Bubblesofearth wrote:dealtn wrote:
The former. Plus, especially in this context, it is the potential fall in Income not value surely?
In which case it is an even more pertinent question to ask which is more important, income falling by a certain % or a drop in income to below a certain value? If you set up a HYP to provide a given level of income and the income rises above your needs then you will likely tolerate a fall more easily than if the income has just kept pace with your needs and then falls. If prudent you will have saved or reinvested the extra income in the first scenario to provide a buffer.
BoE
Indeed. But the question was about "risk" and whether a balanced strategy was less risky. You are now introducing someone's tolerance to that risk. I think I would agree that someone with excess income is more tolerant to that "riskiness" to someone that has lower income. Regardless, for any portfolio holder, at each income value would have a tolerance for less risk, or more balance to that income stream. That is the choice any HYPer has at any point in time. It isn't possible to rebalance and create additional capital value so to minimise risk a balanced portfolio is optimal.
Interestingly though, from an income perspective, it is possible to "create" additional income, by selling low yielders (for whatever reason they have become such) and buy high yielders. So why, both at inception, and during the portfolio's life, doesn't the author, or the protaganists, undertake that switch to a single (or few) high yielding shares? At inception it is considered that to be too high a risk and sectoral diversification is necessary. That concern about the "risk" evaporates, it seems, the next day? The risk doesn't evaporate, indeed it grows with each passing day, the portfolios aims and reality potentially diverge with each passing day, or dividend declaration.
And therein lies the dichotomy of the HYP system. It is both simple and low risk, such that an ordinary person, a Doris, can undertake it, but also a system that grows in risk over its life with no simple system or set of rules to limit that risk such that a simple ordinary person (perhaps unknowingly) is exposed to growing, and eventually significant, risk.
In practice it seems most practitioners of the method aren't purists (and also probably aren't HYP monopolists either), so that total risk is less of a concern. Pure Doris HYPers however are taking risk they perhaps weren't aware of, and in the real world might in practice be "mis-sold" and parallels with long term products such as endowment mortgages exist, and how they were industry scandals from the past.