HYP1 is 23 - thread discussing income and capital diversification

[moorfield]

Irrespective of all the caveats to this HYP and the explanations for what has happened to the income the outcome would be a disaster for a Doris or indeed anyone trying to live off the income. I can speak with complete authority as I rely totally on the income from my portfolio for income. I have no other income than the SP. I can assure you that that sharpens the mind and is one reason why I hold no miners or house builders (except Gleeson which is not one of the biggies)

I regard the HYP under discussion is a complete disaster.

Dod

Sorry this is nonsense Dod. If you are going to complain HYP is a complete disaster, against what bench mark are you claiming that?

Whether it is a disaster or not depends very much on Doris' own needs and expectations at the outset. If a £3451 income was enough for Doris to live off in 2000, then it is still enough now, cost of living factored which would be ~£7800 exactly what HYP produced today.

Scale it up 5x if it makes it easier to understand:
If a £17255 income was enough for Doris to live off in 2000, then it is still enough now, cost of living factored which would be ~£39000 exactly what HYP produced today.

And if she were still using it as a savings vehicle, well she might have £391,464 producing an income of £19,723 today, without any further capital contributions. Against what bench mark is that a complete disaster?

I suspect what you mean is income volatility has been a disaster in some years. I think most folk would agree with that, and I suppose brings us back to cash reserves etc. I am a big fan of high pyadic principles (buy high yield, diversify sectors, hold, do nothing but corporate actions) , its just the implementation of I have come to disagree with, for this reason. I still operate my retirement portfolio as pyad suggested, with a dose of TJHs top up rankings.

I just have 15 ITs instead.

[Dod101]

Irrespective of all the caveats to this HYP and the explanations for what has happened to the income the outcome would be a disaster for a Doris or indeed anyone trying to live off the income. I can speak with complete authority as I rely totally on the income from my portfolio for income. I have no other income than the SP. I can assure you that that sharpens the mind and is one reason why I hold no miners or house builders (except Gleeson which is not one of the biggies)

I regard the HYP under discussion is a complete disaster.

Dod

Sorry this is nonsense Dod. If you are going to complain HYP is a complete disaster, against what bench mark are you claiming that?

Whether it is a disaster or not depends very much on Doris' own needs and expectations at the outset. If a £3451 income was enough for Doris to live off in 2000, then it is still enough now, cost of living factored which would be ~£7800 exactly what HYP produced today.

Scale it up 5x if it makes it easier to understand:
If a £17255 income was enough for Doris to live off in 2000, then it is still enough now, cost of living factored which would be ~£39000 exactly what HYP produced today.

And if she were still using it as a savings vehicle, well she might have £391,464 producing an income of £19,723 today, without any further capital contributions. Against what bench mark is that a complete disaster?

I suspect what you mean is income volatility has been a disaster in some years. I think most folk would agree with that, and I suppose brings us back to cash reserves etc. I am a big fan of high pyadic principles (buy high yield, diversify sectors, hold, do nothing but corporate actions) , its just the implementation of I have come to disagree with, for this reason. I still operate my retirement portfolio as pyad suggested, with a dose of TJHs top up rankings.

I just have 15 ITs instead.

It is a complete disaster. In real life can you imagine anyone living off income as volatile as that? And in the end so reliant on a few stalwarts?

Dod

[Bubblesofearth]

It is a complete disaster. In real life can you imagine anyone living off income as volatile as that? And in the end so reliant on a few stalwarts?

Dod

It would have taken an extraordinary amount of luck to have avoided a fall in dividend income during both the GFC and covid. To claim HYP1 is a complete disaster on those grounds is harsh.

Also, if you are completely reliant on your share portfolio for income, i.e. have no other source, then AFAIA that makes you very unusual. Even more so if you cannot tolerate income volatility. Fair play to you if you've managed it but I wouldn't recommend the HYP approach, or any equity approach, for someone in such a situation.

BoE

[kempiejon]

It is a complete disaster. In real life can you imagine anyone living off income as volatile as that? And in the end so reliant on a few stalwarts?

Dod

It would have taken an extraordinary amount of luck to have avoided a fall in dividend income during both the GFC and covid. To claim HYP1 is a complete disaster on those grounds is harsh.

Also, if you are completely reliant on your share portfolio for income, i.e. have no other source, then AFAIA that makes you very unusual. Even more so if you cannot tolerate income volatility. Fair play to you if you've managed it but I wouldn't recommend the HYP approach, or any equity approach, for someone in such a situation.

BoE

I could imagine having an income as volatile as that, in fact I have lived it. Imagine if your investments were like your business. You might have lots of clients but only a few that generated the majority of your profits, or you trade in a cyclical or seasonal business, you'd need a method to maintain your solvency. Just because HYP had fallow years doesn't rule it out as profitable but one would need some financial awareness.

[Dod101]

But the whole point is that it is intended for a Doris to live off. An unsophisticated elderly lady. She might of course have the income from the HYP paid into a bank account from which see makes regular and modest withdrawals so that the volatility did not bother her. In real life I have cash or near cash reserves to cover shortfalls but have never used them.
Dod

[Bubblesofearth]

I could imagine having an income as volatile as that, in fact I have lived it. Imagine if your investments were like your business. You might have lots of clients but only a few that generated the majority of your profits, or you trade in a cyclical or seasonal business, you'd need a method to maintain your solvency. Just because HYP had fallow years doesn't rule it out as profitable but one would need some financial awareness.

Sure but what Dod is talking about is total reliance on HYP income. My own share portfolio has been moderately successful but I use it to supplement income from other sources rather than relying on it alone.

BoE

[kempiejon]

In real life can you imagine anyone living off income as volatile as that? And in the end so reliant on a few stalwarts?

Dod

Sure but what Dod is talking about is total reliance on HYP income.

Ah gotcha, yes I could imagine living with total reliance on an income like that.

[Itsallaguess]

Sure but what Dod is talking about is total reliance on HYP income.

Ah gotcha, yes I could imagine living with total reliance on an income like that.

And can you imagine living with total reliance on a volatile income like that, which also carries such a concentrated level of single-company risk...

For me personally it's the combination of those two issues that causes the most problems in terms of it being a suitable 'hands off' approach to income-investing.

Cheers,

Itsallaguess

[BullDog]

I could imagine having an income as volatile as that, in fact I have lived it. Imagine if your investments were like your business. You might have lots of clients but only a few that generated the majority of your profits, or you trade in a cyclical or seasonal business, you'd need a method to maintain your solvency. Just because HYP had fallow years doesn't rule it out as profitable but one would need some financial awareness.

Sure but what Dod is talking about is total reliance on HYP income. My own share portfolio has been moderately successful but I use it to supplement income from other sources rather than relying on it alone.

BoE

I expect that's the majority of people too.

[Lootman]

It is a complete disaster. In real life can you imagine anyone living off income as volatile as that? And in the end so reliant on a few stalwarts?

It would have taken an extraordinary amount of luck to have avoided a fall in dividend income during both the GFC and covid. To claim HYP1 is a complete disaster on those grounds is harsh.

Perhaps we were unlucky to have both the global financial crisis and Covid in the last 16 years. And perhaps the next 16 years will contain no such market traumas. But if you believe that some kind of global crisis will happen once a decade then you probably would not allocate so much to a strategy that invests only in UK HY shares (representing about just 2% of global market cap) and, moreover, that is very unbalanced between them.

And 2023 did not have such a global crisis, unless you count the Ukraine war. And yet HYP1's income was down over 30% in that year. If that is not caused by the lack of diversification in HYP1, then by what?

[Bubblesofearth]

Ah gotcha, yes I could imagine living with total reliance on an income like that.

Well I could imagine it as well, I just wouldn't do it.

BoE

[Bubblesofearth]

It would have taken an extraordinary amount of luck to have avoided a fall in dividend income during both the GFC and covid. To claim HYP1 is a complete disaster on those grounds is harsh.

Perhaps we were unlucky to have both the global financial crisis and Covid in the last 16 years. And perhaps the next 16 years will contain no such market traumas. But if you believe that some kind of global crisis will happen once a decade then you probably would not allocate so much to a strategy that invests only in UK HY shares (representing about just 2% of global market cap) and, moreover, that is very unbalanced between them.

And 2023 did not have such a global crisis, unless you count the Ukraine war. And yet HYP1's income was down over 30% in that year. If that is not caused by the lack of diversification in HYP1, then by what?

That's been explained already by the presence of cyclicals and needs to be taken in the context of the big rise in income 2 years previously.

I agree with you on a few points. I wouldn't and don't have all my wealth in a 15 share HYP. Where I'm disagreeing with Dod is in the description of HYP1 as a total disaster. That is based on a very unusual set of criteria, viz the total reliance on the HYP income, and setting start points different from that of HYP1. So it's both unusual and imaginary!

BoE

[kempiejon]

And can you imagine living with total reliance on a volatile income like that, which also carries such a concentrated level of single-company risk...

Perhaps I have different experiences but yes I can imagine that too. It was Dod suggesting it was a total failure and not being able to imagine anyone living like that I commented on. The example I gave of a small business with say 10-15 clients but 3 of them producing 70% of the turnover.. A business that was cyclical with boom and bust years and also seasonal where there might be only a few months of the year where the majority of that turnover came and some months where turnover wasn't even enough to pay basic bills.

I can see that HYP looks risky with income concentration and volatility but so far hasn't it performed? It looks like it has, one would just need to manage the flow. Of course investing in shares is risky and next year or the year after HYP1 could fail catastrophically, disaster scenarios for a couple of the big hitters and inflation eating the income dinner. I can imagine that too. Businesses go bust and they are a risk to capital.

[1nvest]

Sorry this is nonsense Dod. If you are going to complain HYP is a complete disaster, against what bench mark are you claiming that?

Whether it is a disaster or not depends very much on Doris' own needs and expectations at the outset. If a £3451 income was enough for Doris to live off in 2000, then it is still enough now, cost of living factored which would be ~£7800 exactly what HYP produced today.

Scale it up 5x if it makes it easier to understand:
If a £17255 income was enough for Doris to live off in 2000, then it is still enough now, cost of living factored which would be ~£39000 exactly what HYP produced today.

And if she were still using it as a savings vehicle, well she might have £391,464 producing an income of £19,723 today, without any further capital contributions. Against what bench mark is that a complete disaster?

I suspect what you mean is income volatility has been a disaster in some years. I think most folk would agree with that, and I suppose brings us back to cash reserves etc. I am a big fan of high pyadic principles (buy high yield, diversify sectors, hold, do nothing but corporate actions) , its just the implementation of I have come to disagree with, for this reason. I still operate my retirement portfolio as pyad suggested, with a dose of TJHs top up rankings.

I just have 15 ITs instead.

It is a complete disaster. In real life can you imagine anyone living off income as volatile as that? And in the end so reliant on a few stalwarts?

Dod

A real life Doris might have dividends dropped into a interest paying account, no other actions, in which case the initial 4.5% type yield might have been more than enough, many plan their retirement around a 4% initial rate. In which case Doris would have been fine, holding a cash deposit account of ample value to have continued spending at a CPI inflated rate.

As for the drift in individual stocks, US LEXCX formed on a similar basis (but with 30 stocks, left as-is), has also done fine since the 1930's. High recent weighting into Union Pacific, but where things changed around over time as splits/mergers occurred. As of present it even holds some Berkshire Hathaway shares, a stock that wasn't even around in the 1930's. Has however reduced down from 30 to around 20 total holdings.

For the truly indolent/disinterested the approach has evidenced ability to work. Including the HYP1. Relative to 4% being 'enough' in 2000, would require around £5200 recently to compare in real terms, whilst the most recent 'bad' year produced £7700, so yet more added to the cash deposit account (surplus).