The one-way HYP revolving door....

[Itsallaguess]

Many years ago, I used to have what we might call a relatively 'pure' HYP, meaning that it was a broad portfolio of single-company shares, mostly from the FTSE 100, but with a toe-dip into the FTSE 250 from time to time.

Over the years I discovered that fishing at the 'high-end' of the yield-spectrum in the single-company HYP pool was leaving me exposed to a high rate of 'accidents', either in the form of companies that got into difficulty in continuing to pay out those relatively-high dividends, and either cropped them or cut them altogether, or in the form of companies that simply 'got into difficulty' and went through what seemed like fairly regular periods of catharsis. That catharsis might ultimately have been great for the individual companies involved, but they never seemed to be great for me....

Either way, having one or two companies come a cropper every year seemed like par for the course during the period that I was building my 'pure' HYP, and it was clear, to me at least, that in any given year, the relatively high yields being delivered by the 'survivors' in my HYP did not compensate me either for the loss of income in the regular 'failures', or for the stress of knowing that this was likely to be an ongoing situation that I might have to live with as an owner of such an income-seeking portfolio.

I decided that I wanted to do two things to change this situation -

1. I wanted to stop shopping in the 'highest yield' aisle, as I decided that I was regularly getting my shopping home only to discover that I'd bought something with a shelf-life that was incompatible with my requirements.

2. I wanted to stop shopping in the 'single-company' aisle so much too, as I wanted a much broader level of diversification, in both the company/sector areas and also the geographical sphere, than seemed to be deliverable by shopping in that 'single-company' aisle.

So many years ago I started to delve into income-related Investment Trusts. It was the single best investment decision I've ever made.

Since making this decision, I've not once felt the income-wallop that I regularly used to feel when a couple of my single-company HYP shares got into trouble.

Since making this decision, I've been able to spread my capital into the much broader corners of other sectoral and geographical spheres of world investment, in a way that was simply not available to me by just shopping in the UK indexes.

Since making this decision, my invested capital has grown to be multiples of that which was invested in the purer-HYP. I used to worry like hell, given the above issues with the single-company-HYP, about that much smaller lump of capital being enlisted into what I found to be an accident-prone strategy. Now, with multiples of that level of capital tied up in my much broader high-yield portfolio, I sleep like a baby, with no great issues about the broader risks being taken.

I don't fret. I don't picker. I carry a cash-balance depending on my view of the market at any given time, and once a particular level of cash has been generated, I'll then continue to drip-feed investment-capital into the market, spreading the cash around the various existing investments to help balance everything out, or sometimes to pick a new investment if something catches my eye. It's a very simple process....

Since making this decision, I've discovered that many others have made similar decisions and discoveries to me, having themselves often started out with a 'purer' type of HYP, but since then they've decided to also take a similar path into a broader set of income-related investments.

The question I'd like to ask, and related to the title of this thread, is why do we only ever see people heading one-way out of the HYP revolving door?

Why is there not a queue of people going the other way, from a similar wider-scoped approach to income-investing and back into a much narrower remit of single-UK-company portfolios?

Perhaps those investors do exist. If so, why are they so quiet?

Cheers,

Itsallaguess

[csearle]

There is another door through which people get in. But to suggest an answer to your question, maybe people grow more risk averse, and so find investment trusts more suitable to their characters as they grow older?

Chris

[Raptor]

I followed the same route from pure HYP to income generating ITs but for a different reason. Was happy with my pure HYP but we had a long thread on TMF about what to do when you no longer want to or can manage the portfolio. I went from a 90% HYP to around 70% and that figure should go down ( depending obviously on the markets).

My ITs do not need much, if any, work. To be honest the only time I take much notice is when I have some money to invest. To be honest I see this as a one way door from ITs, but not sure if we would not see other types of investment moving to HYP. Maybe a "pure" HYP has gone, I hope not.

Raptor.

[ReformedCharacter]

Thanks for posting that. I have also been moving in a similar direction and - as Chris mentioned - risk-aversion is one reason. Simplicity too. My OH is likely to outlive me by a couple of decades and despite being a highly intelligent and capable person won't want to get emails about 'corporate actions' and whatnot. My guess is that I'll probably lose out a little on income but the advantages of simplicity and income-stability are an acceptable trade-off for me.

RC

[Mentallurgist]

I have a reasonably sized (for me) HYP portfolio, but realised that even with the exposure outside the UK from the FTSE 100 equities that I held , I wanted a little more exposure to different markets.

I now have 13.5% of my portfolio in IT's, namely HFEL, MYI, EAT and BRCI to give me a little more geographic diversity. I think this is something I will probably continue with.

Andy.

[monabri]

Ditto everything IAAG said. After Carillion & Interserve, a ready built HYP in the form of an IT or ETF seems sensible...especially if the current yield on offer is 5%+ (e.g. Merchants). The trade off of lower dividend growth against single (very expensive) point failures is a worthwhile one in my opinion.

I'm 34% non-HYP (whre 'HYP' = individual shares as per HYP Practical).

The question is - what are the plans for the "residual HYP"...just leave it to do it's thing or gradually swap it out for IT/ETF baskets?

[staffordian]

I started with a pure HYP, then began to wonder if it might both be too risky and possibly, in later life, a tad onerous, so I too dipped my toe into the IT water a couple of years ago.

I ran both strategies side by side before deciding earlier this year that I would willingly sacrifice the potential extra bit of income for the (hopefully!) greater security and peace of mind from an entirely IT based portfolio.

I cannot say whether my choice is correct, I refuse to look back and see how my previous portfolio would have done, and in any case, it would take decades to know for sure.

All I know is that I do prefer the relative certainty which an IT portfolio brings even if I miss the occasional pleasant suprise a good annual report would bring when it contained a meaty inflation busting divvy rise

[Arborbridge]

I came through the revolving door into HYP. I already had ITs and a small directly share portfolio, but when I received my pension pot realised I needed to do something different, and found the HYP philosophy. THe idea of buying similar shares to those held in ITs but without charges rather appealed, and since I had directly owned shares still almost the beginning of my investment "career" I had no problem coming through that door.

However, although the HYP is still easily the biggest investment, I have deliberately increased the size of the capital IT basket faster than the HYP. The reasons you have already given affect me too: how would my wife cope? is my HYP really any better than the ITs? - and is the difference worth the bother?
My advice to my wife is to not rush anything. Most of my investments will look after themselves perfectly well, and she knows all the record keeping I enjoy is quite a chore for her and unecessary. If it gives her trouble, I've told her to gradually dump it all in the ITs, spread equally.

I still find HYPing an interesting activity, and the results in terms of income generation are rather better than ITs, though this begs the question of whether the difference is big enough to compensate for the risks.

But here's the rub - if I decided to distribute my HYP amongst the IT basket this year, for instance, I would expect an income drop of around 18%. Now that's quite a wack. I could stand it because there is slack in the system (i.e. a safety margin) but it would sting -even though I can show that the ITs have been more succesful in TR terms.
So, my changes, will be gradually, and have also to work against my own inertia and positive delight in booking large dividends from a variety of companies, or fun choosing which to top up next.

Chris is correct about being less risk averse when we get older. OK, I did the wing walking thing for my 70th, but I definitely drive on average more slowly. There aren't many who (more or less) obey all the 20mph speed limits round here! I want to survive as long as possible in as fit a state as possible. Maybe being actively involved in a HYP keeps my brain working, who knows.

Arb.

PS my ratio of HYP:ITs this year is 1.56:1, down from 1.7:1 a year or two back as I remember.

[alwen]

I changed to hyp from general it’s about 15 years ago. I do not keep good enough records to have a definite answer but we all form impressions of what is happening .
When I have tinkered which is rare and then look back I feel there are more failures than wins.
Part of the reason I am posting is to try and clear my mind but also that trends take so long.
Most strategies have strong and weak periods and so do shares.
Like most when I started investing (about 30 or more years ago) I thought I would be better than average but I now know I am not.
I prefer shares but I do not think the advantage over its is much .
My main point is you seem to need to wait a long time to know if you are wright or wrong so I am sure most people should sit on their hands as long as possible between changes.
Alwen

[Wasron]

I think we do become more risk averse as we age, as we have less human capital to replace the financial capital that could be lost.

We perhaps also become more loss averse. Having experienced a failure or two each year your response was move into ITs, which are much less likely to experience the same sudden drops in price. I have done the same and definitely sleep easier for it.

To come to a place like this, and to buy individual shares, it’s also likely that investing is regarded as a hobby by most who post on these forums. My wife has zero interest in looking after the portfolio. It would be a chore for her, the antithesis of a hobby, so like many, i’ll be leaving instructions to sell all the individual shares and spread it across the ITs if I pop off before her. It’s a built-in defender position that could be done in an hour and that would be that.

Wasron

[tjh290633]

I guess that I'm the odd one out here. I started investing in a unit trust in 1958 and stuck with that medium until my mother died in 1970 and left me 3 shareholdings, 3 fixed interest stocks and some cash. I put the cash into some more unit trusts and gradually moved from the fixed interest into more funds. One of the shares was taken over for cash and that went the same way. I was always attracted by yield above average, which could be obtained from commodity funds and some other equity funds.

I also bought a few more single shares, notably of my then and previous employers, and then privatisation issues came along. Then PEPs appeared and I started down that route alongside the unit trusts into which I was saving regularly. Initially you could only put a small proportion of a PEP into unit trusts, so I was buying more individual shares, then started moving those I already held into the PEP. Most of the unit trusts were also moved into PEPs and some I still hold. Others were cashed and life policies matured providing cash which again went into PEPs. My choice of shares were those which paid reasonably good dividends. I adopted the LTBH principle.

Then I found Motley Fool and soon the PYAD HYP was noticed. I realised that I was already following those principles to a great extent, so have continued in that vein. I tried dabbling in AIM shares, but gave that up as a bad job. I have been investing in ITs for my grandchildren, in order to give them some funds and income when they come of age.

So I have most of my Investment in an HYP, about 60% with maybe 30% in what are now OEICs, and the rest in ITs. The funds give me a comparison with the HYP and the ITs are assessed on a TR basis.

The path of true love never does run true. There have been a few traumas along the road, like Marconi, Cattles and Carillon, to name but three, and a few market setbacks. Had I known what I know now, I would have started out in Investment Trusts rather than UTs, and the time may come when I move back that way. However I feel that the time is not yet ripe for that move. The one thing that I have learned is to avoid fixed interest securities.

TJH

[Crazbe7]

My HYP is 30% ITs by value. All with little or no exposure to the FTSE350. 30% cash and the remaining 40% is mainly FTSE 100 based. I will invest the cash shortly into FTSE 100 high yielding shares. I may top-up my ITs. It will depend on how markets react to Brexit and US/China Trade talks.

For ITS I have concentrated on the Far East, India, South & North America. Looking for better returns rather than risk mitigation.

I hold European ITs but outside my HYP which is ISA based. I also hold a variety of ITs and shares within my SIPP, but this is not HYP based.

I look to balance risk across my whole portfolio rather than across one specific element of my future pension provision.

Crazbe7

[IanTHughes]

My HYP is 30% ITs by value. All with little or no exposure to the FTSE350. 30% cash and the remaining 40% is mainly FTSE 100 based. I will invest the cash shortly into FTSE 100 high yielding shares. I may top-up my ITs. It will depend on how markets react to Brexit and US/China Trade talks

With respect, if your portfolio is as you describe, you do not have an HYP. Furthermore, if your intentions are as you have indicated, you are not following the HYP strategy, certainly not as understood on The Lemon Fool

Nothing wrong with that of course, it is obviously your portfolio to invest


Ian

[onthemove]

The question I'd like to ask, and related to the title of this thread, is why do we only ever see people heading one-way out of the HYP revolving door?

I can't speak for others, but I could add some anecdotal comments from my own experience...

I started off in the early days of TMF using a hybrid of value / HYP style investing. I've never been 'pure' HYP as per the terms and conditions, but I've always felt spiritually a HYP investor.

And this is the key thing for me...

In the early days, I was just starting out in the world of work, and the amount I had available to invest was small. I was saving a few hundred pounds per month, and that was available to invest.

In those early days, my first serious attempt to start doing it properly (after a failed start on a couple of shares I bought before I understood about yields and EPS, etc) was the ISA limit of £3K (when you could hold cash and shares 'mini' ISAs - the shares component for a 'mini' ISA was £3K).

At that time looking at it one way, it equated to a month or two's spending if I lost my job, another way, it would take perhaps 4 to 6 months to rebuild if I completely blew it.

Due to costs, etc, at that time I figured start off with shares in 3 individual companies (£1K each).

When you're just starting out in the world of work, a 6 month 'hiccup' resulting in a reset to zero is what might be called simply building experience. With a lifetime of work ahead, hey, it's just a little false start. In the grand scheme of things, but a blip in history.

And with individual companies, sure the risk is higher, but also the potential upsides are greater. Markets as a whole don't tend to double within 12 months. Individual companies on the other hand, that's not unheard of.

Fast forward to now.

After a couple of decades of saving (extensively) and investing (even choosing to carry on renting rather than buying a house), and the pot value is now very significant.

The income is also significant.

Moreover, even though I'm not near the official retirement age yet, and not really all that near the minimum retirement age yet for a personal pension, I do feel as though the 'goal' is in sight for living off of my share income (excl. pension)

And that is significant.

If my investments went to zero now, then that would be a whole different ball game. I already feel on the home run regards financial independence.

I was already starting to feel comfortable with my dividend income a few hundred pounds per month over my 'budget' for living.

But then my main investment, Stobart, recently decided to cut their dividend. And that was a wakeup.

I was always aware after they'd raised their dividend that it was accounting for around 10% of my dividend income. And I was always aware that with individual shares, when I look at my top payers, if the top 3 aboloshed their payments, all of a sudden that margin would disappear and the dividends would no longer cover my living expenses.

Now, in the early days when the dividends didn't cover my expenses, I felt the risk / reward of holding (only) individual shares was largely worth it.

But I now figure that perhaps since I've now notionally reached the milestone of being able to live of the dividends (on the presumption they would over the long term rise with inflation on average), that perhaps I should now look to start to 'firm up' the payments.

I mean, rather than trying to push for the most income, and taking a risk, that perhaps now I'm going to try to improve the safety margin.

I'm not going to sell the individual shares I hold. And I will still consider individual shares if there are any that I feel really comfortable with.

But for new purchases, I'm going to put far more consideration into the use of ETFs - though only where the yields, etc, warrant it.

And with the risk of Corbyn/ McDonnell wanting to (in effect) nationalise 10% of every UK company - that's the proposal to give 'workers' a 10% stake - but look at the details, and it's really the government who will get it; the workers only get the first £500 dividend - the gov gets the rest, and the gov holds the shares - I'm also looking seriously at diversifying away from the UK.

I'm not going to sell my existing UK holdings. And I would still consider individual UK holdings where there is a compelling offer.

And I certainly will consider ETFs like IUKD, and at the moment even ISF (FTSE100 core) with the FTSE yielding over 4%.

But the way I see it, investing in foreign companies directly is too costly - and difficult, particularly regarding tax considerations.

So for foreign investments, I figure the ongoing charges on ETFs are probably worth it for the diversification they can provide (both geographical, as well as simply their holding multiple investments within the single ETF)

And while I realise that the dividends on ETFs are far less predictable than individual shares, since they only distribute what they receive (they don't try to create any kind of 'progressive' dividend policy), I figure that they should at least be far less susceptible to complete wipe outs that can occur with individual companies.

In summary -

During the early and middle building phase, before it was viable to live off the income, there seemed to me good value in going for individual stocks to try and push the income to the max (since I couldn't live off it anyway), and expose my portfolio to greater chances of gains (and losses!)

Now that actually living off of the income is looking a possibility, I figure now is the time to try to re-inforce / strengthen that income so that it is more likely to persist, rather than trying to maximise it at the risk of it crumbling later.

Diversifying seems to be the obvious way, to me, to achieve that (at the expense of the average yield then being a little lower than buying individual high yielders), and once you start to want a higher level of diversification, then ETFs (or other aggregate investments) then seem to be more cost effective. For example, you can top up ~100 companies in a single trade, single commission charge, if you buy ISF (FTSE 100 core ETF).

And for foreign shares, ETFs seem to sidestep the issue of dealing with withholding taxes. And other considerations holding individual foreign shares, including providing access to markets that you wouldn't be able to reach directly.

Upshot is, there seem to me fundamental reasons why people might generally drift from an individual share HYP into something more diversified as they age.

It doesn't mean they wouldn't go back to the original HYP strategy if they had their time all over again - including expectation of working life ahead of them.

And yes, I do realise that the original HYP was supposed to replace an annuity.

But in practice, perhaps, when push comes to shove, if you are depending on your HYP for your income in retirement, and have no desire to go back to having to work for a living, then it's perhaps not unexpected than many people might find just 30 shares a little 'concentrated' to bet their retirement on.

When push comes to shove, if you want a long - and comfortable - retirement, and perhaps hope to live on the income for 30yr or more, some people (I suspect most) would probably feel a little exposed if they were relying on a 30 share HYP for that length of time.

I'd be surprised if there were many at all who were truly relying on only a HYP for retirement. I mean, I doubt anyone would put their financial future in 30 shares, if they didn't also own their home. And even then, I doubt many owning their own home would still then only have an HYP, without any other kind of investment or income other than the state pension. Maybe one or two, but I doubt it would be many.

(And brexit and the risk of a Corbyn government must surely have all but the most die hard Doris's at least a little concerned that perhaps some diversification away from the UK isn't such a bad thing if your HYP is your main - perhaps only - source of retirement income)

[77ss]

......


The question I'd like to ask, and related to the title of this thread, is why do we only ever see people heading one-way out of the HYP revolving door?...



Itsallaguess

An interesting question.

Back in 2002, I took early retirement and decided to see if I could live of my savings. I also had negligable experience of investing.

I was aware of TMF, and after browsing on the boards for a bit, the HYP route seemed like a sensible approach - having no other income whatsoever.

Well, my HYP saw me through to 2011 - not without incident, but it did the required job, with a modest amount of capital drawdown.

In 2011 my pensions started to kick in, associated lump sums replaced my capital drawdown (as planned) and, all of a sudden, my income exceeded my expenditure. I could afford to pay more attention to total return and less to yield.

I took the decision to gradually switch some of my HYP - increasing my 'collectives' - one tracker and a number of investment trusts. No rush, but I am now up to 26% in ITs. I also bought some lower yielding shares. One extra factor was that with ITs I could diversify into areas where the simple HYP approach is not so easy.

Outcome?

Well, it is still early days to pass any definitive comment on many of my changes, but of those new investments that I have held for 4 years or more, I have been very happy with the results. Perhaps most interestingly, my lower yielding shares are doing well (DGE, RB, ULVR) .

I shall continue the process - just one person's journey - we all have different objectives and circumstances. HYP worked for me; when my circumstances changed, my approach changed. No doubt there are others who need to increase their income and for them, moving towards an HYP approach may be best.

[funduffer]

When I took early retirement 5 years ago, I invested half of my pension lump sum in a HYP and the other half in a portfolio of income generating IT's. The thinking being to supplement my DB pension with additional income (tax free, as I have used ISA's)

My experience has been almost exactly the same as itsallaguess - IT's have been no trouble, no effort and have churned out dividends at over 4% per year.

Like arb, my HYP has had a higher yield, of over 5%, but has been prone to a number of casualties in terms of companies going under or dividends being cut:

Cutters: Centrica, Sainsburys, BHP Billiton, Amec, Pearson, Galliford Try, Capita, Stagecoach - not far off 2 per year
Disasters: Carillion

I will report on all this in April time at my 5 year review, but for now - my experience is the same as that of itsallaguess.

[MDS1951]

I stopped investing new money in my HYP approximately 4 years ago when I began to draw on the dividend income. I had decided that I was fed up with thinking about what new share to buy or top up and I wanted other people to take the investment decisions for me. So I invested over something like an 18 month period £2k per IT in 10 ITs taken mainly from Luni's B7 and B8 lists. That stopped in July 2016 and since then I've been investing my state pension (I began to receive it in August 2016) in 3 Unit Trusts/OEICS. Two of those trusts are trackers and one is managed.

At the end of September 2018 my mother died. She owned her own home and lived in Winchester where house prices are ridiculously high - even for her in need of modernisation throughout property. She lived in a care home for only a year before she died, so her fees didn't have time to make significant inroads into the proceeds she received from the sale of her house.

That means that sometime before the end of the 2018/19 tax year I shall receive what is for me a significant sum of money (exceeding the current value of my equity investments) as my share of my mother's estate.

I am still unwilling to take investment decisions about individual shares, so I am investing in 5 more Unit Trusts/OEICS to achieve a more global spread for my investments. I've researched those UTs etc to make sure that they are reasonably well thought of by other people/investment companies and I am happy with my choices. My UTs/OEICS/ITs/most of my HYP sit in ISAs and my plan is to drip feed £20k a year into my UT/OEIC investments within one of my 2 ISAs until I think I've got enough in there to generate the income I want and maybe get some capital growth as well. I invest now in 8 UTs/OEICS, 4 of which are trackers and 4 are managed. 4 are being purchased for their income-generating abilities while the other 4 are for a mix of income and growth.

So that's my investment journey - in via the HYP door and then through the IT and UT/OEIC doors while keeping my HYP portfolio. It will be interesting to see how each class of investment performs over the next few years.

MDS1951

[flyer61]

But then my main investment, Stobart, recently decided to cut their dividend. And that was a wakeup.

I was always aware after they'd raised their dividend that it was accounting for around 10% of my dividend income. And I was always aware that with individual shares, when I look at my top payers, if the top 3 aboloshed their payments, all of a sudden that margin would disappear and the dividends would no longer cover my living expenses.

I find STOBART uninvestable , very brave move to have it as your (former) top source of income.

[Wizard]

...The one thing that I have learned is to avoid fixed interest securities.

Unless I missed it there isn't any more detail in your post on this learning point. So I wondered if you could expand on how you reached this conclusion.

Terry.

[TahiPanasDua]

My experience is very similar to that of Itsallaguess. I started a HYP with individual picks but stopped buying about 8 years ago for similar reasons. Since then, I have only bought ITs and ETFS with higher yields.

My income portfolio is currently c. 60% HYP, 20% ITs and ETFs, and 20% income bearing legacy Hong Kong stocks.

1. The HYP.

I started before I knew about MF but it's a HYP nonetheless. I was influenced by an American book on the subject which, I think, predated PYAD. I still have too many utilities despite selling a lot to help buy a bigger house. I will wait a few weeks to see how Brexit goes but suspect I will be saying the same thing in a year.

2, The ITs and ETFs.

I started to buy these as I gradually became disenchanted with, for example, the TESCO and BP fiascos. They provide international diversification, plod along effortlessly and yield just under 4%. My wife is smarter and better educated than me but has no interest in the market. She is instructed to sell the HYP on my demise and spread it evenly over the collectives if I don't do so first myself.

3. The Hong Kong Shares.

I have a pathetic long-standing emotional attachment to these as they seem so much a part of our life story. (tut! tut! I hear you say) They provide more international exposure, a good capital return and give a decent 4% pay out. I am going to have to bite the bullet and sell them one day. But maybe not just yet.....

TP2.