Pseudo-HYP and risk/cash weighting

[Newroad]

Morning All.

I'm not sure if this is of interest, but just in case it is, here goes.

You can see the formative thinking behind the creation of my Pseudo-HYP here: https://www.lemonfool.co.uk/viewtopic.php?f=15&t=33704&hilit=pseudo+hyp. I am now 13 stocks in to the 22 stock target. In (accumulation) unitised terms, it has reduced from £100 at open to £97.35 now (having been as low as 83.99).

You can see a number of balance and top-up etc strategies on this forum, perhaps the most notable being Terry's here: https://www.lemonfool.co.uk/viewtopic.php?f=15&t=25337&hilit=portfolio+adjustment. Terry's is very long lived whereas mine is being customised and refined over time, but in general, might be summarised as a high'ish yield, low'ish risk/volatility strategy. It is this latter point which may differentiate it from many others and may be of interest to some.

In short, when topping up or rebalancing, instead of comparing to a median or similar portfolio holding, compare each holding to it's implied cash-weighting (which is determined from it's risk weighting). The higher the risk of stock, determined by proxy from it's volatility (in my case, over a year) the lower it's target cash weighting in the portfolio.

For my current holdings and the next planned one (ANTO) this gives the following

ANTO ____ 4.93%
BATS ____ 9.65%
BP. _____ 6.27%
BT.A ____ 6.64%
GSK _____ 8.78%
LAND ____ 6.86%
LGEN ____ 6.78%
MNG _____ 6.60%
RIO _____ 6.55%
SGE _____ 8.18%
SMDS ____ 6.05%
SSE _____ 7.82%
TW. _____ 6.12%
VOD _____ 8.67%

So, how does this work in practise?

Select the next stock (one per month) from the FTSE 100, with the highest yield (and some other considerations), from a sector which needs filling - and determine the current cash weight to invest in given the current value of the overall portfolio.

I haven't got there yet, but when I get to the 22 holding target, rebalance within the portfolio each month by topping up (min £500 is planned) the holding most below its cash weight. Additionally, once a year, swap stocks in and out of a given portfolio sector if the dividend difference exceeds a threshold - but again, I won't start this until I get to the full 22.

Regards, Newroad

[Charlottesquare]

Morning All.

I'm not sure if this is of interest, but just in case it is, here goes.

You can see the formative thinking behind the creation of my Pseudo-HYP here: https://www.lemonfool.co.uk/viewtopic.php?f=15&t=33704&hilit=pseudo+hyp. I am now 13 stocks in to the 22 stock target. In (accumulation) unitised terms, it has reduced from £100 at open to £97.35 now (having been as low as 83.99).

You can see a number of balance and top-up etc strategies on this forum, perhaps the most notable being Terry's here: https://www.lemonfool.co.uk/viewtopic.php?f=15&t=25337&hilit=portfolio+adjustment. Terry's is very long lived whereas mine is being customised and refined over time, but in general, might be summarised as a high'ish yield, low'ish risk/volatility strategy. It is this latter point which may differentiate it from many others and may be of interest to some.

In short, when topping up or rebalancing, instead of comparing to a median or similar portfolio holding, compare each holding to it's implied cash-weighting (which is determined from it's risk weighting). The higher the risk of stock, determined by proxy from it's volatility (in my case, over a year) the lower it's target cash weighting in the portfolio.

For my current holdings and the next planned one (ANTO) this gives the following

ANTO ____ 4.93%
BATS ____ 9.65%
BP. _____ 6.27%
BT.A ____ 6.64%
GSK _____ 8.78%
LAND ____ 6.86%
LGEN ____ 6.78%
MNG _____ 6.60%
RIO _____ 6.55%
SGE _____ 8.18%
SMDS ____ 6.05%
SSE _____ 7.82%
TW. _____ 6.12%
VOD _____ 8.67%

So, how does this work in practise?

Select the next stock (one per month) from the FTSE 100, with the highest yield (and some other considerations), from a sector which needs filling - and determine the current cash weight to invest in given the current value of the overall portfolio.

I haven't got there yet, but when I get to the 22 holding target, rebalance within the portfolio each month by topping up (min £500 is planned) the holding most below its cash weight. Additionally, once a year, swap stocks in and out of a given portfolio sector if the dividend difference exceeds a threshold - but again, I won't start this until I get to the full 22.

Regards, Newroad

Volatility is the issue, what is this benchmarked against, the index where the individual holding resides (Say FTSE 100) or something wider?

The calcs will be a right pain, for instance if I use two dates what happens if Share A goes ex div before or after say start or end, dates, how do you strip out ex divs fluctuations, especially year on year when say dividend payment dates change and one year you get an extra div?

Also do all shares have their volatility measured at same dates, seems they must to eliminate the market sentiment re their price movements comparing one with another?

This seems a lot of work and frankly making a process semi automatic /a new system does not , imho ,make it better or worse that hunch/sentiment/random walk.

I mainly use ITs but I tend to select where the divs get spent (Mainly my SIPP pension,I am not retired yet) with my views on economy of both UK and ROW, should I today go Asia/USA/Canada/China/UK etc, where I do pick individual companies it tends to be what they do that interests me or if they are real strong index staples. (Your Unilevers/Shell etc)

ITs also ensure I am not pushed into stamp collecting business sectors but more, in the main, geographies

Also if low volatility is your metric do you buy less of those that have taken a hammering thus maybe only partially (Due to the smaller investment) enjoying substantial uplift if it later comes (market mispricing reversing, say) , are you accordingly dooming yourself to mediocrity by scaling down on those that might fizz?

[Newroad]

Hi Charlottesquare.

To address your points in turn ...

The calculations for volatility etc are as per Carver's book "Smart Portfolios", p490 being the most relevant.

The volatility is not compared to another instrument, it is standalone.

Dividend payment dates are ignored. Your point is reasonable in this regard - Carver (broadly) advises that whatever you do, do it consistently - and in this exercise, I choose to ignore that possibility.

Yes, all the shares have the same measurement dates - one full year of daily close pricing.

I would argue that it should reduce volatility compared to random/equal weighting of the same stocks. Whether that produces a better outcome will only be able to be determined with hindsight.

I'm not sure I got the intent of the stamp-collecting and geographies comment, but most of our stuff is global IT's and ETF's. This is a small local experiment on the side - I would guess currently a little under 3% of our investing capital.

I think the answer to your final question is "yes", i.e. fewer of those which have been hammered (and similarly, risen quickly)

I hope that clarifies - and thanks for the interest

Regards, Newroad

[Charlottesquare]

Hi Charlottesquare.

To address your points in turn ...

The calculations for volatility etc are as per Carver's book "Smart Portfolios", p490 being the most relevant.

The volatility is not compared to another instrument, it is standalone.

Dividend payment dates are ignored. Your point is reasonable in this regard - Carver (broadly) advises that whatever you do, do it consistently - and in this exercise, I choose to ignore that possibility.

Yes, all the shares have the same measurement dates - one full year of daily close pricing.

I would argue that it should reduce volatility compared to random/equal weighting of the same stocks. Whether that produces a better outcome will only be able to be determined with hindsight.

I'm not sure I got the intent of the stamp-collecting and geographies comment, but most of our stuff is global IT's and ETF's. This is a small local experiment on the side - I would guess currently a little under 3% of our investing capital.

I think the answer to your final question is "yes", i.e. fewer of those which have been hammered (and similarly, risen quickly)

I hope that clarifies - and thanks for the interest

Regards, Newroad

Sorry, I though volatility impacted selection instead of merely influencing sum invested.

The stamp collecting comment is the selecting sectors and how many sectors your selection requires, in effect say pushing you to buy a miner as you have no miner etc, with individual companies you are often looking for one to fit the vacant sector slot.

Geographies are simpler, you select however many you are comfortable with, I do mainly five, UK, Europe, North America, Asia ex China, China but also have small Vietnam specific and used to have India specific(I found it hard to get an Indian specific IT with reasonable yield), so once only five invested I can add slightly different ITs in each sector (or increase existing)depending upon my regional economic sentiments.

I suspect you are selecting say 15-20 sectors, I can always find something to fit my regions whereas you may strive to fill one/compromise on yield etc to fill that one?

[Newroad]

Hi Charlottesquare.

Yes, as you have now understood, volatility only influences (relative) sum invested.

There are 11 sectors and I am targeting 2 from each, so 22 stocks in total. After that, it will be come a rebalancing (including additional funds) and swap-in/swap-out exercise.

For this purpose, the geography is the UK, FTSE100 only if possible (it has been thus far).

Finally, yes, I may have to compromise on yield for one or two sectors (I think only one thus far, SGE on yield of 2.32% or so, with the FTSE100 yielding 3.55% or so). Hence it being described as a high'ish yield portfolio.

Regards, Newroad