HYP1 is 23 - Total Return

[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.

Rebasing both HYP1 and FT250 total returns to £75,000 start date amounts, and drawing a 4% SWR (4% of initial portfolio value, where that amount is uplifted by CPI each year as the amount drawn at the start of subsequent years (nice consistent inflation adjusted income)) ...


Income increased from £30000 to £4932, residual portfolio values in real (after inflation) terms £116K for FT250, £121K for HYP1 (a flip around from the prior year when the FT250 was ahead).

At 5% SWR ...

[1nvest]

HYP1 is/was a more aggressive SWR style, perhaps might be considered as a 5% SWR targeted choice. A risk there is that of increased risk of failure, as historically 4% SWR is the accepted safer choice.

As a suggested alternative to a annuity the other risk is that of more dynamic/variable income, and of income distribution across each year. With the 5% SWR you take the entire years inflation adjusted income at the start of each year.

Comparing my prior posts income data



and the blue bars reflect inflation adjusted income (5% SWR) that if those were adjusted for inflation would be a constant flat line. In comparison th HYP1 income was more variable around that. What for instance would you do if you were solely reliant upon the HYP1 income in years like 3, 4, 5 and/or 9, 10, 11, 12 when the HYP1 income was relatively down in real terms? Presumably sell shares, likely at relatively lower prices - far from the better times to have been selling shares. Furthermore with dividends distributed across the year (HYP1) compared to having a lump sum dropped into your bank account at the start of the year (SWR) there could be cash-flow issues with the HYP1.

The residual/remaining portfolios for those broadly compare, whether that was holding the HYP1 shares or the FT250 stock index. Such that the indications are that the HYP1 had greater risk, where income might have been too little when most needed, and the risk of concentration, where too much exposure into single stocks could backfire ... and where that risk wasn't compensated - ended up with similar overall residual portfolio value remaining assuming no shares were sold, but where in practice some may have had to be sold in order to pay bills - typically at a bad time to be selling shares.

More suited to old-days, when due to high costs it was more appropriate to buy a diverse bunch of individual stocks and hold those long term. Less appropriate in a era when index funds/ETF's are common and relatively inexpensive to hold/trade.

If you are headed for a shop on a street corner on the other side of a three lane carriageway you might take your chances crossing between the traffic flow (HYP) or walk down to the traffic lights and more safely cross there (SWR). Either way there's no advantage, you still get to the shop at around the same time, but with one choice you took uncompensated risk in order to get there.

[1nvest]

Portfoliovisualizer provides a nice tool for testing many aspects. Here's one that draws a 5% SWR from each of all-stock and a 67/33 stock/gold (hedged portfolio) asset allocations

https://www.portfoliovisualizer.com/bac ... YbrLM1gbxS

US data, but that reveals how a 5% 30 year SWR objective has failed for the all-stock choice when started in November 2000.

A primary risk is that by the time it becomes evident that its failing, its too late to take corrective action as both the income and residual capital values are just too low.

Why the 'hedged' description for 67/33 stock/gold? Because whatever might drive the 67 stock value to halve to 33 might see the 33 gold value double to 67. 33/67 stock/gold rebalanced back to 67/33 stock/gold entails no capital loss and where the number of stock shares held are doubled up after priced had halved. In other cases the 33 gold will have been a lag/drag factor, however the cost of that drag when stocks have performed very well just tends to mean a good instead of great outcome, either of which was good-enough (just less left for heirs than might have been left if you'd been 100% stocks).

For reference the Pound/Dollar rate declined from around 1.42 USD per Pound in November 2000 to 1.26 more recently. So for a UK investor holding US dollars would have been a 1.42/1.26 = 1.12 (12%) FX (currency) gain/benefit factor.

Another of PV's tools is a MonteCarlo tool, where for example you can run tests for a indicator of success/failure probabilities https://www.portfoliovisualizer.com/mon ... sF7lhjCDZu the likes of the outcome from 10,000 simulated portfolios.

[Arborbridge]

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.

Yes, I feel about the same - it's doing what I expected.
I would say there's another big test going on right now, and that is whether over the next couple of year's income will respond to inflation stisfactorily. i.e. it's a big test of the "and rising income" part of what is on the tin. HYP has had an easy ride in that respect since the early 2000s with low RPI, but now the test is really "on".

Arb.

[G3lc]

…..…..so as ever it’s all about picking good dependable stocks with an acceptable dividend and capital growth. But how much is luck? - that’s life. Back to the basic HYP idea.

[1nvest]

…..…..so as ever it’s all about picking good dependable stocks with an acceptable dividend and capital growth. But how much is luck? - that’s life. Back to the basic HYP idea.

I opine that much of HYP is down to luck. It's more a casino play, but in a casino that is typically generous, most come out smiling, funded by a smaller number who come out having lost all. There are alternatives to that casino choice, that on average achieve similar total results, with less risk of being one of the smaller number who end up in tears. Some don't mind taking on the additional risk for no reward, even to the extent of risking their entire retirement funds on that. I guess they enjoy the thrill. Or the satisfaction from, mostly by luck, being able to proclaim how they'd been successful in having avoided a bad case outcome and achieved a good outcome, even if that good outcome was just comparable to others who hadn't taken on the risk.

[Bubblesofearth]

I opine that much of HYP is down to luck. It's more a casino play, but in a casino that is typically generous, most come out smiling, funded by a smaller number who come out having lost all. There are alternatives to that casino choice, that on average achieve similar total results, with less risk of being one of the smaller number who end up in tears. Some don't mind taking on the additional risk for no reward, even to the extent of risking their entire retirement funds on that. I guess they enjoy the thrill. Or the satisfaction from, mostly by luck, being able to proclaim how they'd been successful in having avoided a bad case outcome and achieved a good outcome, even if that good outcome was just comparable to others who hadn't taken on the risk.

What is the risk and how do you quantify it? I'm struggling to imagine a 15 share HYP, selected according to original principles (big-caps, sectoral diversification, equal weight on purchase) that could have lost all or even done a lot worse than the index from which they are taken. Maybe, with the power of hindsight, careful scrutiny of the index components 23 years ago might have enabled one to pick 15 dogs but what were the odds?

There's a lot of talk of risk on this thread but little attempt at measurement. The industry standard of volatility has even been thrown out by some posters but they seem to struggle (or refuse) to provide a quantifiable alternative.

BoE

[Arborbridge]

…..…..so as ever it’s all about picking good dependable stocks with an acceptable dividend and capital growth. But how much is luck? - that’s life. Back to the basic HYP idea.

I opine that much of HYP is down to luck. It's more a casino play, but in a casino that is typically generous, most come out smiling, funded by a smaller number who come out having lost all. There are alternatives to that casino choice, that on average achieve similar total results, with less risk of being one of the smaller number who end up in tears. Some don't mind taking on the additional risk for no reward, even to the extent of risking their entire retirement funds on that. I guess they enjoy the thrill. Or the satisfaction from, mostly by luck, being able to proclaim how they'd been successful in having avoided a bad case outcome and achieved a good outcome, even if that good outcome was just comparable to others who hadn't taken on the risk.

I think that's a bit over the top. In a general sense the stock market is a casino, but I really think that is an extreme view, rather like saying the stocke market is immoral - which many on the left would suggest.

HYP and similar plans are not "casinos" except in the very broadest sense - they are investments with inbuilt mechanisms for mitigating risk. If HYP is a casino, then so are the various ITs one can buy. In other words, the "casino" comment does not tell us very much at all!

And yes, of course, there is luck involved as with everything, but there is also a method and like all methods, it will help you make your own luck. Was it the golfer Garry Player who said "the more I play, the luckier I get"? Well, it was a golfer, anyway.

Arb.

[Arborbridge]

There's a lot of talk of risk on this thread but little attempt at measurement. The industry standard of volatility has even been thrown out by some posters but they seem to struggle (or refuse) to provide a quantifiable alternative.

BoE

Yes, it has been pointed out that we do not understand "risk". Well, I do know what I personally understand, and it isn't "volatility" on a short timescale. I confess that it was a surprise to discover early on in my investment career, that "risk" isn't used in the normal way in the industry. Only a cabale could take a word, redefine it and then tell the rest of society they "don't understand".

Well, it doesn't bother me particularly, but what I need is a exceedingly small risk of losing my whole investment capital - and I believe that to be satisfied when investing in a basket of the largest companies. And if you add to that, the thought that one will never sell, so one is not bothered about volatility, then the risk is really rather small: it virtually falls out of the equation.

I point to TJH as a living testament to this idea over a long enough period to be a useful example to all of us.

Arb.

[Bubblesofearth]

Yes, it has been pointed out that we do not understand "risk". Well, I do know what I personally understand, and it isn't "volatility" on a short timescale. I confess that it was a surprise to discover early on in my investment career, that "risk" isn't used in the normal way in the industry. Only a cabale could take a word, redefine it and then tell the rest of society they "don't understand".

Well, it doesn't bother me particularly, but what I need is a exceedingly small risk of losing my whole investment capital - and I believe that to be satisfied when investing in a basket of the largest companies. And if you add to that, the thought that one will never sell, so one is not bothered about volatility, then the risk is really rather small: it virtually falls out of the equation.

I point to TJH as a living testament to this idea over a long enough period to be a useful example to all of us.

Arb.

Are you really saying that the only risk you are bothered about is losing all your capital? How about your dividend income falling 90% and not recovering? 50%? Correct me if I'm wrong but I would guess there is a level of risk associated with your dividend income that you would struggle to accept. Is it relative to the market or absolute?

If you can identify what you see as risk and then go on to quantify that risk then you've done something few on here have achieved. It's not about accepting volatility as the only measure of risk, it's about identifying and quantifying your personal measure. Of course you don't have to, on-one has to. All I'm saying is that there are a lot of opinions, call it gut-feel or whatever, about risk but little attempt at definition or quantification.

BoE

[Dod101]

There's a lot of talk of risk on this thread but little attempt at measurement. The industry standard of volatility has even been thrown out by some posters but they seem to struggle (or refuse) to provide a quantifiable alternative.

BoE

Yes, it has been pointed out that we do not understand "risk". Well, I do know what I personally understand, and it isn't "volatility" on a short timescale. I confess that it was a surprise to discover early on in my investment career, that "risk" isn't used in the normal way in the industry. Only a cabale could take a word, redefine it and then tell the rest of society they "don't understand".

Well, it doesn't bother me particularly, but what I need is a exceedingly small risk of losing my whole investment capital - and I believe that to be satisfied when investing in a basket of the largest companies. And if you add to that, the thought that one will never sell, so one is not bothered about volatility, then the risk is really rather small: it virtually falls out of the equation.

I point to TJH as a living testament to this idea over a long enough period to be a useful example to all of us.

Arb.

I agree with that and would love some of those who chastise us for failing to take into account ‘risk’ would define what exactly they mean by that. Volatility comes with investing but unless you are a trader it is of little relevance and almost none to those of us who are committed to the principles of LTBH.

Dod

[Dod101]

Yes, it has been pointed out that we do not understand "risk". Well, I do know what I personally understand, and it isn't "volatility" on a short timescale. I confess that it was a surprise to discover early on in my investment career, that "risk" isn't used in the normal way in the industry. Only a cabale could take a word, redefine it and then tell the rest of society they "don't understand".

Well, it doesn't bother me particularly, but what I need is a exceedingly small risk of losing my whole investment capital - and I believe that to be satisfied when investing in a basket of the largest companies. And if you add to that, the thought that one will never sell, so one is not bothered about volatility, then the risk is really rather small: it virtually falls out of the equation.

I point to TJH as a living testament to this idea over a long enough period to be a useful example to all of us.

Arb.

Are you really saying that the only risk you are bothered about is losing all your capital? How about your dividend income falling 90% and not recovering? 50%? Correct me if I'm wrong but I would guess there is a level of risk associated with your dividend income that you would struggle to accept. Is it relative to the market or absolute?

If you can identify what you see as risk and then go on to quantify that risk then you've done something few on here have achieved. It's not about accepting volatility as the only measure of risk, it's about identifying and quantifying your personal measure. Of course you don't have to, on-one has to. All I'm saying is that there are a lot of opinions, call it gut-feel or whatever, about risk but little attempt at definition or quantification.

BoE

Life is full of risks and if you went about worrying about them all the time we would get nowhere. Investing is risky. You might, for instance, in pursuit of dividend income, put all your money into a Carillion. I mitigate that risk by, as far as I am able, avoiding shares like Carillion and spreading my investments over 30 or so shares that I judge to have a low risk of falling over. So far that has worked quite well. I have no idea how to measure that risk but I try to minimise it by keeping a fairly close eye on what is going on. I avoid being too ambitious about dividend yields and try to pick companies that tend to behave sensibly and soberly. I avoid built in volatility such as comes from house builders and miners since I am looking for a steady if modest increase in my dividends year on year. That approach means that I can retain a share like SSE when it resets its dividend as I hope and expect to make up the shortfall from its dividend from my other shares.

Dod

[tjh290633]

Yes, it has been pointed out that we do not understand "risk". Well, I do know what I personally understand, and it isn't "volatility" on a short timescale. I confess that it was a surprise to discover early on in my investment career, that "risk" isn't used in the normal way in the industry. Only a cabale could take a word, redefine it and then tell the rest of society they "don't understand".

Well, it doesn't bother me particularly, but what I need is a exceedingly small risk of losing my whole investment capital - and I believe that to be satisfied when investing in a basket of the largest companies. And if you add to that, the thought that one will never sell, so one is not bothered about volatility, then the risk is really rather small: it virtually falls out of the equation.

I point to TJH as a living testament to this idea over a long enough period to be a useful example to all of us.

Arb.

Are you really saying that the only risk you are bothered about is losing all your capital? How about your dividend income falling 90% and not recovering? 50%? Correct me if I'm wrong but I would guess there is a level of risk associated with your dividend income that you would struggle to accept. Is it relative to the market or absolute?

If you can identify what you see as risk and then go on to quantify that risk then you've done something few on here have achieved. It's not about accepting volatility as the only measure of risk, it's about identifying and quantifying your personal measure. Of course you don't have to, on-one has to. All I'm saying is that there are a lot of opinions, call it gut-feel or whatever, about risk but little attempt at definition or quantification.

BoE

Are you too young to remember the original HYP criteria? Among those was that a company should have increased its dividend for the past 5 years. For some that is modified to maintained or increased its dividend for the past 5 years.

In 2008 we had the GFC which led to many companies suspending or reducing their dividends. That included many illustrious companies. Quite a number took a long time to reinstate their dividends. I was one of many who suffered a sharp fall in dividend income. It was not the end of the world. Decisions had to be made about which companies to cull and which to hold.

Back in 1974 there was an even bigger market hiatus, when share prices fell dramatically. Oddly, dividends were maintained. The market made a rapid recovery. Anyone who was relying on regular sales of shares to provide income would have been in severe distress. Those of us who had dividend income to come found that these continued. A friend of mine was able to buy some of his employer's shares at bargain prices

History tells us that market prices can be volatile and often are. Dividends, on the other hand, are much more stable and show an increasing trend with time. What measure of risk suggests that reliance on dividends is the riskier of the two?

TJH

[Arborbridge]

Are you really saying that the only risk you are bothered about is losing all your capital? How about your dividend income falling 90% and not recovering? 50%? Correct me if I'm wrong but I would guess there is a level of risk associated with your dividend income that you would struggle to accept. Is it relative to the market or absolute?

If you can identify what you see as risk and then go on to quantify that risk then you've done something few on here have achieved. It's not about accepting volatility as the only measure of risk, it's about identifying and quantifying your personal measure. Of course you don't have to, on-one has to. All I'm saying is that there are a lot of opinions, call it gut-feel or whatever, about risk but little attempt at definition or quantification.

BoE

Well, I was using a sort of shorthand explanation because I felt you and I were on the same page, especially about the "casino" remark.

If the value of my capital went to zero, so would my dividends - that goes without saying. But as I view the world, that is never going to happen - nowhere near - if we invest in a diversified portfolio of the biggest companies, preferably best in class.
The point is, that if a basket of those companies went belly up, you and I would have far bigger worries than whether we had lost our capital! Like blood on the streets, revolution, the fall of western democracy. You know, small stuff like that.

Even in the Wall Street Crash or the 1973 crash, those that jumped out of the windows were, sadly, taking too short a view. In the various market corrections we have seen in the past few years (one at least characterised as the worst since 1929) the HYP system has survived well and carried on - and the same is true of high yield ITs.

Arb.

[Arborbridge]

As regards 1973 or 1974 - I seem to remember stock prices fell 75% but recovered again a couple of years later.
I notice TJH (I wasn't invested at that time) tells us that dividends carried on flowing. With a suitable system i.e. an income reserve and a safety margin, HYP or similar schemes would have weathered that storm.

Those funding their pensions from asset harvesting might have been put in a terrible dilemma.

Arb.

[JohnW]

Indeed, it sounds dire. These days we can also invest easily in overseas stocks. US equity market fell ‘only’ 37% from start 1972 to its lowest point in 1974. A bit of diversification can pay off.
But back to TJH’s circumstances. The dividends kept coming in, so you mightn’t have had to sell everything, with some income reserve and a safety margin, and there were bargains to be had.

[G3lc]

………….so does this all suggest we should not be fully invested, but keep some wealth back (perhaps cash) to live on plus some to invest if and when the markets collapse?
The next question how does one store wealth, cash, stocks, gold ???

[Arborbridge]

………….so does this all suggest we should not be fully invested, but keep some wealth back (perhaps cash) to live on plus some to invest if and when the markets collapse?
The next question how does one store wealth, cash, stocks, gold ???

The answer is usually reckoned to be in the affirmative. When running a HYP and actively drawing income, people vary, but they seem to keep somewhere between 18 months and 3 years cash in reserve. Personally, I'm on the lower end as cash is just not earning dividends and is virtually a dead weight.

Arb.

[kempiejon]

………….so does this all suggest we should not be fully invested, but keep some wealth back (perhaps cash) to live on plus some to invest if and when the markets collapse?
The next question how does one store wealth, cash, stocks, gold ???

The answer is usually reckoned to be in the affirmative. When running a HYP and actively drawing income, people vary, but they seem to keep somewhere between 18 months and 3 years cash in reserve. Personally, I'm on the lower end as cash is just not earning dividends and is virtually a dead weight.

Arb.

This I thought was a widely acknowledged method. I used to have pension pots with both legal and general and Friends Provident, I could chose all equity portfolios but I would have to intervene post 50 when the pension provider would begin to move an increasing percentage of my investments into bonds. Is the vanguard lifestyle a similar idea?
Even when one's income all comes from employment I'd say it's prudent to have cash or overdraft to smooth out lumpy expenditure with regular pay checks and a buffer to get through unexpected events like unemployment, ill health, redundancy etc. A couple of years seems sensible to me for such catastrophe planning.
When my HYP goes into drawdown I hope to have an income that is slightly larger than my expenditure - live within my means, a holding pot with a bit of a slush fund to accumulate lumpy dividend payments to allow a regular identical monthly withdrawls and a cash reserve of a couple of years to get me though stockmarket adjustments.

[Bubblesofearth]

Well, I was using a sort of shorthand explanation because I felt you and I were on the same page, especially about the "casino" remark.

Arb.

I think broadly speaking we are. My comments around quantifying risk are aimed more at those who are very critical of HYP1 and the HYP concept generally. There are a number of posters perfectly happy to point out that the portfolio becomes too unbalanced, some shares wither away, it's too UK-centric and, because of factors such as these, it's an overly risky approach. But there is never any rigorous analysis or quantification of this risk. It's rarely based on the industry standard of volatility and seems to be more in the gut-feel camp or simply 'looks too risky to me'.

Personally I think the risks associated with HYP are perfectly acceptable. Ideally more than 15 shares but the general principles are fine IMO.

BoE