...

That's an interesting date to have done some selling! But I'm guessing you mean September 2020...

... The decision for me to do the above boils down to the question:
“Am I successful at creating and running an HYP?”
I have to humbly answer, with my tail between my legs, not exactly.

My understanding of the HYP principle is to have, ideally a rising yield, and also ideally a rising capital. This can then be considered as an annuity replacement.

Whilst my HYP annually beats the FTSE100 on yield, I feel that it is not as ‘successful’ as I would like it e.g. capital IRR over 14 years with dividend reinvested is 5%. This seems low.
Is the dividend annually rising above the RPI? I do not know but I suspect the answer is ‘sometimes’. The reason I do not know is because until recently I was annually contributing to the HYP so unitizing the dividend is difficult.

In your position, I wouldn't be too hard on myself. The 14-year life so far of your HYP means it was started in or near 2007, which places its start near the pre-financial-crisis stockmarket peak. And while the stockmarket has recovered quite a bit from its start-of-COVID falls around this time last year, it's still quite depressed compared with where it was in 2017-2019. As a result, the FTSE100 was probably in the mid-6000s when you started, and now it's in the mid-6000s - i.e. as a first approximation, its CAGR for the last 14 years is roughly 0%. That's without dividend reinvestment, of course, but beating it by about 5% per year isn't bad - to give a comparison point, the total return version of the FTSE100 (which is basically the FTSE100 with dividend reinvestment) has risen from about 3750 in 2007 to about 6250 now (*). That puts its CAGR roughly in the 3.5%-4% range, so your 5% is fairly clearly beating it - not by a huge margin, but a margin of 1%-1.5% compounds up to a nice (though not huge) bonus over 14 years.

In short, I can see that you made the 'mistake' of starting your HYP near a stockmarket peak (**) - but I say 'mistake' in quotes because I don't know of any real way of spotting a stockmarket peak as it happens: it's something one can only really recognise with hindsight. Otherwise, you look to have made the mistake of believing the prevalent HYP myth that a HYP is an annuity replacement... It quite simply isn't, because a HYP has very different investment characteristics to an annuity: continued access to capital, but risk to both capital and income, and while a HYP's demands on the investor's attention are low compared with many other types of portfolios of individual shares, they're considerably higher than an annuity's demands.

Otherwise, you look to me to have done very reasonably - nothing spectacular, but better-than-expected performance for the rather unfortunate period over which you've been HYPing.

(*) Values eyeballed from a long-term chart, so not hugely accurate - but then, a value for 2007 without giving the date more precisely cannot be hugely accurate.

(**) It's probably worth mentioning that it was a stockmarket peak that basically affected all shares. That's in contrast to HYP1, which was also started near a stockmarket peak - but that peak was the tech boom (the bust hadn't got all that far by late 2000), which primarily affected no/low-yield shares.

Gengulphus

[dealtn]

Otherwise, you look to have made the mistake of believing the prevalent HYP myth that a HYP is an annuity replacement... It quite simply isn't, because a HYP has very different investment characteristics to an annuity: continued access to capital, but risk to both capital and income, and while a HYP's demands on the investor's attention are low compared with many other types of portfolios of individual shares, they're considerably higher than an annuity's demands.

Is that a myth (or do we need to define "myth")?

HYP was certainly written about as an annuity "alternative", and the differences, including risk, were discussed and well known at the time too. It is surely valid to compare performance, outcomes if you like, with that annuity alternative. Now if someone were running their HYP and making claims they were operating a personal annuity that would be open to challenge I agree, merely comparing the results I would say not.

[idpickering]

Otherwise, you look to have made the mistake of believing the prevalent HYP myth that a HYP is an annuity replacement... It quite simply isn't, because a HYP has very different investment characteristics to an annuity: continued access to capital, but risk to both capital and income, and while a HYP's demands on the investor's attention are low compared with many other types of portfolios of individual shares, they're considerably higher than an annuity's demands.

Is that a myth (or do we need to define "myth")?

HYP was certainly written about as an annuity "alternative", and the differences, including risk, were discussed and well known at the time too. It is surely valid to compare performance, outcomes if you like, with that annuity alternative. Now if someone were running their HYP and making claims they were operating a personal annuity that would be open to challenge I agree, merely comparing the results I would say not.

I do think HYP is an alternative to an annuity or such like, and always have.

This from Stephen Bland's initial HYP item even virtually states it like this;

Retirement Pays Dividends

Let's say you have retired with a lump sum available from your pension plan, or maybe have been made redundant with a payoff. Alternatively ,perhaps you have been saving hard for a long time and have created a fund to invest for income. What should you do? What options are open to you as an income seeker? There are a very large number.

Conventional wisdom on this topic from IFAs will tend to propel you in the direction of some kind of insurance company product such as guaranteed income bonds or the like. A lot of literature on the subject of retirement investing for income suggests that, even if you have been saving through equity vehicles of some kind up until now, there should be some switch away from equities just because you have retired.

Advisers make such comments because of the perceived risk of keeping money in shares, it being felt by them that at the age of, say, 60, one should be taking less risk than before with savings. From what I have seen, the great majority of retirement lump sums end up either in insurance company investments, or simply in National Savings and bank and building society deposits.

My proposition is that far from avoiding equities, retirement income seekers should actively migrate to this form of investment, even if they have never done so before. It is an option that is considered only rarely, particularly by IFAs. The fact that there is no commission available on such an arrangement has, of course, nothing to do with it. However, I have to say that even other sources such as articles in the press on this topic will rarely suggest shares as a great place for income investing.

https://web.archive.org/web/20140219210 ... 01106c.htm

It all seems pretty much written in black and white there to me. And all seems quite simple to follow and implement. It often amazes me that some here like to over complicate what is, on the face of it, a simple investing method, for income.

Ian.

[Arborbridge]

Otherwise, you look to have made the mistake of believing the prevalent HYP myth that a HYP is an annuity replacement... It quite simply isn't, because a HYP has very different investment characteristics to an annuity: continued access to capital, but risk to both capital and income, and while a HYP's demands on the investor's attention are low compared with many other types of portfolios of individual shares, they're considerably higher than an annuity's demands.



Gengulphus

One can write that HYP is an annuity replacement, but a replacement does not have to be the same.

It was suggested as an alternative to an annuity to provide pension income, with clearly less security but some advantages to compensate.

Arb.

[Gengulphus]

Otherwise, you look to have made the mistake of believing the prevalent HYP myth that a HYP is an annuity replacement... It quite simply isn't, because a HYP has very different investment characteristics to an annuity: continued access to capital, but risk to both capital and income, and while a HYP's demands on the investor's attention are low compared with many other types of portfolios of individual shares, they're considerably higher than an annuity's demands.

Is that a myth (or do we need to define "myth")?

HYP was certainly written about as an annuity "alternative", and the differences, including risk, were discussed and well known at the time too. It is surely valid to compare performance, outcomes if you like, with that annuity alternative. Now if someone were running their HYP and making claims they were operating a personal annuity that would be open to challenge I agree, merely comparing the results I would say not.

I do think HYP is an alternative to an annuity or such like, and always have.

This from Stephen Bland's initial HYP item even virtually states it like this;

Retirement Pays Dividends

Let's say you have retired with a lump sum available from your pension plan, or maybe have been made redundant with a payoff. Alternatively ,perhaps you have been saving hard for a long time and have created a fund to invest for income. What should you do? What options are open to you as an income seeker? There are a very large number.

Conventional wisdom on this topic from IFAs will tend to propel you in the direction of some kind of insurance company product such as guaranteed income bonds or the like. A lot of literature on the subject of retirement investing for income suggests that, even if you have been saving through equity vehicles of some kind up until now, there should be some switch away from equities just because you have retired.

Advisers make such comments because of the perceived risk of keeping money in shares, it being felt by them that at the age of, say, 60, one should be taking less risk than before with savings. From what I have seen, the great majority of retirement lump sums end up either in insurance company investments, or simply in National Savings and bank and building society deposits.

My proposition is that far from avoiding equities, retirement income seekers should actively migrate to this form of investment, even if they have never done so before. It is an option that is considered only rarely, particularly by IFAs. The fact that there is no commission available on such an arrangement has, of course, nothing to do with it. However, I have to say that even other sources such as articles in the press on this topic will rarely suggest shares as a great place for income investing.

https://web.archive.org/web/20140219210 ... 01106c.htm

It all seems pretty much written in black and white there to me. And all seems quite simple to follow and implement. It often amazes me that some here like to over complicate what is, on the face of it, a simple investing method, for income.

HYP is an annuity alternative, yes - but not an annuity replacement. An alternative to something can do a different job, a replacement has to do pretty much the same job. E.g. a bicycle is an alternative form of transport to a car, but it's not a replacement for a car because there are many jobs which a car can be used for and a bicycle cannot.

And HYPs don't do the same job as annuities in several key respects, especially that they don't guarantee a particular level of income for the rest of your life, they aren't 'fire and forget' investments in the way that annuities are, and they retain some level of access to the capital. So they are not annuity replacements.

And the passage you quote doesn't say that they are annuity replacements. It doesn't mention annuities at all, and even for the insurance company product it does mention (guaranteed income bonds), the article is suggesting HYPs as an alternative rather than saying that HYPs are a replacement for them. Which is quite right, because while HYPs have more investment characteristics in common with guaranteed income bonds than they do with annuities, there are still significant differences. In particular, like HYPs, guaranteed income bonds do not guarantee the level of income for the rest of your life, but unlike HYPs, they do guarantee it for several years at a time. Similarly, like HYPs, they aren't 'fire and forget' investments, but unlike HYPs, the investor knows years in advance when they'll have to be remembered rather than potentially having to remember them to deal with a corporate action at quite short notice.

Basically, any investment strategy is an annuity alternative, with various similarities to and differences from annuities - more similarities for some strategies, more differences for others. So I'm certainly not disagreeing with you that HYP is an alternative to an annuity, and although the article you quote does not say that HYP is an alternative to an annuity, it also doesn't say that it isn't an alternative to an annuity.

But being an annuity replacement is another matter, and that's a pretty obvious myth: it's patently obvious that HYPs have largely different investment characteristics to annuities and just a few similarities, but the idea that HYPs are annuity replacements gets expressed frequently, so becomes part of lots of HYPers' mindsets, so gets expressed frequently - precisely the sort of feedback loop that underlies all myths...

As for the simplicity of HYP, I agree with you - but that's I see little if any connection to the question of whether HYP is an annuity replacement.

Gengulphus

[1nvest]

In your position, I wouldn't be too hard on myself. The 14-year life so far of your HYP means it was started in or near 2007, which places its start near the pre-financial-crisis stockmarket peak. And while the stockmarket has recovered quite a bit from its start-of-COVID falls around this time last year, it's still quite depressed compared with where it was in 2017-2019. As a result, the FTSE100 was probably in the mid-6000s when you started, and now it's in the mid-6000s - i.e. as a first approximation, its CAGR for the last 14 years is roughly 0%. That's without dividend reinvestment, of course, but beating it by about 5% per year isn't bad - to give a comparison point, the total return version of the FTSE100 (which is basically the FTSE100 with dividend reinvestment) has risen from about 3750 in 2007 to about 6250 now (*). That puts its CAGR roughly in the 3.5%-4% range, so your 5% is fairly clearly beating it - not by a huge margin, but a margin of 1%-1.5% compounds up to a nice (though not huge) bonus over 14 years.

From a quick glance it looks to me that as a benchmark Terry's TJH Accumulation HYP annualised 5.7% over a similar period.

[dealtn]

HYP is an annuity alternative, yes - but not an annuity replacement.

...

Gengulphus

In which case I don't think the OP has fallen for a "myth" at all. Rereading the original post it seems more likely he has simply used the wrong word "replacement" instead of "alternative". It is clear from his description of what he has done, and his description of HYP "My understanding of the HYP principle is to have, ideally a rising yield, and also ideally a rising capital" that he is not describing an annuity at all. (Although "yield" appears the wrong word too - income being more appropriate).

[Alaric]

And the passage you quote doesn't say that they are annuity replacements.

Given that the very first paragraph suggests that the interested reader may be retiring with a pension lump sum where do you imagine the lump sum could come from, if not from partly giving up an entitlement to a defined benefit guaranteed income? It's not the only source of a lump sum by any means, as the article suggests, but an important one, particularly back in 2000 when defined benefit schemes were more commonplace.

Outside the public sector, it was and still is possible to vary the retirement benefit from a defined benefit scheme between income ("annuity") and cash. If you wanted or needed income should you take it all in that form or take the cash and attempt to "beat" the guaranteed alternative?

[idpickering]

In which case I don't think the OP has fallen for a "myth" at all. Rereading the original post it seems more likely he has simply used the wrong word "replacement" instead of "alternative". It is clear from his description of what he has done, and his description of HYP "My understanding of the HYP principle is to have, ideally a rising yield, and also ideally a rising capital" that he is not describing an annuity at all. (Although "yield" appears the wrong word too - income being more appropriate).

Agreed. Maybe Stephen Bland could throw some light on this issue to stop some here from seemingly appearing to be floundering around in the dark?

Ian.

[Gengulphus]

In your position, I wouldn't be too hard on myself. The 14-year life so far of your HYP means it was started in or near 2007, which places its start near the pre-financial-crisis stockmarket peak. And while the stockmarket has recovered quite a bit from its start-of-COVID falls around this time last year, it's still quite depressed compared with where it was in 2017-2019. As a result, the FTSE100 was probably in the mid-6000s when you started, and now it's in the mid-6000s - i.e. as a first approximation, its CAGR for the last 14 years is roughly 0%. That's without dividend reinvestment, of course, but beating it by about 5% per year isn't bad - to give a comparison point, the total return version of the FTSE100 (which is basically the FTSE100 with dividend reinvestment) has risen from about 3750 in 2007 to about 6250 now (*). That puts its CAGR roughly in the 3.5%-4% range, so your 5% is fairly clearly beating it - not by a huge margin, but a margin of 1%-1.5% compounds up to a nice (though not huge) bonus over 14 years.

From a quick glance it looks to me that as a benchmark Terry's TJH Accumulation HYP annualised 5.7% over a similar period.

Quite possibly - but when one has done better than the market, the fact that someone else has done even better doesn't seem to me to be a good reason to be very hard on oneself!

HYP is an annuity alternative, yes - but not an annuity replacement.

In which case I don't think the OP has fallen for a "myth" at all. Rereading the original post it seems more likely he has simply used the wrong word "replacement" instead of "alternative". It is clear from his description of what he has done, and his description of HYP "My understanding of the HYP principle is to have, ideally a rising yield, and also ideally a rising capital" that he is not describing an annuity at all. (Although "yield" appears the wrong word too - income being more appropriate).

Fair point, and you may be right - but I don't regard it as at all clear that the OP simply used the wrong word. And I prefer to assume that people mean the words they use unless it's pretty clear that they don't - it's better IMHO to do that and risk them needing to clarify, than to assume they mean something else and risk ending up putting words in their mouth.

And the passage you quote doesn't say that they are annuity replacements.

Given that the very first paragraph suggests that the interested reader may be retiring with a pension lump sum where do you imagine the lump sum could come from, if not from partly giving up an entitlement to a defined benefit guaranteed income? It's not the only source of a lump sum by any means, as the article suggests, but an important one, particularly back in 2000 when defined benefit schemes were more commonplace.

Outside the public sector, it was and still is possible to vary the retirement benefit from a defined benefit scheme between income ("annuity") and cash. If you wanted or needed income should you take it all in that form or take the cash and attempt to "beat" the guaranteed alternative?

I agree that that's what the article suggests about the source of the lump sum (*). But as your use of "guaranteed alternative" suggests, the point of taking the lump sum from a pension plan and investing it in a HYP was to invest it in an alternative to an annuity...

(*) Apart from the detail that it just says "lump sum available from your pension plan", without any hint about whether it's a defined-benefit or defined-contribution pension plan.

Gengulphus

[Alaric]

(*) Apart from the detail that it just says "lump sum available from your pension plan", without any hint about whether it's a defined-benefit or defined-contribution pension plan.

Back in 2000 if you wanted an income from a defined contribution plan , your options beyond taking a 25% lump sum were either to buy an annuity or to put it in drawdown. Apart from income instability a high yield strategy could be suitable for a pension plan in drawdown.

[csearle]

Moderator Message:
This is all straying a bit from the OP's musings. Perhaps we could bring the focus back to that. Thanks - Chris

I have decided to trim some shares to raise capital to invest in other areas...

[triatharoo]

Is the dividend annually rising above the RPI? I do not know but I suspect the answer is ‘sometimes’. The reason I do not know is because until recently I was annually contributing to the HYP so unitizing the dividend is difficult.

Speaking of beginners.... (Just trying to get back in to this after some time).

What do you mean by "unitizing the dividend"? I understand accumulation units and income units - are you talking about income units or something different?

Cheers

[TopOfDaMornin]

Is the dividend annually rising above the RPI? I do not know but I suspect the answer is ‘sometimes’. The reason I do not know is because until recently I was annually contributing to the HYP so unitizing the dividend is difficult.

Speaking of beginners.... (Just trying to get back in to this after some time).

What do you mean by "unitizing the dividend"? I understand accumulation units and income units - are you talking about income units or something different?

Cheers

I was talking about finding a way to determine if the dividend was rising or falling over the years. This is made more complex as different years had different amounts contribute in capital to the HYP.

I will sit down and come up with some sort of calculation but I suspect during accumulation phase of a HYP this is difficult to calculate and perhaps not too accurate.

TDM

[TopOfDaMornin]

Fair point, and you may be right - but I don't regard it as at all clear that the OP simply used the wrong word.
Gengulphus

Apologies, I used the wrong word. Instead of "annuity replacement" I should have said "annuity alternative".

The HYP was actually started in June 2003 and has an IRR, with dividend reinvested, of just under 5%.
I think the FTSE100 Total Return from 2003 to 2020 is about 7%. I could not find a data source for FTSE100 Total Return from 2003 by week.


To some extent this discussion has answered by question: "Is my HYP successful?"

The answer, could be argued, yes it is as the capital and dividend has risen more than the RPI. Off course, others may have a different definition of 'what is HYP success'. I am happy to open a topic on this if there is interest.




The reason I put 'Beginners' in the topic title (Beginners HYP: selling shares) is because I feel that only getting 5% return since June 2003 is fairly poor, hence the reference to beginner. But like I stated, the HYP is there to do a job and mine, by my simple understanding, has done the job.

TDM

[IanTHughes]

I could not find a data source for FTSE100 Total Return from 2003 by week.

Here is the source I use. Weekly only goes back to Jun 2009, but Monthly goes back to Nov 2002

https://uk.investing.com/indices/ftse-1 ... rical-data

Hope that helps


Ian

[Gengulphus]

I could not find a data source for FTSE100 Total Return from 2003 by week.

Here is the source I use. Weekly only goes back to Jun 2009, but Monthly goes back to Nov 2002

https://uk.investing.com/indices/ftse-1 ... rical-data

Another possible source is https://markets.ft.com/data/indices/tea ... =UKX.T:FSI. You need to be a subscriber and logged in to get the full charting and historical data facilities, but you can do a lot from the free basic chart by using the mouse wheel to zoom in and out on the chart, plus click-and-dragging the chart to scroll it sideways. You don't get perfect accuracy, but by zooming in enough, it's usually possible to eyeball the whole number part of the index value with complete certainty and the first decimal place to within +/-0.1. Not a fast source (it's only really good for checking a few specific dates, not for bulk data unless you have a lot of time and patience!) but it goes back to 24 June 1994 (when the index value was 1075.6 as closely as I can eyeball it).

Gengulphus

[TopOfDaMornin]

I could not find a data source for FTSE100 Total Return from 2003 by week.

Here is the source I use. Weekly only goes back to Jun 2009, but Monthly goes back to Nov 2002

https://uk.investing.com/indices/ftse-1 ... rical-data

Hope that helps


Ian

Thank you

[TopOfDaMornin]

I could not find a data source for FTSE100 Total Return from 2003 by week.

Here is the source I use. Weekly only goes back to Jun 2009, but Monthly goes back to Nov 2002

https://uk.investing.com/indices/ftse-1 ... rical-data

Another possible source is https://markets.ft.com/data/indices/tea ... =UKX.T:FSI. You need to be a subscriber and logged in to get the full charting and historical data facilities, but you can do a lot from the free basic chart by using the mouse wheel to zoom in and out on the chart, plus click-and-dragging the chart to scroll it sideways. You don't get perfect accuracy, but by zooming in enough, it's usually possible to eyeball the whole number part of the index value with complete certainty and the first decimal place to within +/-0.1. Not a fast source (it's only really good for checking a few specific dates, not for bulk data unless you have a lot of time and patience!) but it goes back to 24 June 1994 (when the index value was 1075.6 as closely as I can eyeball it).

Gengulphus

Thank you

[tjh290633]

What do you mean by "unitizing the dividend"? I understand accumulation units and income units - are you talking about income units or something different?

Cheers

Dividend income per income unit (or accumulation unit) is the usual way. Quote it in the appropriate units (GBp usually).

TJH