Optimal share holdings in a HYP

[F3nlander]

Hi,
I'm still in the HYP-building phase of my HYP but at some point I will need to stop buying new shares in new sectors.
I wanted to get the combined wisdom of the HYP community on what you think the optimal number of shareholdings in a HYP is. Apologies if this has been done before but I couldn't find anything on a quick search.
Thanks so much.

[daveh]

I've posted 25-30 (though I have more), too many may be a pain to keep your eye on.

Pyads original article was for 15.

For me if I was sticking with single companies I'd want to aim for more than 15. If you were adding some ITs or ETFs for say coverage of foreign shares you could go for fewer individual shares (I'll say no more about ITs or ETFs as that is for discussion on the Strategies board). If you are buying in one go it is unlikely that you will find more than 10-15 suitable candidates at any one time and I wouldn't relax your selection criteria just to meet an arbitrary number of holdings. Just buy what passes when the cash is available. As time goes on different companies may be available when cash is available and then its a matter of whether you top up an existing holding or add something new.

[IanTHughes]

Hi,
I'm still in the HYP-building phase of my HYP but at some point I will need to stop buying new shares in new sectors.
I wanted to get the combined wisdom of the HYP community on what you think the optimal number of shareholdings in a HYP is. Apologies if this has been done before but I couldn't find anything on a quick search.

Personally, I do not believe in there being an ”optimal” number of shareholdings for a High Yield Portfolio (HYP).

The point of diversifying an HYP across multiple shareholdings, is to reduce the amount of damage that would result from any single failure – to value or income. If one only has one holding one is risking a 100% drop – to value or income – if the value collapses/dividend is suspended. Each “extra” holding will reduce the amount of damage that would result from any singlr failure – to value or income, but will also decrease the overall HYP yield.

Looking at the numbers we get the following table:

#  | Risk Amount | Risk Reduction
 1 |     100.00% |               
 2 |      50.00% |         50.00%
 3 |      33.33% |         16.67%
 4 |      25.00% |          8.33%
 5 |      20.00% |          5.00%
 6 |      16.67% |          3.33%
 7 |      14.29% |          2.38%
 8 |      12.50% |          1.79%
 9 |      11.11% |          1.39%
10 |      10.00% |          1.11%
11 |       9.09% |          0.91%
12 |       8.33% |          0.76%
13 |       7.69% |          0.64%
14 |       7.14% |          0.55%
15 |       6.67% |          0.48%
16 |       6.25% |          0.42%
17 |       5.88% |          0.37%
18 |       5.56% |          0.33%
19 |       5.26% |          0.29%
20 |       5.00% |          0.26%

As can be seen, moving beyond fifteen holdings reduces the amount risked, as a result of one failure, by less than 0.5%, but will surely reduce the overall portfolio yield. So, fifteen is the recommended ”minimum” number of holdings.

Now, you mention that you are building your HYP over time. I would suggest that, until you have a minimum of fifteen shareholdings, simply purchase the highest yield that you can find, where you consider the dividend to be sustainable, and where your HYP ”does not already contain a shareholding”.

Once you have that minimum of fifteen shareholdings, simply add the highest yield that you can find, where you consider the dividend to be sustainable. Of course, although that may mean a new shareholding, thus increasing your diversification and decreasing the amount being risked by a single failure, it may also mean your “doubling up” on a current holding. Not a problem in my view, it simply means that, for your next few purchases, that “doubled up” holding may have to be temporarily excluded from consideration.

Enjoy!


Ian

[moorfield]

Interesting that you've asked this.

I've voted 11-14 (I suspect one of few who will).

I'll explain with more detail why I've come to think this recently, and probably on the other board, give me couple days...

[idpickering]

FWIW I went for the 25 -30 option, I hold 28.

I'm not sure there is a max or min number of holdings that are the ideal. We each have different criteria and stomach for risk. Whatever you're happy with I guess.

Ian.

[Arborbridge]

I'm the one person so far who has gone for the biggest number. That's partly because I believe it to be true, but also more or less what I've always felt happy with.
I also note that when compared with ITs HYPers seems to go for very few shares. Any ITs with around 40 or fewer would be regarded as "high conviction" or even high risk.

Arb.

[Grumpsimus]

It has been mentioned that Pyad originally went for 15 shares. It should be remembered that this was a demo portfolio. He later suggested 15-20 shares would be appropriate for HYP.

This ties in well with academic research, which suggests that a DIVERSIFIED portfolio of 20 shares will largely capture the market and no further gains are made after 25 shares.

I have seen some very large portfolios of 40 or 50 shares, which must be a pain to manage. These large portfolios are often achieved by doubling up on sectors, suggesting an inability to make decisions.

[tjh290633]

Hi,
I'm still in the HYP-building phase of my HYP but at some point I will need to stop buying new shares in new sectors.
I wanted to get the combined wisdom of the HYP community on what you think the optimal number of shareholdings in a HYP is. Apologies if this has been done before but I couldn't find anything on a quick search.
Thanks so much.

I put 25-30, but often things may not be in your control. In the last century I worked my way up to about 20 holdings in a PEP, then ISAs replaced them, and I started on a parallel portfolio in an ISA, with no duplication of holdings. The PEP had grown by demergers of Hanson, ICI, BG group and BT, but of the demergers shares I only retained Zeneca, Imperial Tobacco and Energy. US Industries, Millennium Chemicals, Centrica and O2 were sold. Energy Group was taken over and replaced by Scottish Power. Then GEC became Marconi and I got some British Aerospace shares, which I retained.

Without going into it in more detail, you can see how my portfolio grew of its own volition. So a hoped for 25 grew to 37.

TJH

[Newroad]

Hi F3nlander.

I should first state that I am in no way an authority on HYP's. However, to try and give you something to work with and noting the PYAD'ic advice to be diversified, let me suggest the following as broad advice. Note, this is not specific to HYP's but nevertheless usable in that context.

The research I have seen suggests that you get adequate diversification when holding at least eight of the eleven GICS (https://www.msci.com/our-solutions/indexes/gics) sectors, e.g. Smart Portfolios by Carver, p264 (https://www.harriman-house.com/smart-portfolios). It may be that within your chosen investment universe (e.g. FTSE100 or FTSE350 or whatever) you can't get shares that are suitable for a HYP in all eleven - that's fine - do the best you can in the above context.

However many sectors you can get shares suitable for your HYP from, the research then suggests to do so in multiples of the sectors, to main overall balance. So let's say you can get HYP suitable shares from nine sectors in your universe, either go for 9, 18, 27 etc stocks. Exactly how many would be down to your specific situation, taking into account

Dealing costs as a proportion of each purchase
How many HYP suitable shares in each sector
Your predilection to manage many or few stocks over time

Big picture, I would suggest two or three times the number of sectors you can identify HYP suitable shares in is likely to be about right - which means from 16 (i.e. 2 * 8) to 33 (i.e. 3 * 11) in practise.

There's potentially more to it (e.g. the weighting of each share) but that's a start. However, it is just one view - do you own research and form your own opinion.

Regards, Newroad

[Bubblesofearth]

Hi,
I'm still in the HYP-building phase of my HYP but at some point I will need to stop buying new shares in new sectors.
I wanted to get the combined wisdom of the HYP community on what you think the optimal number of shareholdings in a HYP is. Apologies if this has been done before but I couldn't find anything on a quick search.
Thanks so much.

Hi F3nlander

I've joined Arb in selecting 31+ shares.

Most of the research talked about on here and in general focusses on the relationship between number of shares and risk relative to the market. Risk being measured by volatility. And it can be shown that building a portfolio of shares, especially one with shares taken from different sectors of the economy, can approach whole market risk once you get much beyond 10 companies. I suspect the thinking behind PYAD's original 15 shares was along these lines.

When I first joined TMF some 15+ years ago I would have thought along these lines as well. However, as I've read and (hopefully) learned more I now believe a larger number of shares is optimal. The reason is not to further reduce volatility risk but rather to increase the chance of picking up big winners, both from a dividend and capital growth perspective. There's now a fair bit of research out there showing that market gains are very asymmetric with the majority of those gains coming from a relatively small number of massively outperforming companies. The maths around ensuring selection of some of these is different from the maths around reduction of volatility risk. Because of their relative scarcity you basically need a larger portfolio to capture winners than to reduce risk.

My advice to you would be to do your own research around this before deciding how many shares to opt for.

BoE

[dealtn]

Until you define "optimal" it isn't possible to answer.

[F3nlander]

Until you define "optimal" it isn't possible to answer.

OED does a good job on that:
adjective
best or most favourable; optimum.

[dealtn]

Until you define "optimal" it isn't possible to answer.

OED does a good job on that:
adjective
best or most favourable; optimum.

Which means what for you?

Best return, least volatility, least risk of negative tail event, maximises income, least volatile income, lowest financial cost, lowest portfolio management effort, smoothest income, best monthly spread of income ....

You are relatively new but if I can give a small piece of advice, if you are asking for help sarcasm and poor engagement isn't the most optimal approach to get it.

[moorfield]

Until you define "optimal" it isn't possible to answer.

A good point. What is "optimal" makes more sense in a relative context imo. The obvious comparison I can think of making is that between HYP and its Evil Twin PHY. More on this in due course, in the other place...

[Arborbridge]

Until you define "optimal" it isn't possible to answer.

OED does a good job on that:
adjective
best or most favourable; optimum.

To be honest, that doesn't help at all because it just raises further questions.

Maybe, one can only fall back on non-exact definitions in any case because it is all going to be personal to what one feels is optimal for one's own outlook and circumstances.

The answers will go round in circles.

Arb.

[F3nlander]

OED does a good job on that:
adjective
best or most favourable; optimum.

Which means what for you?

Best return, least volatility, least risk of negative tail event, maximises income, least volatile income, lowest financial cost, lowest portfolio management effort, smoothest income, best monthly spread of income ....

You are relatively new but if I can give a small piece of advice, if you are asking for help sarcasm and poor engagement isn't the most optimal approach to get it.

Sorry, my poor excuse for humour I'm afraid

By optimal I mean optimal for the objectives of a HYP - I'm sure they have been spelt out very eloquently somewhere on this board - but for me it comes down to something I remember PYAD espousing: an inflation beating income stream that requires little management.

[88V8]

Which means what for you?
Best return, least volatility, least risk of negative tail event, maximises income, least volatile income, lowest financial cost, lowest portfolio management effort, smoothest income, best monthly spread of income ....

By optimal I mean optimal for the objectives of a HYP - I'm sure they have been spelt out very eloquently somewhere on this board - but for me it comes down to something I remember PYAD espousing: an inflation beating income stream that requires little management.

I voted 15-19.
But I do not practice what I preach. Over the years the number of holdings has crept up as 'good ideas' have materialised. Some were good, some less so.
And that's without considering the extent to which I've moved towards ITs and FI. In all I have ... rather a lot.

If you want to keep an eye on all your holdings, keep abreast of company announcements, the twists and turns of the business, run a spreadsheet, then it can become very time consuming and the fewer you start with the better. Fifteen is plenty imho.

If on the other hand you plan to leave it pretty much alone you could allow yourself a few more.

Btw, you do not have to be in all sectors. Luni used to call that 'sectoral philately'. Some sectors such as housebuilding and mining are cyclical and may not produce the steady stream you want.

V8

[F3nlander]

Hi,

Once you have that minimum of fifteen shareholdings, simply add the highest yield that you can find, where you consider the dividend to be sustainable. Of course, although that may mean a new shareholding, thus increasing your diversification and decreasing the amount being risked by a single failure, it may also mean your “doubling up” on a current holding. Not a problem in my view, it simply means that, for your next few purchases, that “doubled up” holding may have to be temporarily excluded from consideration.
Ian

Thanks Ian,

That makes sense.

It looks like the community majority view is more or less equally split between 15-30. Equally important is the idea from tjh that even if you start with x no. of shares, over time with demergers, you are more likely to end up with x + y no. of shares.

Given that, I think your advice is sound: stick to 15 but each time you have cash to spend, do another trawl, if there is a new share with a higher yield and sustainable dividend in the same sector, double up in that sector, if there is a new share in a new sector with a higher yield and sustainable dividend, add that new share/sector, if neither of the first two apply, double up the holding of the same share. I think in that way, over time, you are going to end up with more than 15 shares. Add in demergers and this total will likely start ending up closer to 20 , 25 and then 30.
Thanks for your input.
F3nlander

[F3nlander]

Hi,
There's now a fair bit of research out there showing that market gains are very asymmetric with the majority of those gains coming from a relatively small number of massively outperforming companies. The maths around ensuring selection of some of these is different from the maths around reduction of volatility risk. Because of their relative scarcity you basically need a larger portfolio to capture winners than to reduce risk.
BoE

Thanks Bubbles,

That's a really interesting point about increasing the likelihood of a big winner in your portfolio with the more share holdings you have.

I suppose it also depends on how much one wants to actively manage one's portfolio. It is very early days for me at the moment, I am currently of the opinion that a low-maintenance, top-up HYP would suit me (and I love the HYPTUSS spreadsheet for pointing out where the top ups should go), but that view may well change over time to accepting that my HYP is more akin to an actively managed IT for income.

For now, I think I will stick to a target of 15 but not get too precious if I can add a new sector/new share holding in the future if its yield is high enough and I judge it to have a sustainable-enough dividend.
F3nlander

[idpickering]

Thanks Ian,

That makes sense.

It looks like the community majority view is more or less equally split between 15-30. Equally important is the idea from tjh that even if you start with x no. of shares, over time with demergers, you are more likely to end up with x + y no. of shares.

Given that, I think your advice is sound: stick to 15 but each time you have cash to spend, do another trawl, if there is a new share with a higher yield and sustainable dividend in the same sector, double up in that sector, if there is a new share in a new sector with a higher yield and sustainable dividend, add that new share/sector, if neither of the first two apply, double up the holding of the same share. I think in that way, over time, you are going to end up with more than 15 shares. Add in demergers and this total will likely start ending up closer to 20 , 25 and then 30.
Thanks for your input.
F3nlander

One of my faves from PYAD is this, and it fits in well with your comments I think.

HYPersavers

https://web.archive.org/web/20071231131 ... avers.aspx

I've based my HYPing on it over the years.

Ian.