When to start running a HYP

[SDN123]

There was an interesting element to a recent thread on the HYP Practical board regarding using HYP as a savings vechile. I’m interested to know what others thinks.

I think of my investments having two phases:
- accumulation (“saving”) - when I’m adding new money and
- decummulation (“drawing down”) - when living off dividends.

I definitely in the accumulation phase right now.

I’m planning for HYP to be a major element of my decummulation phase - other possible tools in this phase include bonds, growth shares (selling down to release profit), BTL, state pension, annuities, working (ugh!)

Currently about 10% if my net worth is invested in a HYP (see previous annual reports). The largest chunk of the rest is invested in a passive portfolio of EFTs and funds (see books by Tim Hale).

What I have learnt so far (from starting clearing a credit card debt 11 years ago and knowing nothing about saving beyond post office savings book):
- HYP requires investor skill (a little for buying, a bit more to handle taxes, platforms and corperate actions and a lot ore if you want to sell anything)
- HYP is no different from other investing in that requires patience to be successful.
- HYP seems the best suited tool for me to produce a high and increasing income in the decummulation phase.
- HYP is not the best (total return) investment took for me.
- HYP is not risk free.
- The income that I can produce from HYP is related to how much capital I have.
- Beyond a “sweet spot”, stretching for more %income from HYP requires selecting more risky shares. The “sweet spot” is hard to define.

What I conclude from all of that is:
- It’s good to “practice” HYP for some time.
- Aim for maximum capital at the point of switching from accumulation to decummulation.
- I’m unlikely to make HYP my sole source of income at any point.

And at this point in time (somewhere between 5 to 10 years from retirement):
- Run a (relatively) small HYP while accumulating to learn the ropes.
- Invest the rest in the best “total return” scheme that suits.

All to say that my current approach is spot on for me.

OR my plan and analysis is simply an exercise in confirmation bias and self-delusion.

Thoughts?

SDN

[OLTB]

Hi SDN

I'm in a similar boat to you - I'm in the building phase and started my HYP nearly two years ago and wanted to 'experience' the way a HYP works before needing to draw on it. I've learned along the way from others posters that keeping a couple of years' worth of income in a cash fund is useful for those periods when dividends are either reduced or temporarily suspended (think 2008/2009).

I also have two other portfolios - an IT and passive (also Hale) as at the end of the day, I don't know what investment style is going to be best for me. Using these three, I hope that I won't all be wrong!

I am starting my HYP with the hope that the income generated will first of all cover my regular standard direct debits and standing orders. After this target has been reached, I will hope they will cover some other expenses such as food and fuel so that I can make the other portfolios last a bit longer. I like the idea of my State Pension being my holiday fund (I think it was TJH who does this and I think that sounds wonderful!). However, I understand that this may not be the case as my retirement savings pot isn't huge and I don't have too many years left for compounding to work to any significant effect (approx. 13 years to go).

Anyway, that's my approach, but I'm steering clear of BTL as I don't want the hassle of tenants/repairs etc. and you can't cash in a house as quickly as you can a stock/fund etc.! I am aware that others may have different views on BTL, so may be in a minority.

Cheers, OLTB.

[tjh290633]

Sometimes an HYP can be best for total return, but it all depends on the market. In the dot;com boom, for example, it was not, but in the aftermath it definitely was.

My experience has been that over the long term the TR has been more than adequate.

TJH

[staffordian]

A point worth bearing in mind is that by using an HYP strategy for accumulating as well as in retirement is that you are not jumping into something unknown.

In addition, using a different accumulation strategy then liquidating that and buying a one shot HYP portfolio risks buying at a bad time, and trying to find a significant number of quality candidates at the same time.

As we know, HYP candidates come and go, so buying through the accumulation phase enables one to take advantage of these shares as they become affordable, and it also means that by monitoring income during this phase, the amount availabe in retirement is already known with some confidence.

[OZYU]

A point worth bearing in mind is that by using an HYP strategy for accumulating as well as in retirement is that you are not jumping into something unknown.

In addition, using a different accumulation strategy then liquidating that and buying a one shot HYP portfolio risks buying at a bad time, and trying to find a significant number of quality candidates at the same time.

As we know, HYP candidates come and go, so buying through the accumulation phase enables one to take advantage of these shares as they become affordable, and it also means that by monitoring income during this phase, the amount availabe in retirement is already known with some confidence.

Taking your last point, calculation/estimation you x% required withdrawal rate from your pot is elementary and does not require years of planning, nor does moving from growth to income, particularly in a tax shelter. It can be done smoothly at negligible cost in terms of the overall pot when/if required.

Our experience has been that although our HY ISAs have performed satisfactorily, our other portfolios centred on growth/TR, properly analysed as to their performance, have done consistently better. I am not talking about years here, but decades. So we advised our children to run a diverse portfolio by yield, market cap and geography, target overall yield in the 2-3%, so that divis do grow at a serious lick in that investing space. And I am glad that they have been largely doing so. And their returns are absolutely going to deliver the goods without the need to chase high yield in retirement, hence reducing their risks, as we can clearly see by the size of the TR pots they have built, as our three children are approaching retirement, one imminent. Small Cos, US, disruptors, Tech, Far East is where we advised our grandchildren to be, the UK market going forward will lag that lot by quite a margin imho looking twenty-thirty years down the road imho, being dominated by important sectors looking at declining margins. It will probably be a more uneven ride, but grandkids should not care a jot about that.

HYP fixation is most certainly not the answer to all investment, and bear in mind that our HY ISAs, thus near HYP, are very large by now. So I intimately know that HYP can and cannot do. In the past couple of years, not much, apart from producing a possie of cutters and having trouble matching RPI on the capital front (an essential requirement imho) for most HYP-like practitioners I have spoken with outside these often biased boards.


Ozyu

[Dod101]

What OZYU has written are basically my thoughts and experience. If I were to personalise it I think that the black and white pronouncements from pyad are often taken as the Gospel, when in fact they are/were merely an idea. OTOH, we oldies need to remember that a strategy, any strategy, is better than threshing about without one!

Today, many years into retirement, I live off the dividends from my HYP but I also run a Growth portfolio along side. At times I will take profits from it and place these into the HYP and occasionally the other way so I am not a pure HYPer and I think it is best not to be a pure anything. We need to be pragmatists!

Dod

[tjh290633]

As is obvious, I differ from you two in my approach, which is to concentrate on building a stream of dividend income. The actual capital values are of little consequence.

Consequently withdrawal rate does not matter. Nevertheless the total return has been more than adequate.

TJH

[Itsallaguess]

And at this point in time (somewhere between 5 to 10 years from retirement):

- Run a (relatively) small HYP while accumulating to learn the ropes.

- Invest the rest in the best “total return” scheme that suits.

Thoughts?

Personally, I can't fathom why I might be convinced that a non-HYP, total-return approach might be best during the 'accumulation-phase', and yet also be convinced that moving to a dividend-release (HYP) process might be best during the 'de-cummulation phase', especially if this also involved running a small-scale, 'parallel-HYP', so as to learn this essential-secondary-strategy for the latter phase....

If you're already convinced that total-return works best for capital appreciation, why not simply carry it on and release some of that capital when you need it during your spending years?

To me, this seems like an over-complication if you do think you need to undertake the two strategies.

This isn't to say that I disagree regarding the TR approach, and I've got lots of sympathy with that view even though I tend to sway my own portfolio in a much more dividend-accumulation process, and it's more to question how someone might hold a TR view, and yet also be convinced that the TR strategy then needs swapping at some point into a dividend-release strategy - it's that specific issue that I'd need more convincing to understand why this might be the case.

I prefer the 'switch' approach, where dividends will accumulate and snowball during my working years, and then switch to pay-out mode during my retirement. One strategy, one switch...

But I really don't see why a similar 'one strategy, one switch' approach can't also be taken using a TR strategy. When the time comes to spend it, then just sell some and spend it, instead of feeding it all back in....

Cheers,

Itsallaguess

[moorfield]

And at this point in time (somewhere between 5 to 10 years from retirement):
- Run a (relatively) small HYP while accumulating to learn the ropes.
- Invest the rest in the best “total return” scheme that suits.
Thoughts?

Whatever scheme you choose - HYP or "total return" - it's important to consistently and actively measure progress against a longer term target. Personally I find it easier to measure in terms of dividend income (being reinvested), rather than capital value - the latter I find can be frequenly less predictable than the former. Concentrate on dividend income and allow the capital to look after itself, someone once wrote somewhere.

[SDN123]

And at this point in time (somewhere between 5 to 10 years from retirement):

- Run a (relatively) small HYP while accumulating to learn the ropes.

- Invest the rest in the best “total return” scheme that suits.

Thoughts?

Personally, I can't fathom why I might be convinced that a non-HYP, total-return approach might be best during the 'accumulation-phase', and yet also be convinced that moving to a dividend-release (HYP) process might be best during the 'de-cummulation phase', especially if this also involved running a small-scale, 'parallel-HYP', so as to learn this essential-secondary-strategy for the latter phase....

Great question!

1. So far my record of selling is awful. And to add to the pain I need to pay to sell!

HYP offers me a method of (semi) passive and (semi) fee-free income without needing to make sell decisions.

2. I find the HYP tax decisions / costs easier (income tax for dividends vs capital gains tax for selling). I think dividends will be more tax efficient (cheaper).

This issue is a bit specific to me as I work overseas and plan to retire “back home” in the UK. I can’t add funds to ISAs when I’m non-resident. When I’m resident in the UK again it will take a while (and more tax decisions) to shelter everything again.

3. I strongly suspect that if I sell to create income i’ll Be very aware of total capital value (and that could easily make sell decisions even harder). I also strongly suspect that I will be much less concerned about total capital value when taking dividends from a HYP.

I think each of the 3 factors above are different between saving and drawing down. Different enough that a different approach is appropriate for me for the two “stages”.

SDN

[SDN123]

And at this point in time (somewhere between 5 to 10 years from retirement):
- Run a (relatively) small HYP while accumulating to learn the ropes.
- Invest the rest in the best “total return” scheme that suits.
Thoughts?

Whatever scheme you choose - HYP or "total return" - it's important to consistently and actively measure progress against a longer term target. Personally I find it easier to measure in terms of dividend income (being reinvested), rather than capital value - the latter I find can be frequenly less predictable than the former. Concentrate on dividend income and allow the capital to look after itself, someone once wrote somewhere.

I sort of agree - I do keep good records, which is how I know that judged over the last 7 years the passive portfolio has been a better savings vechile (judged by total return) than my HYP. Simple arithmetic means that if I switch all of my capital to a HYP today i’ll get more income than if i’d been in only invested in HYP all of that time.

SDN

[SDN123]

Sometimes an HYP can be best for total return, but it all depends on the market. In the dot;com boom, for example, it was not, but in the aftermath it definitely was.

My experience has been that over the long term the TR has been more than adequate.

TJH

If I could guarantee your level of success (or persuade you to manage my portfolio for me, for free of course) I would be very happy to stick with just HYP. I can’t persuade myself that I’m as skilful or knowledge as you. (Yet.)

I do take your point though, across my investment “life” HYP might outperform, in purely capital terms, other approaches - my judgement so far is that I have a method that is more likely to grow more for me. By enough that it’s worth the extra complications.

SDN

[Itsallaguess]

HYP is a total crock as a strategy to generate equity total returns over time.

I can say this because the chance of picking the 0.3% of top performing stock is so small when one is picking 15-20 stocks from the reject bin. (This is also true of all other stock-picking strategies, so this criticism is not limited to HYP). The research above shows the vast majority of common stocks achieve returns in line with bonds, without the known benefits of that asset class. Thus the majority of common stocks have a subpar true risk/reward profile.

But in order to achieve the observed equity outperformance over bonds, we absolutely must include the top performing stocks in our portfolio.

The only way I know of to reliably achieve this is by buying all the stocks: for example an all-market passive tracker product.

I say it again: HYP is a total crock as a strategy to generate equity total returns.

No.

I think you'll find that HYP as a strategy will absolutely generate equity total returns over time. It's almost impossible for that not to happen....

What you're saying is that HYP might be a total crock as a strategy to generate top-performing equity total returns....

I think you'll find that you won't have many disagreeing with you there, and that includes me and I run a HYP (hybrid/IT's..)...

But that's not to say that HYP can't deliver adequate equity total returns though, is it.....?

So if it can deliver 'adequate' equity total returns, we might then look to see if there's any other advantages of following a HYP strategy that might differentiate it from following your passive tracker product that might well generate 'better' equity total returns, and as luck would have it SDN123, the OP of this thread, has luckily already pointed some of them out -

1. No need to make any selling decisions to generate income. This is a potential benefit at a personal level, where selling decisions may be difficult for an investor to make at all in the first instance, or just worry that they'll get such selling-decisions 'right', and it's also a benefit at a financial level, because there are no costs involved with generating the dividends - they just continue to land in your bank account...

2. Potential for tax-advantages / administration effort with regards to dividend income vs capital gains.

So if we agree that the above issues might well benefit an investor following a HYP strategy, it then starts to become a valid trade-off between any potentially different strategy (your all-market passive-tracker, for instance...) that might not deliver the above benefits, and a HYP strategy that might...

So when people say that HYP is a 'total crock' of a strategy, I think they need to be much clearer on why they think this is the case, and if such a statement is being made with regards to 'pure' financial returns (your total-return view, for instance...) without also looking at what might be any other potential benefits, then I think it's a flawed statement from the outset....

Cheers,

Itsallaguess

[vrdiver]

But we could achieve the income objectives via bonds with more certainty, and less risk. The major reason to use equities is to gain the equity risk premium over bonds, which HYP is particularly poorly placed to do due to the likelihood of not holding the big winners.

OK.
I currently have a HYP and I live off the income (it produces 5%) without touching the capital. The dividends increase in line with inflation.
Would you be kind enough to post a bond portfolio that I should switch to so as to reduce risk whilst still allowing me to take the income and not draw down the capital?

VRD

[Itsallaguess]

And at this point in time (somewhere between 5 to 10 years from retirement):

- Run a (relatively) small HYP while accumulating to learn the ropes.

- Invest the rest in the best “total return” scheme that suits.

Thoughts?

Personally, I can't fathom why I might be convinced that a non-HYP, total-return approach might be best during the 'accumulation-phase', and yet also be convinced that moving to a dividend-release (HYP) process might be best during the 'de-cummulation phase', especially if this also involved running a small-scale, 'parallel-HYP', so as to learn this essential-secondary-strategy for the latter phase....

Great question!

1. So far my record of selling is awful. And to add to the pain I need to pay to sell!

HYP offers me a method of (semi) passive and (semi) fee-free income without needing to make sell decisions.

2. I find the HYP tax decisions / costs easier (income tax for dividends vs capital gains tax for selling). I think dividends will be more tax efficient (cheaper).

This issue is a bit specific to me as I work overseas and plan to retire “back home” in the UK. I can’t add funds to ISAs when I’m non-resident. When I’m resident in the UK again it will take a while (and more tax decisions) to shelter everything again.

3. I strongly suspect that if I sell to create income i’ll Be very aware of total capital value (and that could easily make sell decisions even harder). I also strongly suspect that I will be much less concerned about total capital value when taking dividends from a HYP.

I think each of the 3 factors above are different between saving and drawing down. Different enough that a different approach is appropriate for me for the two “stages”.

Great answers! :p

All clearly valid and important on a personal level, and I can now see where you're coming from much better than I could initially, so thanks for fleshing that out a bit.

It also, very handily, goes some way to counter the point made by ap8889 when he's tried to highlight what he thinks might be some flaws with the HYP approach, so thanks equally for providing some great examples as to why a predominantly income-oriented strategy might particularly suit someone over and above a more capital-gain driven strategy.

Personally, I also think the HYP strategy is great in terms of not having to worry about selling-decisions (in the main...), and also in the way that it removes the costs that would be associated with selling investments to release spendable capital, so I'm actually quite content with regards to giving up some potential 'investment performance' if it allows me to plod on with a single strategy that simply requires an 'income-flow' switch to be thrown at some given point in the future....

That's not to say that I don't also run some more growthy (less income-oriented...) sections of my investments as well, and I do, but it's not a huge section of my investment capital, and is not an area that I'd be comfortable turning into my 100% strategy, so I'm happy to continue with the mix that I've got, but remain convinced that for me, the HYP (hybrid/IT's) strategy approach is one that certainly suits my investment personality over the very long-term, which is a very important aspect for me in this type of discussion, and it seems to be delivering really quite adequate returns that look likely to satisfy my long-term goals.

Anyway, to answer your initial question of 'When to start running a HYP', I'm sorry to say that my answer would always have to be '20 years ago'! ;p

Cheers,

Itsallaguess

[moorfield]

I say it again: HYP is a total crock as a strategy to generate equity total returns.

That rather depends on how you qualify "crock", doesn't it? Which you haven't really done in your post.

I've been following HYP (near enough) reinvesting dividend income for 10 years and have trebled my accumulation unit price, an annualised return of roughly 11-12%. Out of curiosity, how far down your "crock" scale would that put me?

But in order to achieve the observed equity outperformance over bonds, we absolutely must include the top performing stocks in our portfolio.

What's a "top performing" stock please? Can you give us, say 15, examples?

[tjh290633]

But we could achieve the income objectives via bonds with more certainty, and less risk. The major reason to use equities is to gain the equity risk premium over bonds, which HYP is particularly poorly placed to do due to the likelihood of not holding the big winners.

And can you get a stream of income, increasing at up to three times the rate of inflation, from a portfolio of bonds?

TJH

[tjh290633]

Just to amplify the above, here is the record of dividend per unit for my HYP, compared with the RPI, from 1987 to 5 Apil 2018. This is unitised on an "Income unit" basis.

.            Ordinary    Rebased     RPI    
Year to      Divs/unit   Divs/unit   Rebased
05-Apr-88         2.87      100.00    101.80
05-Apr-89         2.75       95.71    114.30
05-Apr-90         4.33      150.98    125.10
05-Apr-91         5.75      200.34    133.10
05-Apr-92         7.97      277.71    138.80
05-Apr-93         7.33      255.30    140.60
05-Apr-94         6.65      231.50    144.20
05-Apr-95         7.93      276.14    149.00
05-Apr-96         7.81      272.15    152.60
05-Apr-97         8.90      310.02    156.30
05-Apr-98         9.35      325.60    162.60
05-Apr-99         8.91      310.18    165.20
05-Apr-00        11.96      416.65    170.10
05-Apr-01        12.42      432.57    173.10
05-Apr-02        13.82      481.20    175.70
05-Apr-03        12.95      451.20    181.20
05-Apr-04        12.48      434.56    185.70
05-Apr-05        12.96      451.25    191.60
05-Apr-06        14.09      490.63    196.50
05-Apr-07        15.07      524.76    205.40
05-Apr-08        26.09      908.86    214.00
05-Apr-09        22.76      792.84    211.50
05-Apr-10        11.91      414.74    222.80
05-Apr-11        16.71      582.13    234.40
05-Apr-12        18.79      654.57    242.50
05-Apr-13        20.89      727.68    249.50
05-Apr-14        21.48      748.29    254.80
05-Apr-15        22.40      780.31    258.00
05-Apr-16        22.77      793.06    261.40
05-Apr-17        24.93      868.15    270.60
05-Apr-18        31.73    1,105.17    275.80

As you will note, dividends have increased by about 4 times the increase in the RPI.

TJH

[toofast2live]

2008 to 2018. Ouch!

Be sure to have an adequate reserve if it’s a major part of your income...

[SDN123]

But we could achieve the income objectives via bonds with more certainty, and less risk. The major reason to use equities is to gain the equity risk premium over bonds, which HYP is particularly poorly placed to do due to the likelihood of not holding the big winners.

Hi,

Please make this real for me.

I have (say) £100,000 in a HYP. My current portfolio (published each year on the Practical board) would generate approximately £4,900 per annum from this amount of capital. No need to sell and so a reasonable chance for capital appreciation over time. (See evidence provided by others.). A reasonable chance of this income growing year-on-year in real terms (see evidence provided by others.)

Now point me to a bond portfolio, a real one if possible, that I can buy today that:
- provides that level of income;
- has a chance of capital appreciation;
- has a chance of real income growth.

If I need more capital to create that level of income (£4,900 per annum) please suggest how I find it.

These are real questions: of course I’d prefer a lower risk method of producing the same income from this level of capital.

SDN