HYP1 is 23 - Total Return

[Bubblesofearth]

No. Your thesis is that rebalancing isn't any riskier than a rebalanced portfolio.

Not sure where that comes from or even what it means?

That thesis is backed up by your postulation that it is possible for the portfolio to have grown significantly, and therefore if it has any downside from there it isn't particularly risky.
This fails as an argument on 2 simple points.

Firstly, it might not have grown (instead of capturing an "Apple" and 14 average, you might capture a "Carilion" and 14 average, or worse).

Secondly, even if it has risen before falling, that potential fall still represents a risk.

I've given you an idea of the kind of numbers of big winners over 20+ years. What are the odds of selecting none of these and, instead, your portfolio of 14 average shares plus a dud? Also, how would rebalancing such a portfolio help or even be possible?

BoE

[dealtn]

No. Your thesis is that rebalancing isn't any riskier than a rebalanced portfolio.

Not sure where that comes from or even what it means?

Apologies a typo. "Unbalanced isn't any riskier than a rebalanced portfolio"

[Bubblesofearth]

Apologies a typo. "Unbalanced isn't any riskier than a rebalanced portfolio"

Ah, OK, that makes sense now. It misses a bit of context though as obviously unbalanced is riskier than balanced for the same value portfolio. But if we assume that the market is asymmetric then I still maintain that a significant risk is missing out on capturing, and continuing to hold, those shares that go on to become big winners. Only by doing so will the portfolio be likely able to match or surpass the index from which it is taken.

There are a number of potentially confusing factors though. A big one is the HYP rule of equal weight on purchase. IMO this is as important as LTBH in maximising returns. TJH's portfolio and HYP1 both have this going for them. Sectoral diversification is also key as indices have suffered in the past by being top heavy in particular sectors that have subsequently suffered badly (Dotcom and banks being obvious examples).

Given the number of factors involved, the paucity of actual data and the fact that we are well down the road of repeating ourselves it's probably best to stop now. I'm sure these arguments will be revisited before too long!

BoE

[chris]

It is a shame that there is not more investigation of what seems to have been accepted as 'the new HYP methodology' by most of the posters on this site. I would still contend that the rebalancing mantra that seems to be prevalent, actually leads to worse returns than leaving the portfolio as it is. Whilst maybe 15 may be considered a bit too low a constituent portfolio, I think that with 25 or more shares, any outperformance is not going to be great enough to make a significant difference to the risk of the portfolio.

I have skin in the game and started a SIPP in 2013 with transfers in from other pension funds and have now retired (since the start of May) and am living on the dividends created by my HYP, as I want to try to maintain the capital. I am 61 years old. Therefore the dividends generated by this portfolio are of significant importance to me.

Unlike some, I am less interested in the unitisation and income per unit of the portfolio. I just know how much each shareholding cost me and what it is worth now, plus a spreadsheet of what I have received in dividends from each share per year, how many shares I had and the dividends per share, and how much in total I have achieved in every year.

My understanding of the stock market is that it generally looks at two factors when deciding a share's price - a value placed on either the future growth potential of a share or a value based on the future returns of a share. Because of the criteria for a high-yield share, most of the companies we are investing in are not growth companies but are companies that are in a 'cash cow' phase of their cycles. Therefore the market judges them on how their results will sustain or grow that level of return by way of dividends.

Looking first at HYP1, last year one of the posts had a very good analysis from years 10-22 of what the values and returns of the constituents were at any given point in the cycle and how their value and more importantly, their return, increased. It is clear from this that had you diversified when the 3 main gainers increased, either by reinvesting in the other companies or by buying HYP companies from other sectors, you would not only have missed out on the large increases in share price but also, more importantly, the large increase in dividends that they yielded.

Getting back to my portfolio and looking at the fortunes of 2 of them - BAE which I bought in the back end of 2013 and Vodafone which I bought mid 2014. I bought the same amount of each in terms of cash. The first full year dividend for BAE was £693.09 in 2014 and for Vodafone it was £918.24 in 2015. On the face of it, Vodafone was a better buy. This year, the dividend from Vodafone will be £552.20 and BAE will be £1242.30. However, if you look at the current yields, BAE is yielding 2.6% whereas Vodafone is yielding 12%. The value of BAE shares is 10 x that of Vodafone and is the highest of all shareholdings, the nearest to it had a higher initial cost. Am I worried that BAE is too great a proportion of my portfolio - not in the slightest.

After having a Carillion in the portfolio, along with another few duds, I have also had some winners and after those duds had a policy of only topping up those shares whose value was greater than the purchase price, rather than the TJH mantra of top slicing good shares and investing in those whose yield has grown because their share price has fallen. I confess to 2 exceptions to this rule where I thought that the share prices had fallen in an industry and whilst the shares in L&G and Next were underwater for a while, I felt that they were better than that and whilst L&G recovered by about 20%, Next recovered by 74% in value terms. Their dividends were still good with L&G increasing year on year and Next being more dependent on the 'specials'.

However, I have also tried to cull poor performers, (Centrica, M&S, BT) and I don't know why I have not culled Vodafone before now. Triumph of hope over experience I expect.

Last year a new HYP was created and at the time I suggested that it would be a good idea to have someone rebalance that portfolio every 6 months or 1 year and compare the two, which I felt would be a far more useful analysis than just another HYP. With smaller portfolios, there may be a benefit in rebalancing but I have 36 shares in my HYP portfolio (ok I admit that one of those is a slug of 8.75% Aviva prefs) and I am of the opinion that rebalancing is not necessarily generative in terms of either total value or more importantly, dividend income and is certainly not a material factor in the risk profile of a reasonably sized portfolio.

[tjh290633]

Last year a new HYP was created and at the time I suggested that it would be a good idea to have someone rebalance that portfolio every 6 months or 1 year and compare the two, which I felt would be a far more useful analysis than just another HYP. With smaller portfolios, there may be a benefit in rebalancing but I have 36 shares in my HYP portfolio (ok I admit that one of those is a slug of 8.75% Aviva prefs) and I am of the opinion that rebalancing is not necessarily generative in terms of either total value or more importantly, dividend income and is certainly not a material factor in the risk profile of a reasonably sized portfolio.

You only rebalance when you have to. It was 10 years before I felt the need. Then I set the limit for no more than 10% in a single share. If I had stuck to that 10% limit, it would probably be no more frequently than every 3 years, if that.

The odds are that the share breaching the weight limit, whatever it is, will have a yield well below the portfolio average. Those shares ranking for topping up are likely to have yields well above that average. The odds are that the income from the cash released will increase threefold after reinvestment. In my own case, the limits which I set preclude the highest yielding shares. I could relax those limits (5% of either income or cost) but I prefer to keep them.

Earlier you mentioned unitizing. I took it up to eliminate the effects of either introducing new capital or withdrawing cash from the portfolio. I feel that, without unitizing, you cannot get a real feel of performance. You might want to reconsider. It can be done retrospectively if need be.

TJH

[moorfield]

Unlike some, I am less interested in the unitisation and income per unit of the portfolio. I just know how much each shareholding cost me and what it is worth now, plus a spreadsheet of what I have received in dividends from each share per year, how many shares I had and the dividends per share, and how much in total I have achieved in every year.

I take an even lighter view - all I am interested in _really_ is actual vs. target total income received year on year. I think very very few "builders" here think about extrapolating into the future. They are too busy looking in the rear view mirror (and arguing about who has the shiniest one). But this is simple to do and (in keeping with the thread title) we have some excellent empirical data to help do it, which has two very practical applications -

Firstly, it helps the builder peer beyond the short term - a decade or two further on, say - and plan for their retirement. With a guesstimate of inflation, a target retirement income can also be expressed in "today's money" to help put that in some context.

Secondly, and more relevantly, it serves as a useful "hands-off/hands-on" switch. In years of surplus income (eg. HYP1 13-19) the builder can remain "hands-off", there is no need to tinker, and that surplus can be reinvested or alternatively used to build a cash reserve. In years of shortfall (eg. HYP1 9-12) the builder might choose to be "hands-on" and do some tinkering of poor performers or reinvest any cash reserve.

This is something I have been doing (well, not so much the hands-off/hands-on bit) for fifteen years - I have been thinking about retiring before 60 since well before I was 40, and 5-7 years out I now have a very good idea of what my income will look like plus/minus a margin of safety. Unitisation, income per unit, xirr etc. is all very well but I'm not sure what folk actually do with this data other than report it. Basket weaving just to keep the inpatients busy, if you like.

[CliffEdge]

As a quick aside aren't we all TR investors? Isn't TR a measure of how the sums invested have changed due to capital appreciation/decline and any income like dividends/interest generated by said investments all added together? One can focus on dividends, growth, value, fixed interest, whatever but when you do the sums you get a value as to how the investment amount has changed or total return.

From my perspective it is not a matter of only growth or only income. There are mechanisms for converting income into capital growth and vice versa, so the distinction is a bit arbitrary. Often that might be a decision based on taxation.

I prefer to think in terms of cashflows. Bond investors approach it that way but I think equity investors should too. As long as future cashflows meet or exceed my liabilities than a strategy can be considered sound. And whether those cashflows derive from interest, dividends, premiums, rent or profits (capital gains in the case of securities) does not really matter.

I do not ignore dividends but I certainly do not have a love affair with them, as some apparently do. And insofar as I consider dividends, I look more for increasing dividends and not their current yield. I tend to be more impatient with a holding that pays no dividend at all. But otherwise a 1% or 2% yield is fine as long as I believe in the story.

Good points.

Also say you "invest" £100,000 in something like NCYF which shells out around 9% of its capital every year then you have converted capital to income that can then be given to sprogs from that income free of IHT (or PET botheration).

[Arborbridge]

Unitisation, income per unit, xirr etc. is all very well but I'm not sure what folk actually do with this data other than report it. Basket weaving just to keep the inpatients busy, if you like.

That's a very good point. When I first started keeping records, I did so in order to compare various investment ideas - then later when HYP started, keeping records was an ongoing way of seeing if HYP itself compared well to, say, IT investment - or to show it met targets such as "high and rising income with a chance of capital appreciation". How else would I have known?

Fair enough. Then after some years, it becomes something of a labour of love because one does not want to break the record sequence. I wouldn't say it's and end in itself. No - I still want to know how well my investment performance compares with others in order to decide whether or not to change direction. This I have in fact done - for over the past two or three years rather more of my reinvestments have gone into various ITs than into direct shareholdings. For example, I have more in ex-UK investments and world trackers or foreign ITs than previously.

Keeping records may be a sledgehammer to crack a nut, but it in my view it's a good way of "knowing where I stand". I would like to reduce the amount I do, but at the same time, it seems a pity to give up altogether! If I knew more about software and programming, I am sure there would be a way to integrate my records to cut down the occasions I find I'm making multiple entries.

Arb.

[CliffEdge]

Unitisation, income per unit, xirr etc. is all very well but I'm not sure what folk actually do with this data other than report it. Basket weaving just to keep the inpatients busy, if you like.

That's a very good point. When I first started keeping records, I did so in order to compare various investment ideas - then later when HYP started, keeping records was an ongoing way of seeing if HYP itself compared well to, say, IT investment - or to show it met targets such as "high and rising income with a chance of capital appreciation". How else would I have known?

Fair enough. Then after some years, it becomes something of a labour of love because one does not want to break the record sequence. I wouldn't say it's and end in itself. No - I still want to know how well my investment performance compares with others in order to decide whether or not to change direction. This I have in fact done - for over the past two or three years rather more of my reinvestments have gone into various ITs than into direct shareholdings. For example, I have more in ex-UK investments and world trackers or foreign ITs than previously.

Keeping records may be a sledgehammer to crack a nut, but it in my view it's a good way of "knowing where I stand". I would like to reduce the amount I do, but at the same time, it seems a pity to give up altogether! If I knew more about software and programming, I am sure there would be a way to integrate my records to cut down the occasions I find I'm making multiple entries.

Arb.

You don't use some kind of relational database?

[Arborbridge]

You don't use some kind of relational database?

Can you translate that into English? For a moment, I thought you had turned into an AI chatbot.

Are not my charts made from several sets of data being compared "relational"?


Arb.

[moorfield]

When I first started keeping records, I did so in order to compare various investment ideas - then later when HYP started, keeping records was an ongoing way of seeing if HYP itself compared well to, say, IT investment - or to show it met targets such as "high and rising income with a chance of capital appreciation". How else would I have known?

And how many years has it taken you to realize that comparison will never be settled?

I posit that the choice between HYP or PHY is largely irrelevant because either ought at least double income in a decade through the continuous reinvestment of income - that's +7.2% pa, which is conservative against Malcolm's LLLS chart. The important thing I think is not to tinker for the sake of it. PHY edges it for me because it provides (intrinsic) diversification and cash management, and less volatile income flows - easier to sleep.

[CliffEdge]

You don't use some kind of relational database?

Can you translate that into English? For a moment, I thought you had turned into an AI chatbot.

Are not my charts made from several sets of data being compared "relational"?


Arb.

Back in the mists of time (triassic? I think) there was something called Access from Microsoft. We minions got sent on a one day course with Popcorn Training PLC about relational databases (using Access). The tutor was a very nice lady with long black hair who was most enamoured with her newly acquired Toyota Rav 4. It was a nice bright red and high off the ground so she could see into the distance which she considered a boon.
About the only thing about Access that I remember is that the basic idea is you only keep a piece of data in one place. Any other references, uses, or presentations of that piece of data use links to that one copy. One benefit being that if it needs updating, it only need to be done in that one location etc. etc. I'm sure there are loads of consequent advantages.

Hopefully an expert will come along and explain it properly.

[Arborbridge]

When I first started keeping records, I did so in order to compare various investment ideas - then later when HYP started, keeping records was an ongoing way of seeing if HYP itself compared well to, say, IT investment - or to show it met targets such as "high and rising income with a chance of capital appreciation". How else would I have known?

And how many years has it taken you to realize that comparison will never be settled?

I posit that the choice between HYP or PHY is largely irrelevant because either ought at least double income in a decade through the continuous reinvestment of income - that's +7.2% pa, which is conservative against Malcolm's LLLS chart. The important thing I think is not to tinker for the sake of it. PHY edges it for me because it provides (intrinsic) diversification and cash management, and less volatile income flows - easier to sleep.

I've always said that investment is a never ending story - in that sense it is never "settled". What made you think it ever would be, or that I thought it ever would be? But that does not invalidate my wish to see the progress as I go along - and to think about how this compares with other investment ideas.
To dismiss a choice conparison as "largely irrelevant" because of what they "ought" to do, just isn't my way - I need to see that it is happening.

BTW, my actual income has been exceeded by my required income in every year so far - so as a pension system whatever I'm doing seems to be stacking up happily for me. Real income has also exceeded the forecast income in every year apart from 2020, but that was saved by my safety margin arrangement.

Arb.

[Arborbridge]

Can you translate that into English? For a moment, I thought you had turned into an AI chatbot.

Are not my charts made from several sets of data being compared "relational"?


Arb.

Back in the mists of time (triassic? I think) there was something called Access from Microsoft. We minions got sent on a one day course with Popcorn Training PLC about relational databases (using Access). The tutor was a very nice lady with long black hair who was most enamoured with her newly acquired Toyota Rav 4. It was a nice bright red and high off the ground so she could see into the distance which she considered a boon.
About the only thing about Access that I remember is that the basic idea is you only keep a piece of data in one place. Any other references, uses, or presentations of that piece of data use links to that one copy. One benefit being that if it needs updating, it only need to be done in that one location etc. etc. I'm sure there are loads of consequent advantages.

Hopefully an expert will come along and explain it properly.

OK - I see what was behind your question now. If I had been cleverer with Access, or a similar database years ago, maybe I would have gone down that route. We did run a database at work, but I just found at home it was easier with a spreadsheet - which grew like topsy as I thought of more things to do!
I feel it's all a bit late to start again, so I content myself with the method I know, pruning it here and there.

[stacker512]

OK - I see what was behind your question now. If I had been cleverer with Access, or a similar database years ago, maybe I would have gone down that route. We did run a database at work, but I just found at home it was easier with a spreadsheet - which grew like topsy as I thought of more things to do!
I feel it's all a bit late to start again, so I content myself with the method I know, pruning it here and there.

Trouble with a database (Access sucks!) or spreadsheet is that it pushes a person towards being a data management administrator, rather than actually managing their investments.

Perhaps less so with spreadsheets, which is why so many people are more comfortable going that route. One still has to manage all the sheets, formulas, layouts, presentation aspect, and to learn the fancy unusual spreadsheet formulas and capabilities. Not saying this is a bad thing, but it does put up at least some sort of barrier to entry.

Databases even more so. Which engine? (MySQL? MSSQL? Postgress? SQLite? etc) and one has to manage the server (regardless of the form of the server) and permissions, and the table layout, mess with database normalisation, etc.

HYPTUSS is great, but I don't see anything like that available for general investment tracking - has no one made theirs available?
Bringing this back on topic, would something like that help us track differences between portfolios, i.e. comparing HYP1 vs some other portfolio?

[tjh290633]

If you want a portfolio that works out the current value for you, then lots of websites have them available. Ii, ADVFN, Bloomberg, Trustnet, etc. you have to keep it up to date yourself as you trade shares.

TJH

[Dod101]

Unlike some, I am less interested in the unitisation and income per unit of the portfolio. I just know how much each shareholding cost me and what it is worth now, plus a spreadsheet of what I have received in dividends from each share per year, how many shares I had and the dividends per share, and how much in total I have achieved in every year.

I take an even lighter view - all I am interested in _really_ is actual vs. target total income received year on year. I think very very few "builders" here think about extrapolating into the future. They are too busy looking in the rear view mirror (and arguing about who has the shiniest one). But this is simple to do and (in keeping with the thread title) we have some excellent empirical data to help do it, which has two very practical applications -

Firstly, it helps the builder peer beyond the short term - a decade or two further on, say - and plan for their retirement. With a guesstimate of inflation, a target retirement income can also be expressed in "today's money" to help put that in some context.

Secondly, and more relevantly, it serves as a useful "hands-off/hands-on" switch. In years of surplus income (eg. HYP1 13-19) the builder can remain "hands-off", there is no need to tinker, and that surplus can be reinvested or alternatively used to build a cash reserve. In years of shortfall (eg. HYP1 9-12) the builder might choose to be "hands-on" and do some tinkering of poor performers or reinvest any cash reserve.

This is something I have been doing (well, not so much the hands-off/hands-on bit) for fifteen years - I have been thinking about retiring before 60 since well before I was 40, and 5-7 years out I now have a very good idea of what my income will look like plus/minus a margin of safety. Unitisation, income per unit, xirr etc. is all very well but I'm not sure what folk actually do with this data other than report it. Basket weaving just to keep the inpatients busy, if you like.

I appreciate the slightly cynical attitude here and pretty well follow it myself (at almost exactly 29 years retired and living entirely off my dividends except for the State Pension)

I do not unitise and am fairly hands off although I do an assessment on 1 January each year and may top some of the good capital performers but not to any formula; more gut feeling. I measure both yield and capital performance as I like both to be positive. I think the tobaccos may be for culling this year despite the great income because I think BAT has signalled a limited future for growth in them despite the great income. I have not decided though and may well take at least a couple of years to run them down.

There is no point in a great income if it comes at a big capital cost. In all though, I think there is far too much navel gazing. Let things happen and they will usually work out.

Dod

[Arborbridge]

In the first place, I seized on unitising as the answer to a problem I had: whenever I added a £1000 to my portfolio, the chart went up by £1000 - clearly nonsense since this was not a stock market gain. Similarly, when I started looking at income the same thing happen: doubt the capital and my income doubled. Aren't I clever!? er, No.

Unitisation gave me a way to give me a true measure of whether my gains were really due to the stock market, or just due to additional effort.

I can agree, however, that ultimately it is how much income you have to live on which counts - and for that purpose, it matters hardly at all how it was arrived at, as long as it's enough. Knowing it was through greater efficiency is nice, but not essential.

When I first joined TMF, I had the impression that it was rather the done thing that people showed the change in unit value, and reported each year what progress had been, or not. Many did back then.
At the same time that unitisation offerred me a way of checking my portfolios on a like for like basis, I was able therefore to join this particular "club". Since then, it seems fewer people are doing that, and more are of the "I'm doing OK and that's all that matters" variety.

Arb.

[tjh290633]

For me, the real point of unitisation is that it does not reveal the size of your portfolio. That can go up and down when you add capital or withdraw cash, and is irrelevant if you are looking at performance. The unit value is not affected by such events, unless you make a major change in the underlying investments.

Effectively it does not matter whether your portfolio value is £10,000 or £1 million. The unit value is the real indicator of progress.

TJH

[chris]

You only rebalance when you have to. It was 10 years before I felt the need. Then I set the limit for no more than 10% in a single share. If I had stuck to that 10% limit, it would probably be no more frequently than every 3 years, if that.

This makes no sense whatsoever and is totally bizarre. What you are saying is that in the early years when you have very few shareholdings and in a time where a significant over-concentration can occur, there is no need to rebalance. However, after a few years , you can put a very loose filter on to avoid over-concentration but when you get to 30+ shareholdings you need to really trim this down so that you make a lot more changes to your portfolio to avoid this problem. If trimming to avoid over-reliance has any merit, it is in a small portfolio in the early years. However, the HYP proposed had 30+ constituents and since you seem to take that as a sign that there needs to be more emphasis on rebalancing, then surely it would be good to use your method to see what impact that has on performance. Here I am not talking about the value of the shareholding but the dividends achieved every year. It would seem that there is a real concern about this method being tested...?

It has saddened me that this has morphed into a discussion about unitising, because an emphasis on that is largely an intellectual one for those that want to analyse how they are doing - and no harm in that, but it is not a key concern for me. I am with Moorcroft in that the real number I am concerned with is how much am I receiving in dividends, is it rising and is it enough to live on?

If TJH's portfolio doesn't do well, he has less to leave to his beneficiaries; if mine doesn't do well, I don't eat!