HYP1 is 17

[Lootman]

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.

It's a commendable idea but it's also insufficient. If the idea here is that there is a cash cushion to make up for years like 2008 when the income falls precipitously then that would require more than just setting aside a portion of the dividends, in the way that investment trusts do. You'd also have to set aside some of the capital. The reason is clear - that 40% drop in income could happen from year one to year two, and the portion of the dividends held back from year one would be totally inadequate to make up that shortfall.

So for instance if this portfolio had instead been set up in 2007, then you would have had to hold back 40% of 2007's income in order to be made whole in 2008. And even then what would you do in 2009, when the dividends were only a little higher than 2008?

What this really means is that if 75K is all you had at the start, then you'd have to invest only (say) 60K in HY shares and hold 15K as a safety margin. In addition you'd hold back some of the dividends each year to keep the margin adequate. Both of these approaches would significantly change the performance numbers cited, which assume 100% all-in with no risk mitigation nor safety margin.

So the real-life HYP1 would have 20% worse numbers than the theoretical one cited here.

[Plutus]

Are the other HYPs still being monitored please?

I seem to recall that HYP4 was a bit of a disaster?

viewtopic.php?f=15&t=2761&p=26465&hilit=HYP4#p26465

So, if the BP share price was 600p, the portfolio would get 500 shares. Using HYPTUS, we can get the share prices today and then calculate the current value and how much it has changed from the original £3k investment. Some shares (eg banks) have been dogs in terms of their share price but others (Bats , Compass) have done well.

BP, Lloyds, BATS, United Utilities, BT Group, Aviva,Tate & Lyle, RBS, GSK, Persimmon, Pearson, William Hill , Land Securities, Compass, Rentokil

[idpickering]

A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? 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

Hi Terry, thj covers my feelings on this in his first paragraph above. (my bold).

Ian.

[idpickering]

A brilliant return Stephen, thanks for the update. How much more evidence is required to show HYPing works? 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.

I agree with your comment above Arb, and do not feel I went OTT.

Ian.

[OLTB]

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.

It's a commendable idea but it's also insufficient. If the idea here is that there is a cash cushion to make up for years like 2008 when the income falls precipitously then that would require more than just setting aside a portion of the dividends, in the way that investment trusts do. You'd also have to set aside some of the capital. The reason is clear - that 40% drop in income could happen from year one to year two, and the portion of the dividends held back from year one would be totally inadequate to make up that shortfall.

So for instance if this portfolio had instead been set up in 2007, then you would have had to hold back 40% of 2007's income in order to be made whole in 2008. And even then what would you do in 2009, when the dividends were only a little higher than 2008?

What this really means is that if 75K is all you had at the start, then you'd have to invest only (say) 60K in HY shares and hold 15K as a safety margin. In addition you'd hold back some of the dividends each year to keep the margin adequate. Both of these approaches would significantly change the performance numbers cited, which assume 100% all-in with no risk mitigation nor safety margin.

So the real-life HYP1 would have 20% worse numbers than the theoretical one cited here.

That's a point well made Lootman - my post was more a ramble to myself to ensure that as I close in on retirement, it would make sense to start building up a cash buffer to protect my HYP income during the leaner years.

As you say, if HYP1 started off on that basis then the amount invested and therefore income received wouldn't have been as illustrated.

Cheers, OLTB.

[Gengulphus]

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. ...

Only if you presume that the investor allowed the income they needed to grow from £3,451 in 2001 to £5,040 in 2008. Or in other words, that they ratchet up their income requirements whenever the market gives them some extra income, and are never willing to give some of that increase back when it does the opposite - which is IMHO a crazy way to deal with a portfolio that they were told right from the start had risks to both capital and income (see the original HYP article).

Not saying that the drop to £3,187 income in 2009 could have been dealt with entirely by giving up some previous income increases - it couldn't, as £3,187 is less than the initial £3,451, and income requirements would presumably have risen in line with inflation. An investor in HYP1 who didn't leave any margin for error (in the form of a cash reserve, income requirements below the initial income or both) would have had to withdraw capital - I'm only saying that giving up some previous increases would have mitigated that need, not got rid of it entirely. But if someone takes a course of action that they've been warned carries risks without leaving any margin for error, and those risks actually materialise, who can they blame but themselves?

Also, to anticipate a possible question some might have: what if the investor bought HYP1 in 2008, so they hadn't had the previous income increases but still faced the near 40% drop in income? The answer to that is that in that case, they didn't buy a HYP based on the shares' yields, etc, when they bought - if one reads HYP1's year 7 review as a rough guide to what HYP1 was like in early 2008, it's not hard to spot some shares that wouldn't have been bought due to not having the yield or not having the dividend record, and four shares that were each over 10% of HYP1's capital value and so would have been bought with significantly lower weightings. (Incidentally, one of those four was BT, which was responsible for the biggest single-holding income drop (in cash terms, not percentages) in HYP1 between 2008 and 2009, due to its high weighting.)

How a HYPer who bought in 2008 according to HYP1's principles would have fared in 2009, I don't know (and indeed it probably depends significantly on exactly when they bought in 2008 - it was a year of drastic changes!). But HYP1's income drop between 2008 and 2009 is very unlikely to give any real clue...

Gengulphus

[Gengulphus]

For newcomers and for those who do not know the detailed history of HYP1 (that includes me), pyad's additional comments show that there is no such thing as a non tinker HYP. ...

Only if they also don't know the meaning of the word "tinker" in HYP contexts: voluntary selling. Pyad's additional comments don't indicate any of that.

Gengulphus

[Gengulphus]

Is my plucked out of the air 3% annual increase on the initial sum too ambitious a target to aim for or was perhaps the first years income unrealistically high to base projections on ?

On the second of those questions, a more realistic figure would be what I've sometimes called the "year 0 income": what the shares would have produced between 13 November 1999 and 13 November 2000, had HYP1 owned them then. That's because that would have been a known figure when HYP1 was bought, whereas the actual income the first year turned out to produce would have required a working crystal ball... I did produce a figure of £3,212 for the "year 0 income" back in 2001 in my 'Happy Birthday!' post. That shouldn't be treated as totally accurate, partly due to the currency exchange rate issue mentioned in that post and partly because there was some minor difference in calculation methods between me and pyad that led to my year 1 income figure of £3,466 being £15 higher than his of £3,451 - I think I remember something about ex-dividend dates that fell exactly on November 13th. But a round-number figure of £3,200 should be quite accurate enough...

Or another known figure at HYP1's purchase date is the portfolio's forecast yield of 4.8%, implying first year income of around £3,600 (see HYP1 selection article). That's realistic in the sense that someone could have had the figure when HYP1 was bought and so could have relied on it, but clearly doing so would have proved rather too optimistic.

On the 3% annual increase, I think I would go for increases in line with RPI inflation. I haven't worked out whether that would work out more or less ambitious than a flat 3%.

Gengulphus

[Gengulphus]

Sounds like a good subject for which Gengulphus could get the ball rolling with some analysis of choices and possible outcomes

Sorry, but no. I'm not taking on new projects that involve a commitment of time and energy at present - indeed, I've just shed an existing one. Things that are done on an if-and-when-I-feel-like-it-and-have-the-time-and-energy basis (like reading these boards and posting to them), yes, but nothing else.

Gengulphus

[Lootman]

Only if you presume that the investor allowed the income they needed to grow from £3,451 in 2001 to £5,040 in 2008. Or in other words, that they ratchet up their income requirements whenever the market gives them some extra income, and are never willing to give some of that increase back when it does the opposite - which is IMHO a crazy way to deal with a portfolio that they were told right from the start had risks to both capital and income (see the original HYP article).

Yes, because of the fortuitous start year of HYP1, it should have enabled a cash margin to have been built up, as long as the investor didn't blow the windfall increases in income from 2000 to 2007. You correctly predicted my response to that - that an investor who started later would not have been in such a favourable situation. I take your point that a later start would have entailed different shares being purchased and therefore the results would have been different. But even so, 2008 massacred the vast majority of shares and so I'd suggest that whatever HY shares had been thrown up for purchase in 2007, the odds are very good that they would have suffered similarly. For instance, various bank shares had very good yields in 2007. Too good, as it turned out.

So I maintain that saving some of the increase in dividends would have been necessary, but is not sufficient. The real way to be safe would have been not to have invested all of your 75K in HY shares, but rather retained some of it as cash or money market instruments. And that means that in practice a working HYP1 would have done worse than the theoretical numbers cited here.

Or stay 100% invested and accept that you may have to draw down capital if we have another 2008.

[Gengulphus]

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.

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?). ...

I don't remember doing exactly that analysis - which doesn't necessarily mean that I didn't do it, but does mean that I don't remember doing so and so am unlikely to have archived it.

But I did archive my 'Safety margin investigations' post, which might be what you're thinking of. It investigates the closely-related idea of holding the reserves as extra shares, which you add to by reinvesting surplus dividends when there is a surplus and subtract from by selling shares when you need to make up a deficit of dividends. Its advantage over a cash reserve is that the extra shares themselves generate dividend income, reducing the chance of there being a deficit to make up; its disadvantage is that if you do have to make up a deficit, you may well be selling at a loss and so taking less cash out of the reserve than you put in.

The former is a small-but-cumulative long-term advantage - the extra income should build up over time - while the latter is a bigger-when-it-happens short-term disadvantage - the loss at which you're selling could easily be the equivalent of several years of income on the capital involved. My feeling is that the best method involves both: a cash reserve big enough to tide one over say 5 years of dividend income being fairly severely down (*), and anything over that being reinvested in the portfolio to get the long-term income benefits.

(*) Which does not mean that it holds 5 years of living expenses - it only needs to make up the difference between what you need and the depleted level of income you're getting per year. For example, if your HYP is producing 125% of what you need and you want to cater for its income being 40% down, i.e. for it producing 60% * 125% = 75% of what you need, then it only needs to be able to supply the missing 25% of what you need. So a cash reserve of 1.25 years of living expenses would cater for 5 years of your dividend income being that seriously down.

Gengulphus

[Gengulphus]

Are the other HYPs still being monitored please?

Possibly by pyad, but if anyone else has been monitoring them all along, they've kept very quiet about it.

HYP4 could probably be 'monitored in retrospect' by anyone willing to put the work in (there would be a lot of it, and I am not taking it on!), as long as they were willing to follow the 'reinvest in the share that produced them, no matter what' method of handling corporate action proceeds. That's because that method doesn't suffer from hindsight bias, and HYP4 hasn't undergone any takeovers, for which any method of choosing replacement shares does suffer from hindsight bias.

HYP2 and HYP3 have undergone takeovers and so any 'monitor in retrospect' attempt for them will be wide open to criticism for hindsight bias.

Gengulphus

[moorfield]

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%.

Total income thus far is £76,085 over the 17 years, averaging £4,476 per year which is 5.97% pa on the £75,000 cost. An interesting milestone is that this total income has now exceeded the original investment.

Furthermore, I've appropriated pyad's data to compare HYP1 income versus the RPI/CHAW index since 2001
(source: https://www.ons.gov.uk/economy/inflatio ... /chaw/mm23)

It's been a rocky ride, but crushing inflation it is currently - thanks for the update pyad.

[CryptoPlankton]

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.

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?). ...

I don't remember doing exactly that analysis - which doesn't necessarily mean that I didn't do it, but does mean that I don't remember doing so and so am unlikely to have archived it.

But I did archive my 'Safety margin investigations' post, which might be what you're thinking of.

It could be! Thank you for linking to it anyway as it was a really good read. (I suspect I was getting my memory of this jumbled with more general comments you may have made on the subject over the years.)

My feeling is that the best method involves both: a cash reserve big enough to tide one over say 5 years of dividend income being fairly severely down (*), and anything over that being reinvested in the portfolio to get the long-term income benefits.

(*) Which does not mean that it holds 5 years of living expenses - it only needs to make up the difference between what you need and the depleted level of income you're getting per year. For example, if your HYP is producing 125% of what you need and you want to cater for its income being 40% down, i.e. for it producing 60% * 125% = 75% of what you need, then it only needs to be able to supply the missing 25% of what you need. So a cash reserve of 1.25 years of living expenses would cater for 5 years of your dividend income being that seriously down.

I think that is a very sensible strategy (as it's pretty much what I intend to do!). The worked example is a good guide for investigating different options - I suppose the "right" proportion of reserve cash is ultimately a personal thing, influenced by how reliant an individual is on a consistent HYP income and his or her tolerance to risk.

Thanks again.

[Dod101]

I think there is an awful lot of nonsense written here. Anyone with a HYP ought to have a big cash reserve. I have about four years of expenses but that is not sitting there against a downturn in HYP income, it is there as a positive asset allocation programme. But I have never needed to draw on it to supplement my income over at least 20 years, I simply draw in my expenses or ride it out.

A HYP works and is no more high risk than any other share investment strategy provided it is managed. Hands off (except when proscribed by corporate actions) is a potentially disastrous strategy. That appears to be the definition of no tinkering according to the pyad bible and it leads almost inevitably to the totally unbalanced portfolio illustrated by the said pyad in the first post of this thread.

Dod

[idpickering]

I think there is an awful lot of nonsense written here. Anyone with a HYP ought to have a big cash reserve. I have about four years of expenses but that is not sitting there against a downturn in HYP income, it is there as a positive asset allocation programme. But I have never needed to draw on it to supplement my income over at least 20 years, I simply draw in my expenses or ride it out.

A HYP works and is no more high risk than any other share investment strategy provided it is managed. Hands off (except when proscribed by corporate actions) is a potentially disastrous strategy. That appears to be the definition of no tinkering according to the pyad bible and it leads almost inevitably to the totally unbalanced portfolio illustrated by the said pyad in the first post of this thread.

Dod

To me your's is a logical strategy Dod. That's a nice cash buffer. I agree with your second paragraph above particularly. To be totally hands off is alien to me, and some HYP management is required. Although I am trying to be more hands off.

Ian.

[Arborbridge]

A HYP works and is no more high risk than any other share investment strategy provided it is managed. Hands off (except when proscribed by corporate actions) is a potentially disastrous strategy. That appears to be the definition of no tinkering according to the pyad bible and it leads almost inevitably to the totally unbalanced portfolio illustrated by the said pyad in the first post of this thread.

Dod

Although I more or less agree with your post, Dod, I can't help picking up on this paragraph. You say HYP is no more high risk than any other strategy, but then shoot your logic in the foot! It has to be managed because it has higher risk inherent, I would say, and one of the high risk areas you point out yourself - that of imbalance over time.

[Dod101]

A HYP works and is no more high risk than any other share investment strategy provided it is managed. Hands off (except when proscribed by corporate actions) is a potentially disastrous strategy. That appears to be the definition of no tinkering according to the pyad bible and it leads almost inevitably to the totally unbalanced portfolio illustrated by the said pyad in the first post of this thread.

Dod

Although I more or less agree with your post, Dod, I can't help picking up on this paragraph. You say HYP is no more high risk than any other strategy, but then shoot your logic in the foot! It has to be managed because it has higher risk inherent, I would say, and one of the high risk areas you point out yourself - that of imbalance over time.

Well to pick you up on that, any share strategy has to be managed so a HYP one is no different in that regard. Any portfolio needs to be managed, whether you are Warren Buffet, Unilever, Arb or Dod. The point to me is they all evolve over time whether we like it or not. Constituents come and go and thus the only question is whether we manage it. If we do not manage it it will almost certainly lead to an unbalanced portfolio as the survivors-survive, whilst others fall by the wayside. Thus managing it or trying to manage it can hardly do any further harm.

Fundamentally no one (apart from pyad) would seriously think that his HYP1 is suitable for real life and so to that extent his hands off or no tinkering (as in the pyad dictionary) approach does not work.

Dod

[pyad]

I haven't looked at this board since my original message and couple of follow ups shortly after, to assist a reader who misunderstood something.

Anyway, looking briefly through the large volume now there was one comment that caught my eye, merely because it's arithmetically wrong. However the thread has become so confused with nested responses and so on that I cannot trace who said it or why or in what context. It's this:

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

As I can't trace the origin of the comment, I'm assuming it refers to my latest review of HYP1 and its yield because 4.2% would be the income of £7,327 on the closing value of £172,485. However that is an elementary math error because the yield on any portfolio is the income on the opening capital value, not the closing.

As last year's closing value was £153,721, the historical yield for 2017 is therefore 4.8%. That is significantly better than the 4.2% mentioned by whoever or whyever it was stated.

Apologies though if the comment I am criticising was not about that.

[Arborbridge]

I haven't looked at this board since my original message and couple of follow ups shortly after, to assist a reader who misunderstood something.

Anyway, looking briefly through the large volume now there was one comment that caught my eye, merely because it's arithmetically wrong. However the thread has become so confused with nested responses and so on that I cannot trace who said it or why or in what context. It's this:

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

As I can't trace the origin of the comment, I'm assuming it refers to my latest review of HYP1 and its yield because 4.2% would be the income of £7,327 on the closing value of £172,485. However that is an elementary math error because the yield on any portfolio is the income on the opening capital value, not the closing.

As last year's closing value was £153,721, the yield for 2017 is therefore 4.8%. That is significantly better than the 4.2% mentioned by whoever or whyever it was stated.

Apologies though if the comment I am criticising was not about that.

It was me what done it, Pyad, but I rather lazily quoted a yield figure with Dod had posted:) But even so, that statement I made defending HYP was valid, though the yield is significantly higher than I said.

It does remind me of discussions on the TMF boards about "what sort of yield" people are quoting! They did not always compare apples with apples.