HYP1 is 23 - Total Return

[1nvest]

HYP1 is just one sample.

That's true, only because you choose to discuss one example: there are others that have shown commendable robustness.

Of course, I agree with you that having a small number of shares is a higher risk - I've written so myself in the past few days.
But that is a concern mainly if you are interested in a high capital growth over a few years - but if you are intending to hold in perpetuity you can virtually ignore the risk. A strange idea and it takes some getting used to, but it does seem to work.

Forgetting to worry about the capital was something unique to Pyad - but he had a point.

Arb.

Income is just one element of total return. Total return and withdrawing fixed rates of income measures, such as SWR indicate that increasing SWR even a little can make a huge difference to outcome. HYP by its nature promotes taking more, in effect ups the SWR rate and in so doing increases the risk. But at least is dynamic enough to revise the withdrawal rate (dividend cuts) which helps reduce that risk, but in so doing introduces another risk of potentially that income being insufficient to cover your needs. Given the choice of variable rates of income or a consistent inflation adjusted income, and many might more prefer the latter.

For most it wont make a difference, bad case outcomes relative to modest withdrawal rates are relatively infrequent, the majority will do OK. Even the more extreme cases such as a third in each of stocks, hard cash, gold coins stuffed under a mattress. Stock prices might broadly rise with inflation, as might the price of gold, hard cash will lose to inflation but be topped up with stock dividends that might also see that cash pile broadly increase with inflation. Some might sleep better in mind that they have two thirds in-hand, (most) others would be uncomfortable with that



the best choice of asset allocation is one that you're comfortable with, as much money is lost by flipping around.

[1nvest]

but if you are intending to hold in perpetuity you can virtually ignore the risk. A strange idea and it takes some getting used to, but it does seem to work.

Forgetting to worry about the capital was something unique to Pyad - but he had a point.

Arb.

Reminding that as in how stock prices have had a history of collapsing more than 75% and taken decades to recover, so also have dividends. A intention to hold in perpetuity and ability to do so are distinctly different, enforced selling of shares at such times is inclined to align with selling at deeply low prices.

[Lootman]

HYP1 is just one sample.

That's true, only because you choose to discuss one example: there are others that have shown commendable robustness.

Of course, I agree with you that having a small number of shares is a higher risk - I've written so myself in the past few days.
But that is a concern mainly if you are interested in a high capital growth over a few years - but if you are intending to hold in perpetuity you can virtually ignore the risk. A strange idea and it takes some getting used to, but it does seem to work.

Forgetting to worry about the capital was something unique to Pyad - but he had a point.

I always thought the "capital doesn't matter" mantra was basically an acknowledgement that investing in HY shares is inherently risky and subject to an elevated probability that you will see erosion of capital. Not least because some of these UK HY shares are paying out uncovered dividends and so are effectively disgorging their own capital.

As such pyad had a desire to nip that criticism in the bud by unilaterally declaring that "capital doesn't matter". And comparing the method to an annuity. But a lot of people would disagree and if HYP1 had lost half its value I do not think that many would now regard that as acceptable.

Imagine that in 1999 each Fool had been asked to set up a "quirky" portfolio that broke a few rules, and then track them for 23 years. I dare say that some of them would have beaten the index. Certainly for the UK index which has been dire in that time. But some might even have beaten the global index.

So in 1999 Lootman picks a "one share portfolio", just for fun. And then I never touch it. Now this has a 50% chance of beating the index, but also a non-zero chance of getting wiped out. Now suppose I picked Apple. Jackpot, I would now look like an investing genius. But would that convince anyone to do the same thing now?

[Bubblesofearth]

I always thought the "capital doesn't matter" mantra was basically an acknowledgement that investing in HY shares is inherently risky and subject to an elevated probability that you will see erosion of capital. Not least because some of these UK HY shares are paying out uncovered dividends and so are effectively disgorging their own capital.

As such pyad had a desire to nip that criticism in the bud by unilaterally declaring that "capital doesn't matter". And comparing the method to an annuity. But a lot of people would disagree and if HYP1 had lost half its value I do not think that many would now regard that as acceptable.

Imagine that in 1999 each Fool had been asked to set up a "quirky" portfolio that broke a few rules, and then track them for 23 years. I dare say that some of them would have beaten the index. Certainly for the UK index which has been dire in that time. But some might even have beaten the global index.

So in 1999 Lootman picks a "one share portfolio", just for fun. And then I never touch it. Now this has a 50% chance of beating the index, but also a non-zero chance of getting wiped out. Now suppose I picked Apple. Jackpot, I would now look like an investing genius. But would that convince anyone to do the same thing now?

IIRC the 'capital doesn't matter' mantra was more about preventing panic selling. It's a commonly held belief that a lot of private investors will push the panic button after big falls, usually the worst time to sell. If you don't look at the capital you remain blissfully ignorant

Anyone investing in any portfolio of shares, regardless of size, should be prepared for a halving in value. Dotcom and GFC did this Globally. I imagine covid could have gone on to do the same if not for the timely development of vaccines. It's a risk that comes with the rewards that equities offer.

I'm not sure a 15 share HYP is as risky as many people seem to think. Firstly it's composed of big caps which are inherently less risky than smaller companies. Secondly it diversifies by sector thus mostly removing whole sector risk - think tech companies in 2000 or banks in the GFC. Thirdly it equal weights on purchase thus removing the cap-weighted portfolio risk of the biggest holdings taking the portfolio down too much if they fail. To some extent the poor performance of the FTSE100 since 2000 is a reflection of these kind of cap weightings and sector concentrations.

Finally, a quick comment on your one share example, the chance of beating the index is significantly less than 50%. This is because the performance of equity markets are asymmetric. Most of the gains come from a relatively small fraction of outperforming shares. You can actually see this for HYP1 and other portfolios (mine is another example). For this reason I prefer a portfolio with considerably more than 15 constituents. Double that number is IMO closer to optimal for dividend, capital and total return.

BoE

[dealtn]

HYP1 is just one sample.

That's true, only because you choose to discuss one example: there are others that have shown commendable robustness.

Of course, I agree with you that having a small number of shares is a higher risk - I've written so myself in the past few days.
But that is a concern mainly if you are interested in a high capital growth over a few years - but if you are intending to hold in perpetuity you can virtually ignore the risk. A strange idea and it takes some getting used to, but it does seem to work.

Forgetting to worry about the capital was something unique to Pyad - but he had a point.

Arb.

That really has to be spoken by someone that doesn't understand the meaning of the word "risk" (and possibly also "work").

[1nvest]

I'm not sure a 15 share HYP is as risky as many people seem to think. Firstly it's composed of big caps which are inherently less risky than smaller companies. Secondly it diversifies by sector thus mostly removing whole sector risk - think tech companies in 2000 or banks in the GFC. Thirdly it equal weights on purchase thus removing the cap-weighted portfolio risk of the biggest holdings taking the portfolio down too much if they fail. To some extent the poor performance of the FTSE100 since 2000 is a reflection of these kind of cap weightings and sector concentrations.

Bogle advocated buying the 50 largest S&P500, no-changes. Mauldin (Deep Inside the Dow) revealed how the original Dow30 stocks bought in initial equal weighting, left as-is thereafter, excelled the performance of the dynamic Dow index, suggesting that dropping stocks that fell out saw some rebound back in again such that you ended up better off overall in not having sold/repurchased in a sell-low/re-buy higher like manner and, importantly - having bought in initial equal weights.

At present if you bought the 50 largest FTSE100 stocks you'd be buying into around 87% of the total market cap. That's more inclined to pretty much at least track the FTSE100. Buying the largest of 15 stocks across sectors would have you holding 55% of the FTSE100 market cap. As you say the poor performance of the FTSE100 is largely down to its particular tilt at particular times. Initial equal weighting reduces that risk and will find its own cap-weighting distribution over time when left as-is. In effect buying the index is buying into a already cap tilted entity.

HYP1 follows similar lines, but rather than picking the biggest, targets a element of 'value' in the way of relative dividend yield measures. Mostly the HYP1 has kept up with other alternatives to the FT100's high tilt and poor 2000-2003 type decline period in not having bought into its particular sector/stock weightings evident at that time. The 15 HYP were less concentrated into the heavily weighted stocks/sectors that suffered.

Of the original Dow30 unchanged however and you'd be down to 9 remaining holdings, and with higher concentration into individual stocks. A good thing in the sense that holding higher weightings into the best performing stocks is a good thing, but bad in the sense of higher concentration risk. Mauldin's indicative figure for having accepted exposure to that risk = 1.3% annualised additional total return. Does that mean you might bolster SWR from the broadly accepted historic 4% indicated 30 year case, to 5.3% ... no. However the HYP1 style tempts you to go down that path, or rather I should say intentionally directs you down that path in concentrating on higher dividends (withdrawal rates). For most that will be fine, 4% historic SWR was the worst case, in most cases 6% was fine. But is a somewhat casino play. Over enough samples there will be a number who weren't lucky enough to fall into the larger number of sets that worked out OK, who might be inclined to curse it, however such cases aren't inclined to remain around and posting about their investment failure/poverty.

Many will see their portfolio outlive them, for modest/average withdrawal rates will see a substantial legacy for heirs, is it worth taking on more risk to further bolster that substantial legacy at greater risk to oneself in the way of drawing modestly more. Increasing SWR even a little can make a significant difference to outcome, can lead to a cliff-edge situation. Where once on that pathway it can be inescapable, too late to rectify the inevitability of failure.

[Arborbridge]

That's true, only because you choose to discuss one example: there are others that have shown commendable robustness.

Of course, I agree with you that having a small number of shares is a higher risk - I've written so myself in the past few days.
But that is a concern mainly if you are interested in a high capital growth over a few years - but if you are intending to hold in perpetuity you can virtually ignore the risk. A strange idea and it takes some getting used to, but it does seem to work.

Forgetting to worry about the capital was something unique to Pyad - but he had a point.

Arb.

That really has to be spoken by someone that doesn't understand the meaning of the word "risk" (and possibly also "work").

Well, that's your view, and you are entitled to it

[csearle]

Methinks your Man from Mars would particularly feel that concentrating his purchases on shares listed on that little island was far too narrow, after all from Mars he/she/it has observed the entire World. I think Man from Mars would likely choose ITs covering different world regions for the wider geographic exposure that brought.

So far, all that strategy has done is lost me capital (as opposed to my [tinkering] HYP). If I could speak Martian I'd counsel against IT. C.

[kempiejon]

So far, all that strategy has done is lost me capital (as opposed to my [tinkering] HYP). If I could speak Martian I'd counsel against IT. C.

Who cares about the capital, how's the income? Wouldn't the Martian be able to invest in a galactic tracker.

[Itsallaguess]

Methinks your Man from Mars would particularly feel that concentrating his purchases on shares listed on that little island was far too narrow, after all from Mars he/she/it has observed the entire World.

I think Man from Mars would likely choose ITs covering different world regions for the wider geographic exposure that brought.

So far, all that strategy has done is lost me capital (as opposed to my [tinkering] HYP).

If I could speak Martian I'd counsel against IT.

Hi Chris,

The last time you raised that particular point on an income-related thread, we weren't able to detail the IT-losses you were thinking of -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=38709&p=582025#p582025

You never came back to that thread with any further details at the time, so we were never any clearer on your particular issue - is that the same one you're discussing here, and if so are you able to answer the question on that linked thread above?

Cheers,

Itsallaguess

[csearle]

That's an odd thing to say when presented with a 23 year record in which the "owner" has at no time suffered a loss of capital. For a retiree, I'd say that was good enough

HYP1 avoided total dogs like Carillion by virtue of its start date, Later adopters were not so lucky. Given that static dividends and a collapsing share price equals high yield, the method of selection seems designed to find Companies the market thinks are on their way out or at best are just demonstrating high "yield" by returning capital in the form of dividends.

I also failed to avoid Carilion. But that's what the diversification is for. My HYP has still done, and continues to do, what it is supposed to do, notwithstanding this. C.

[csearle]

So far, all that strategy has done is lost me capital (as opposed to my [tinkering] HYP).

If I could speak Martian I'd counsel against IT.

Hi Chris,

The last time you raised that particular point on an income-related thread, we weren't able to detail the IT-losses you were thinking of -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=38709&p=582025#p582025

You never came back to that thread with any further details at the time, so we were never any clearer on your particular issue - is that the same one you're discussing here, and if so are you able to answer the question on that linked thread above?

Cheers,

Itsallaguess

In the pub at the moment old bean, so haven't my beloved spreadsheet in front of me, but from my recollection my IT (HINT) IRR has spent absolutely ages at between -6% and -9%. The ITs I had before it, which it turns out weren't income ITs, did far worse.

I'm still hoping to sell the bloody thing at at least parity before the end of the Earth tax year. C.

[Itsallaguess]

In the pub at the moment old bean

That's the exact same thing you said last time!

:O)

Enjoy your pint Chris.

All the best,

Itsallaguess

[1nvest]

For April years, comparing TJH HYP Accumulation to FT250 total return index since 2000, and the two have broadly compared



Comparing Pyad's HYP1 November years data in a similar manner, and again the two have compared, which is also indicative that HYP1 compared to TJH HYP



Note that for HYP1 total return I assumed dividends were invested at the ongoing portfolio growth rate
(current value + dividends - prior years value ) / prior years value

Dividends are just part of total return, the same dividends/income taken from TJH HYP or HYP1 could have been equally drawn from the FT250;s total return ... to similar overall income/capital value effect.

[tjh290633]

For April years, comparing TJH HYP Accumulation to FT250 total return index since 2000, and the two have broadly compared

Snip Tables

Comparing Pyad's HYP1 November years data in a similar manner, and again the two have compared, which is also indicative that HYP1 compared to TJH HYP

I wonder how much this is due to equal weighting, which means that lower capitalisation shares have as much influence as the relatively few heavyweight shares in the main index.

TJH

[1nvest]

For April years, comparing TJH HYP Accumulation to FT250 total return index since 2000, and the two have broadly compared

Snip Tables

Comparing Pyad's HYP1 November years data in a similar manner, and again the two have compared, which is also indicative that HYP1 compared to TJH HYP

I wonder how much this is due to equal weighting, which means that lower capitalisation shares have as much influence as the relatively few heavyweight shares in the main index.

TJH

Or earlier years (start) risk reduction. Buy into the current market cap and you're overweighting more into stocks that have relatively outperformed, that as your own records show Terry can turn around (prior years worst/best can be the following years best/worst).

This thread viewtopic.php?f=31&t=41478 mentioned Monevators HYP and three IT comparison. Approximately aligned to HYP1's Nov year and three IT's total returns of (I just grabbed the recent 12 month total return change from trustnet for each of those, so not a precise alignment).

Edinburgh 8.8%
City of London 0%
Merchants -1.1%

Thirds each (average) 2.57%

HYP1 and the average of the best 5, mid 6, worst 5 (there's now 16 stocks in HYP1)

25.6%
6.4%
-20.9%

average of three 3.7%, assuming equal weighted at (Nov) year start (-0.8% year loss (total return) in terms of the variable ongoing actual HYP1 stocks weighting). Each of those IT's are more diversified than just 5 stocks - which has the effect of smoothing down the averages of each of the thirds best/mid/worst). But generally will tend to average out much the same, as in how longer term the Dow 30 (10 stocks in each of best/mid/worst) has broadly tended to compare in overall total returns to the S&P500 (166 stocks in each of best/mid/worst). I would expect that if you recorded the best/mid/worst thirds of the actual individual assets in each of those IT's and combined the three best/mid/worst you'd see more HYP like figures (combined third best assets in each of CTY, Merchants, Edinburgh ...etc.).

The indications are that having initially equal weighted, reduced the risk of the likes of having £100 to bet on a 10 horse race and betting £10 on each horse rather than putting £91 on one horse and £1 on each of the other 9 horses, that just letting that initially equal weighting ride to find its own cap weighting tends to yield comparable mid/longer term rewards as if you yearly rebalanced back to equal weightings, you end up having had higher weighting in the stock(s) that did well, less average weighting in the stock(s) that performed relatively poorly. The 'rebalance' bonus is less about a bonus, more about risk reduction (less concentration in a prior good stock that turns sour). Broadly washes, on average, but riskier for some samples/cases (that had a great stock go deeply south and severely hurt their portfolio).

For reference these are the figures I transposed from HYP is 22 and HYP is 23


Where total return in each case = ( current value + current years income - prior years value ) / prior years value. Or in csv (easier to copy into Excel/Libre calc)

Code: Select all

AngloAmerican,1131.73,16147,493.53,9621,-37.36%
BAT,1874.87,27508,1964.27,21407,-15.04%
BT,437.51,6796,437.51,6903,8.01%
Currys,39.09,1060,12.41,583,-43.83%
Glaxo,242.78,3724,155.96,3933,9.80%
Haleon,0,977,14.78,1143,18.50%
InterConHotels,432.78,19621,471.75,24093,25.20%
Land,260.55,4249,263.25,4039,1.25%
Lloyds,163.88,3365,193.89,3211,1.19%
Mitch&But,0,1017,0,1545,51.92%
M&G,239.38,2487,258.9,2640,16.56%
Persimmon,2483.95,14322,845.6,12092,-9.67%
Pearson,185.33,8386,195.13,8639,5.34%
Shell,317.52,9245,390,10310,15.74%
RIO,2967.32,27846,1670.01,27153,3.51%
UU,346.26,8024,362.26,8517,10.66%

Fundamentally starting with equal weight, and you can either let that ride, or take measures as you do to reduce over concentration risk, and on average end up with similar total return outcomes, but where non-rebalanced may be inclined to lead to deep regret for a small number - those for whom a really big winner that had risen to dominate the index, took a tumble or maybe even totally failed, deep regret that they hadn't profit taken and distributed/diversified the proceeds around.

The FT250 is more inclined to be more equal weighted like, unlike the FT100 that caps the largest individual stock to no more than 10% weighting and sometimes individual stocks hit that level, in the case of the FT250 its rare for individual stocks to even breach 2% weighting - as such stock tend to eject out of the FT250 and into the FT100. In effect profit taking the best, dropping the worst out of the bottom and replacing them with growing risers. It also captures stocks that have become 'value' plays that fall out of the FT100, that in some cases rebound to rise back into the FT100. Structurally similar to HYP's. FT100 as a benchmark is a poorer choice IMO, accepts risers in at the bottom, and holds them until they fall back out of the bottom again and where it can become quite tilted at times, high tech stock weightings in the lead up to the dot com bubble burst, high financials weightings prior to the 2008/9 financial crisis.

[1nvest]

The other element is should you go with high yielders for income, or take perhaps the same amount of income out of total returns, in which case you don't limit your stock candidates/selections. Dividend yield can reflect 'value' but where it also reflects risk, broadly washes.

Furthermore should you go all-in stocks alone, or diversify. Personally I prefer to diversify, play a Martingale approach. 67/33 stock/gold and if the stock 67 halves to 33 the driving factors of that might see the 33 gold value double to 67. No capital loss despite stocks having halved, and where rebalancing back to 67/33 stocks/gold again has you holding twice as many shares are before. Historically that yielded broadly similar average rewards, but was safer (better risk adjusted reward).

US data indicator

Total returns comparison
https://www.portfoliovisualizer.com/bac ... CGrk6tfxwl

MonteCarlo 4% 30 year SWR for just stock (87% success rate)
https://www.portfoliovisualizer.com/mon ... kNrH4kEU2J

MonteCarlo 4% 30 year SWR for 67/33 stock/gold (99% success rate)
https://www.portfoliovisualizer.com/mon ... yGNr4Y12Z5

[Itsallaguess]

from my recollection my IT (HINT) IRR has spent absolutely ages at between -6% and -9%.

Coming back to the above income-IT performance Chris, I've just dug out the following Henderson International Income (HINT) information from Google Finance and the AIC site -



Sources -

https://www.google.com/finance/quote/HINT:LON?window=MAX

https://www.theaic.co.uk/companydata/henderson-international-income/dividends

As a HINT owner myself, who's happy to say that it's not been one of my better performers over recent years, I do still look at the above performance metrics and actually see one of the best things about my move over to income-IT holdings, in that even what we might consider relatively middle-of-the-road performance like that, it's still much, much better 'poor performance' than the typical single-share 'poor performance' that we often see on the likes of the long-running 'Too High Yield?' thread, where almost complete wipe-outs are not uncommon when people chase ultra-high yields, and those adventures often end in much more abject 'failure' than the types of figures we're looking at on the above image...

A 5-year dividend-growth-rate of 7.1% per annum with a current yield of 4.7% is, I suspect, a level of income-related performance that would beat many common single-share HYP holdings in recent years, and unless you're able to highlight something I'm missing in the above figures Chris, and given that you've mentioned HINT a couple of times when discussing your unhappiness with 'income-IT's', then I do begin to wonder if it's being a little unfairly maligned, given the lack of detail to point out just where you're unhappy with it from an income-investment perspective...

Here's HINT's 10-year dividend-history -



Source - https://www.fidelity.co.uk/factsheet-data/factsheet/GB00B3PHCS86-henderson-intl-income-trust-plc/dividends

Given the above snapshots of performance information, if HINT is being held up as a bad example of income-IT performance, then I'd perhaps actually suggest that it helps to make the argument *for* income-IT's as a personal-investment strategy to deliver long-term and reliable income, and not against them...

Cheers,

Itsallaguess

[moorfield]

A cracking post IAAG, thanks for taking the time to dissect HINT further for us. It's been on my shortlist already as a new addition into my PHY next year.

[dealtn]

I'm still hoping to sell the bloody thing at at least parity before the end of the Earth tax year. C.

If you're not happy why wait (or more accurately why wait further)?

This kind of price anchoring bias seems to be a common failing. Your entry price is irrelavent (outside of some limited legitimate tax concerns) and is certainly ignored by the market. The market is open and available to sell into every day, as is the market for the alternative purchase you have in mind.

Professionally I was always amazed at people that would be happier having bought something at 100 waiting to get out and buy something else when the prices were say 80 and 100 to have "finally" sold at 101 and reinvested at 150 in an alternative seen as clearly better since it had risen 50%. They just couldn't see that selling at 80 and buying at 100 was better, and even with hindsight could rationalise waiting.