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HYP1 is 17

Practical discussions about equity High-Yield Portfolios (HYP) for income
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Lootman
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Re: HYP1 is 17

#95695

Postby Lootman » November 14th, 2017, 6:07 pm

kiloran wrote:Isn't that presuming that the investor needs all of the dividend to live off, and has no reserve? In a more real-world case, I suspect the investor would have some margin so the good years compensate for the bad years. A bit like annuities?

CryptoPlankton wrote: You are assuming that all of the dividends are withdrawn (i.e. no safety margin) and that there is no cash reserve. I think any prudent HYP holder will have considered the possibility of such events and these contingencies have been discussed quite a lot (though not sure I've seen much since the move from TMF?). I know that with my intended withdrawal strategy, even this extremely bad spell would not have come close to forcing me to eat into the capital.

You both may well be correct but that isn't stated in the analysis. I agree it would be prudent - a portfolio cannot truly be analysed or measured without regard to the investors situation, objectives and needs.

But then that reserve idea means tying up another pool of cash which cannot be invested. If that additional cash is taken into account then the overall returns of this approach are lower than as stated here.

So let's say he started with that 75K of shares but also had 15K on the side as a reserve for 2008-type events. The returns should be computed based on a 90K capital sum and not 75K.

Put another way, HYP says nothing about what percentage of your assets should be in it, as opposed to cash and other asset classes that reduce the risk and provide more balance and diversification. HYP carries a good deal of excess risk, as others have noted, and its outperformance may be attributed to taking on more risk by being 100% invested in a market that has been rising, but may not in the future.

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Re: HYP1 is 17

#95701

Postby Snorvey » November 14th, 2017, 6:21 pm

According to thisismoney.com, £75,000 to £172,485 over 17 years is about 4.9% compound per annum

If you reinvest the annual divs at the same growth rate you get an additional £118,414

Add them together and that's £290,899 (I think if you add each annual income to the existing lump sum and compound it up from there it might be even more than that, but I'm pretty fick when it comes to maffs.

Still, not bad Pyad. Not bad at all.

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Re: HYP1 is 17

#95703

Postby Wizard » November 14th, 2017, 6:34 pm

For me much of the benefit of the long period HYP1 has been running is to see how it has performed versus other options. However, PYAD chose to post the 17 year update on HYP Practical and as I know we are not permitted to discuss the merits of HYP on that Board I presume there is no choice but to replicate the thread for a slightly different discussion in HYP Strategy.

My comments are therefore here: viewtopic.php?f=31&t=8413

Terry.

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Re: HYP1 is 17

#95706

Postby tjh290633 » November 14th, 2017, 6:45 pm

Arborbridge wrote:Both HYP1 and TJH HYP show large drops in income. With this to guide us, several of us apply mechanisms to reduce the pain a) but using and income reserve held in cash or near cash b) in not drawing down the full amount of income, but reinvesting it.

HYP1 + Terry have shown us the risks - it's up to us to learn from this, but as an experiment and demonstration, Pyad is to be commended in putting it all out there. Not many would keep an experiment going so long and with such commendable transparency.


Arb.

Looking at my own figures, there was a substantial rise in 2007-8 of dividends, about 33% if one ignores special dividends. There was a small rise in 2008-9 of about 7%, then the fall of nearly 45% in 2009-10. The record of my dividends per unit, taking the first year as 100, are as follows:

Ordinary 
Year to Divs/unit
05-Apr-88 100.00
05-Apr-89 79.62
05-Apr-90 120.32
05-Apr-91 165.08
05-Apr-92 210.07
05-Apr-93 195.12
05-Apr-94 187.68
05-Apr-95 228.12
05-Apr-96 221.61
05-Apr-97 252.05
05-Apr-98 266.99
05-Apr-99 280.15
05-Apr-00 381.31
05-Apr-01 402.71
05-Apr-02 440.42
05-Apr-03 413.03
05-Apr-04 393.61
05-Apr-05 460.56
05-Apr-06 502.49
05-Apr-07 536.54
05-Apr-08 713.67
05-Apr-09 763.42
05-Apr-10 421.09
05-Apr-11 575.48
05-Apr-12 676.91
05-Apr-13 739.40
05-Apr-14 754.71
05-Apr-15 792.79
05-Apr-16 805.25
05-Apr-17 897.18

You will note the subsequent recovery, which involved a certain amount of portfolio repair, and that the dividend in 2010-11 exceeded that of 2006-7, which is what a prudent investor might have been expecting as the normal level, taking 2007-10 as an abnormal period. As I said, this ignores special dividends which might have been reinvested.

The actual cash dividends received differ a lot from these unitised data, taking into account capital injections and dividend income withdrawals. The drop in 2088-9 is accounted for by the phasing of dividends and cash injections, at that time when the PEP was being built.

TJH

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Re: HYP1 is 17

#95707

Postby Wizard » November 14th, 2017, 6:47 pm

CryptoPlankton wrote:
Lootman wrote:
pyad wrote:
Income

This is what HYPs are all about and the £7,327 for this year was another record by a long way, up 19.6% on last year and therefore crushing inflation. From year one, the increase is 112.3%.

2008 5,040
2009 3,187
2010 3,297

If income "is what this is all about" then that near 40% drop in just one year would presumably have required somebody living off this portfolio to have withdrawn capital, which in turn would have depleted the subsequent performance. I mention this because you state below that dividends are not reinvested, so presumably are consumed by the holder:

You are assuming that all of the dividends are withdrawn (i.e. no safety margin) and that there is no cash reserve. I think any prudent HYP holder will have considered the possibility of such events and these contingencies have been discussed quite a lot (though not sure I've seen much since the move from TMF?). I know that with my intended withdrawal strategy, even this extremely bad spell would not have come close to forcing me to eat into the capital.

Edit: Sorry, see the point has already been made...

Well, personally I think being able to take a 36.8% drop and have that all absorbed by a safety margin suggests one heck of a safety margin. In 2009 the pay out from HYP1 was less than in its first year in 2001 and did not get back above the 2001 level until 2011, like I say that is an awfully big safety margin.

Terry.

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Re: HYP1 is 17

#95709

Postby OZYU » November 14th, 2017, 6:49 pm

You have to be seriously blind to consider that by any stretch of the imagination HYP1 has delivered on its primary income aim.

Even if you ignore the horrible drops when the proverbial hit the fan, which for a retiree with a modest portfolio size, hence unable to have much of a buffer, relying on irregular income would gave been a serious problem, the income has only grown by 1.7% p.a. in real (net of RPI) terms over the period.

All the long established income portfolios which I am familiar with, say half a dozen family varied approaches portfolios I am intimately aware of, have beaten RPI by quite a bit more than that.

So for its primary aim, not good at all imho.

Sensible re balancing woud not have resolved the dip( holding ITs would most definitely have, and is a safer route imho when resources are tight), but the income today would in my estimation been considerably higher, in excess of £10k, because that is what re balancing achieves, it re distributes excess capital into higher income in HY portfolios(by utilising to your advantage the natural in and out nature of popularity of ones diversified holdings). Ask TJH, or anyone practicing this for very long periods well in excess if 17 years, as we do too and have always done in our HY portfolios.

So sorry, but not as much a success as claimed. The overall IRR is OKish, no more, but too much capital poorly deployed, hence the horrendously out of balance thus very risky indeed resulting portfolio, over the period imho.

An experiment followed over a good period though, valuable in that respect.

Ozyu

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Re: HYP1 is 17

#95742

Postby Arborbridge » November 14th, 2017, 8:53 pm

In my opinion, it isn't that HYP isn't "so much of a success as claimed", but just exposes that this type of equity income investment is high risk. You have to plan for the possibility of large drops (and according to TJH's figures large increases) in income. The alternative is to seek safer but lower yielding options. Beggars cannot choose: if one's portfolio is not big enough to provide a suitable pension using lower yielding or fixed interest instruments or an annuity, then the sad truth is that one has to take more risk.

HYP does seem to do what it says on the tin. The only problem is that what is on the tin is sometimes not too clear!

Given an 12-18 month reserve and a lower rate of withdrawal (ball park, say 75%) with the rest re-invested, HYP1 or its derivatives would have provided the income a pensioner needs. It's not the only solution, but it is a solution, and one which possibly gives a slightly higher yield with a lower skill input needed than other forms of investment.

One thing we should point out (and praise), is that Pyad has come up with a real time exposition of a method. This is very unusual and we have few comparators to use which are not hand waving opinions hampered by hindsight bias.

Arb.

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Re: HYP1 is 17

#95745

Postby CryptoPlankton » November 14th, 2017, 9:04 pm

Wizard wrote:
CryptoPlankton wrote:
Lootman wrote:If income "is what this is all about" then that near 40% drop in just one year would presumably have required somebody living off this portfolio to have withdrawn capital, which in turn would have depleted the subsequent performance. I mention this because you state below that dividends are not reinvested, so presumably are consumed by the holder:

You are assuming that all of the dividends are withdrawn (i.e. no safety margin) and that there is no cash reserve. I think any prudent HYP holder will have considered the possibility of such events and these contingencies have been discussed quite a lot (though not sure I've seen much since the move from TMF?). I know that with my intended withdrawal strategy, even this extremely bad spell would not have come close to forcing me to eat into the capital.

Edit: Sorry, see the point has already been made...

Well, personally I think being able to take a 36.8% drop and have that all absorbed by a safety margin suggests one heck of a safety margin. In 2009 the pay out from HYP1 was less than in its first year in 2001 and did not get back above the 2001 level until 2011, like I say that is an awfully big safety margin.

Terry.


Hi Terry

I suppose it depends what you mean by "awfully big". I am expecting to take 80% of my annual dividends as income at the end of each year, increasing it proportionally in years of improving total portfolio income and freezing it in years where the total portfolio income drops. I will start with a cash reserve equal to half the first year's income. The unused 20% will be either reinvested or added to the reserve, depending on how I assess the adequacy of the reserve each year (I would aim to maintain at least the equivalent of half the last year's income and probably a little more).

I think you will find that this strategy would cope comfortably with the volatility in income produced by HYP1. The blip in 2003 (-£222) would have hardly made a dent in the previous year's surplus, let alone the starting reserve of £1380. In 2008, income of £4032 (80% of 5040) would have been withdrawn. Continuing to withdraw £4032 in each of the next three years (before the portfolio income again exceeded that figure) would have meant drawing on a total of £1769 from reserves. The minimum reserve at the end of 2008 would have been £2520 (half of that year's portfolio income) so the shortfall would have been comfortably covered. There would also have been £3000 or so (I haven't calculated it) more from the cumulative unspent income from previous years either added to this or generating more income (thereby reducing the shortfall).

If it was my sole source of income I would probably tweak this a bit more on the side of caution but, in any event, I don't think it takes that much to be prepared for the "shocks". Whether I would be happy to live off an "untinkered" HYP1 is another matter!

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Re: HYP1 is 17

#95754

Postby Wizard » November 14th, 2017, 10:09 pm

CryptoPlankton wrote:Hi Terry

I suppose it depends what you mean by "awfully big". I am expecting to take 80% of my annual dividends as income at the end of each year, increasing it proportionally in years of improving total portfolio income and freezing it in years where the total portfolio income drops. I will start with a cash reserve equal to half the first year's income. The unused 20% will be either reinvested or added to the reserve, depending on how I assess the adequacy of the reserve each year (I would aim to maintain at least the equivalent of half the last year's income and probably a little more).

I think you will find that this strategy would cope comfortably with the volatility in income produced by HYP1. The blip in 2003 (-£222) would have hardly made a dent in the previous year's surplus, let alone the starting reserve of £1380. In 2008, income of £4032 (80% of 5040) would have been withdrawn. Continuing to withdraw £4032 in each of the next three years (before the portfolio income again exceeded that figure) would have meant drawing on a total of £1769 from reserves. The minimum reserve at the end of 2008 would have been £2520 (half of that year's portfolio income) so the shortfall would have been comfortably covered. There would also have been £3000 or so (I haven't calculated it) more from the cumulative unspent income from previous years either added to this or generating more income (thereby reducing the shortfall).

If it was my sole source of income I would probably tweak this a bit more on the side of caution but, in any event, I don't think it takes that much to be prepared for the "shocks". Whether I would be happy to live off an "untinkered" HYP1 is another matter!

I am responding on the thread on HYP General as I will be mentioning an IT as a comparative, which is not permitted on this board.

Terry.

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Re: HYP1 is 17

#95812

Postby idpickering » November 15th, 2017, 7:26 am

A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? :D Maybe we/I meddle to much, when long term hold and a bit of patience does the job for you. Well done Stephen.

Ian.

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Re: HYP1 is 17

#95837

Postby Wizard » November 15th, 2017, 9:16 am

idpickering wrote:A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? :D Maybe we/I meddle to much, when long term hold and a bit of patience does the job for you. Well done Stephen.

Ian.

Ian

Well I guess it depends what "the job" is; would you be happy with the level of income generation concentration HYP1 has in your own HYP? Personally, for me a take away from this is how critical for risk mitigation ongoing management of the HYP is.

Terry.

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Re: HYP1 is 17

#95848

Postby tjh290633 » November 15th, 2017, 9:58 am

Wizard wrote:
idpickering wrote:A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? :D Maybe we/I meddle to much, when long term hold and a bit of patience does the job for you. Well done Stephen.

Ian.

Ian

Well I guess it depends what "the job" is; would you be happy with the level of income generation concentration HYP1 has in your own HYP? Personally, for me a take away from this is how critical for risk mitigation ongoing management of the HYP is.

Terry.


I think that the point is that, with a minimal tinkering policy, the level of concentration is acceptable and inevitable. I should further add that one cause is the decision to put all the proceeds of takeovers into the replacement share. From memory this was Associated British Ports and Gallagher.

My choice is to introduce new shares at the median holding value, and usually to use the balance to bring underweight higher yield shares up to weight. I also trim overweight holdings from time to time, when necessary by my own rules. To tinker or not is a personal choice.

TJH

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Re: HYP1 is 17

#95879

Postby OLTB » November 15th, 2017, 11:26 am

I'm in the building stage and I find it reassuring to have the ability to 're-balance' the HYP holdings regularly using dividends. To be able to top-up those constituents whose share price has dropped for what ever reason is a useful way of trying to ensure an equal (well, as equal as can be given that the share prices will change straight after a purchase) portfolio.

Having this experience in the building phase to see how the HYP works through the inevitable ups and downs is useful once the dividend income starts to be drawn for the income essentials in retirement (food/bills/gin etc.), rather than be re-invested.

Once I am living off the HYP proceeds, I don't think that I could see my HYP left alone as HYP1 has been and being in the position of having so much income relying on relatively few shares - this would concern me (a personal thing). Using a 'tinkering' system to rebalance in retirement that many contributors here utilise is therefore what I think I will do for my own peace of mind. In the meantime I shall use dividends and spare cash to try and have the HYP constituents as equal weight as possible.

I also like CryptoPlankton's (and others) idea of only using a percentage of the income generated in retirement, and having a balance in cash to support income for years when dividends are lean.

Cheers, OLTB.

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Re: HYP1 is 17

#95890

Postby CryptoPlankton » November 15th, 2017, 11:58 am

OLTB wrote:
I also like CryptoPlankton's (and others) idea of only using a percentage of the income generated in retirement, and having a balance in cash to support income for years when dividends are lean.

Cheers, OLTB.


I certainly can't take any credit for the "idea"! It has been discussed at some length in the past and I believe, as Arborbridge hinted, dealt with in some detail by Gengulphus on TMF (his analysis now sadly lost?). Having said that, it is in my nature to err on the side of caution so I have always intended to draw from my income investments at a safely (as possible) sustainable rate. If I couldn't afford to, I don't think I would consider myself financially secure enough to start doing it...

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Re: HYP1 is 17

#95893

Postby Arborbridge » November 15th, 2017, 12:03 pm

Wizard wrote:
idpickering wrote:A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? :D Maybe we/I meddle to much, when long term hold and a bit of patience does the job for you. Well done Stephen.

Ian.

Ian

Well I guess it depends what "the job" is; would you be happy with the level of income generation concentration HYP1 has in your own HYP? Personally, for me a take away from this is how critical for risk mitigation ongoing management of the HYP is.

Terry.


Let's keep our eye on what this was all about: it was to show the evolution of a classic no-tinker HYP, subject only to market trading requirements. So not withstanding the perceived disadavantages, it has proved the point that an essentially "hands-off" HYP does provide a reasonable and increasing income, plus a good chance of capital increase too. No one said it could not be modified or improved, but the basic idea is robust and works. We all have different POVs, but I'd say a current yield of 4.2% for relatively little work would improve the lot of many a Doris or Joe whose alternative might be to grumble about low interest rates or lousy annuity rates.

Although Ian might be seen to go OTT at this point, I agree that Pyad's dogged experiment shows that HYP works, and he is to be congratulated for his transparency and regular reporting of the progress.

Arb.

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Re: HYP1 is 17

#95904

Postby Wizard » November 15th, 2017, 12:31 pm

Arborbridge wrote:
Wizard wrote:
idpickering wrote:A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? :D Maybe we/I meddle to much, when long term hold and a bit of patience does the job for you. Well done Stephen.

Ian.

Ian

Well I guess it depends what "the job" is; would you be happy with the level of income generation concentration HYP1 has in your own HYP? Personally, for me a take away from this is how critical for risk mitigation ongoing management of the HYP is.

Terry.


Let's keep our eye on what this was all about: it was to show the evolution of a classic no-tinker HYP, subject only to market trading requirements. So not withstanding the perceived disadavantages, it has proved the point that an essentially "hands-off" HYP does provide a reasonable and increasing income, plus a good chance of capital increase too. No one said it could not be modified or improved, but the basic idea is robust and works. We all have different POVs, but I'd say a current yield of 4.2% for relatively little work would improve the lot of many a Doris or Joe whose alternative might be to grumble about low interest rates or lousy annuity rates.

Although Ian might be seen to go OTT at this point, I agree that Pyad's dogged experiment shows that HYP works, and he is to be congratulated for his transparency and regular reporting of the progress.

Arb.

All I was trying to say was that IMHO the "classic no-tinker HYP" (or to be more precise the HYP1 example of it) has resulted in a level of concentration that I would not be happy with and that therefore for me ongoing management of the portfolio* is a key modification. Surely that is exactly what it is all about, as you put it, a long running experiment to show what can happen with a "classic no-tinker" HYP to allow people to decide if that is an approach that they would be happy to adopt.

Terry.

* I deliberately would not refer to it as tjnkering as I think in this context and on this board that word seems to have negative connotations.

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Re: HYP1 is 17

#95906

Postby Wizard » November 15th, 2017, 12:35 pm

Arborbridge wrote:We all have different POVs, but I'd say a current yield of 4.2% for relatively little work would improve the lot of many a Doris or Joe whose alternative might be to grumble about low interest rates or lousy annuity rates.

Moderator Message:
Come on play another tune. Anymore posts like this and I will pass this on to the administrators. Raptor.

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Re: HYP1 is 17

#95911

Postby bluedonkey » November 15th, 2017, 12:48 pm

I'm in the building phase and have always been LTBH with no re-balancing by voluntary sales.

However, I couldn't stomach >20% of my retirement fund in one share. I would feel compelled to reduce that.

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Re: HYP1 is 17

#95949

Postby Gengulphus » November 15th, 2017, 2:57 pm

PinkDalek wrote:
ian56 wrote:
staffordian wrote: On the other hand, eleven out of the fifteen shares are either slightly or significantly under water capital wise and the contribution to income very unequal.



My bold, I could be wrong but I understood equal weighting at the start (ie £5000), to me it seems as if only 5 are therefore under water.


I don’t hold the history of HYP1, whereas I’m sure some do. However, there was a substantial capital return in, from memory, 2006 involving Ladbroke/Hilton. I’d hazard a guess that your 5 may be only 4 but nor do I know what happened with the 2009 rights issue.

The earlier capital returns were generally reinvested in the share that produced them, for no net loss of capital from the holding, and I'm pretty certain that 2006 is early enough for that to be true. And certainly Ladbrokes hasn't done very well, so I suspect it is among the capital losers.

However, one of the original 15 was Bass, which became Six Continents and then demerged into Intercontinental Hotels and Mitchells & Butlers. So those two should be counted together, and the combination is certainly a capital winner. Especially as they've done quite a few capital returns between them - Intercontinental Hotels in particular has been doing about one per year in recent years. The earlier capital returns were reinvested in the share that produced them, as commented on above, and I think that includes all of Mitchells & Butlers' capital returns. But certainly Intercontinental Hotels' recent capital returns have been reinvested in other companies, with the result that the holding values understate the Bass -> Intercontinental Hotels + Mitchells & Butlers capital performance and overstate that of the companies reinvested in (Lloyds this year, but there have been others, Shell among them IIRC).

But you may notice that means that the 15 current holdings only correspond to 14 original holdings - what happened to the 15th original holding? The answer is that it was Alliance & Leicester, which got taken over during HYP1's year 8 - a "dark year" for the portfolio because pyad left TMF 2-3 months into it and only returned somewhat over a year later, some months into its year 9. Two other companies also got taken over during that year, and only two replacement companies were bought for the three that had gone - Pearson and Persimmon. Of the three takeovers, Alliance & Leicester was the smallest and if memory serves me correctly, pyad has mentioned that he reckoned it was too small for a replacement holding, so he topped up one or more existing holdings instead: I've a feeling Shell was among them, or possibly even the only one. I don't think he ever produced a detailed account on TMF of what happened to HYP1 in year 8 (certainly there was no "HYP1 is 8" article or HYP board post around November 13th, 2008), so exact details are difficult to be certain about.

So I rather suspect that Shell may be the 'heir' of two original £5k chunks of capital, or even a bit more because of reinvested returns of capital by other holdings, and so that it is actually a capital loser - though if so, the blame for much of that capital loss is due to Alliance & Leicester, not Shell. And similarly, the credit for much of BATS's capital gain is actually due to Gallaher, which it replaced on a takeover, and similarly the credit for much of BT's capital gain is actually due to Associated British Ports, and so on.

The moral of all of which is that keeping track of the original 15 x £5k holdings' separate contributions to each current holding's capital value is not easy, because of the 'mixing' effect of takeovers and other corporate actions. The "reinvest in holding that produced it, or replace if that's impossible due to takeover" policy might hold that off for quite a while, but if persisted in will eventually produce silly results due to reinvestments that are too small or that buy shares blatantly not in accordance with HYP share selection principles. As a result, "what happened to the capital in each original holding?" becomes a question whose answer is hard to determine and which doesn't actually tell you all that much about the current holdings...

Gengulphus

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Re: HYP1 is 17

#95956

Postby Gengulphus » November 15th, 2017, 3:15 pm

pyad wrote:Thus even an eternity portfolio will experience such changes over time, a process I've termed "market trading". On balance the market will trade for the investor in a way that is highly beneficial to a portfolio long term.

No, sorry, it won't. It will do the selling half of the trading for the investor, but it won't in general do the buying half (in some specific cases, it will effectively do that, such as when a company is taken over for shares in the acquirer, but not in general).

A significant part of HYP1's imbalances is due to the way it did the buying, especially with large takeover proceeds like those from Gallaher and Associated British Ports, and you cannot offload responsibility for that on to the market doing the trading for you, because it didn't!

Gengulphus


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