what I have learnt...

[valueinvestor123]

Ok so I used to post quite a bit on motley fool (UK) and then they closed it...

I started investing in 2006 (just before the big market crash; that was fun). I really liked HY and contrarian investing from the start: it's the only 'strategy' (rather 'philosophy') that made any sense to me...

However, i made a few observations over the years and a few wrinkles that I wanted to discuss.

1. Regular investing does not really work. At least, not in small bits. One of the problems with HYPs is to decide what to do with dividends. The problem is, for smaller portfolios (<200k), the accumulated dividends is not enough to buy a decent spread of shares, to diversify the risk. I found that you have to purchase at least 10 shares at once to capture enough of that spread to ensure you don't only pick basket cases. The reality is that out of 30 shares (from at least 15-20 different sectors), most of them will underperform the index. There will be only a few (6-7) that will perform above average, and maybe 1 or 2 that will be spectacular. Those few, will determine the whole portfolio's performance and income generation. It's unlikely you can capture those if you buy <10 shares at once. Spreading purchases over time doesn't work as the universe of the candidates changes.

2. I avoid buying at market tops. I know I know....buy when you have cash. And it has been difficult with the market continuously climbing. However, I find it psychologically better to invest after a decent pullback of at least 10% or preferably more. Yes, there is that opportunity cost. I like to park it somewhere where I can access it quickly and somewhere where it can pay >1% interest. I put some in peer2peer and some platforms have not been kind to me (Lendy etc). So might as well have put it straight back into the market...Still, I am not sure I would buy at market tops (or rather, 'new highs', you don't know when it's the top until after).

3. Avoid first 1-2 highest yielding shares from ftse 100 and 2-3 from 250: those are likely to be cut anyway...

Otherwise things have been going well. IRR is showing at close to 18%pa since 2006 so some things did go well (I also used mild gearing). I also made stupid mistakes along the way. I would probably recommend a couple of UK income ITs to someone who can't be bothered with spreadsheets and a bit of hassle reinvesting/finding new shares/corporate actions etc.

The major headaches have been on the admin front: I absolutely don't pay any attention what happens to shares after I buy them and have to often reconstruct what happened, when they get taken over or demerged or liquidated etc...It's sometimes a pain to find any info at all. Some smaller companies have weird arrangements sometimes where you have to vote, in order not to lose out (sometimes lose everything: it happened to a couple of my holding). And I just go sometimes for a year or two not checking anything at all. Also with brokers: they tend to change pricing structures quite often and moving from one broker to another when you have 200+ holdings is not easy. So IT's might be easier to help with that. But I believe with a bit of discipline and some regularity (eg checking every 6 months and making purchases in bigger quantities on a regular basis), ITs can be beaten in my opinion. But ITs are more convenient.

What about you?

[Itsallaguess]

What about you?

Hi there,

Good to see you - it's been a while...

I tend to share your approach to investing on market dips, and also avoiding what we might see as 'ultra high-yielders', that are clear outliers from the general market.

Where I've not followed that second point in my early investment period, my record was poor, to the point where I nearly walked away from the market. Since taking the view that ultra high-yielders are often value-traps, my investments have taken on more balanced results...

It doesn't look like your scattergun approach, where you might be invested in a very large number of holdings, aligns at all with the periods where you might be 'away from the markets' either in a physical or 'mental' sense, or in fact both at once. Coupled with what sounds like a simple inability to manage such a large number of holdings from an admin point of view, this suggests that there is a fundamental mismatch between your current strategy, and your ability to manage it....Reading between the lines of your post, it sounds like you've perhaps come to the same conclusion.....

I've tended to move away from 'single-company' income investments following many years of using a mainly HYP approach, and have now come to the conclusion that income Investment Trusts tick almost all of the investment boxes that I personally look to tick, and I think it's telling that you mention them yourself in your post...

I find that buying income IT's, especially if done during market-dips, delivers everything I need from my investments, and does so in a way that is acutely aligned with my psychological needs as an income-investor, who has come to the conclusion that holding a portfolio of 20 or 30 individual HYP shares delivers enough regular 'issues' that I simply want to hide them all behind an Investment Trust shaped curtain....

The fact that they also deliver a level of diversity that I would struggle to achieve whilst still wanting a low level of 'active management' is a welcome bonus.

The fact that they can reach global markets, and areas of the markets, that I would struggle to reach using individual investments is a welcome bonus.

The fact that they use portfolio management options that offer trust managers methods of portfolio control during times where they can be an advantage, and hold revenue reserves that are likely to deliver smoother income-flows for me as an income-seeker, is a welcome bonus.

The fact that, if buying on general market dips, they give me a good entry into a high number of investments using a small number of purchases is a welcome bonus.

The fact that they remove large amounts of 'individual share admin' from my investment processes is a welcome bonus...

Off-setting the above, the fact that they often deliver slightly lower yields than some of the options that might be available via individual income-investments is one of the minor downsides, but this is a price I am absolutely willing to pay to achieve the above wider benefits.....

Reading the above, these Investment Trusts might seem to remove almost all of the issues that you seem to be currently struggling with, except for the hurdle that seems to point to you 'needing' to have 'active control' over a huge number of active-investments, and the problem you seem to have, in my view, is a clear misalignment between that 'active management' need, and the desire not to have to deal with the admin down-sides...

Something needs to budge there, it seems...

Cheers,

Itsallaguess

[Arborbridge]

What I've learnt is that it is difficult for me to produce a total return to equal that of an IT basket - or indeed an OEIC basket. It is not easy for me to "outrun" a professional manager. What I can do, is provide a slightly higher income than ITs, though with lower growth of capital and income. I can also retain my capital and produce higher income than my original alternative with my pension pot, which was an annuity.

My current TR, judged by XIRR is 5.93% for HYP (from 2006); 9.21% for income ITs (from 2009). 5.92% is pretty poor, considering the yield takes up most of that!

Neither come close to your 18%, on which - if that is directly comparable - you are to be congratulated. Indeed. it's something of a exceptional result. My best IT result is for Finsbury Growth and Income, XIRR 20.12% since June 2010. Also of interest is my investment in Fundsmith which has returned 18.19% XIRR since 2015, though this is complicated by having been a monthly savings scheme.



Arb.

[SalvorHardin]

For regular investing using your dividends, what about investment trust monthly savings plans? I have three, investing £1,500 per month.

The fixed management fees (e.g. BMO (what used to be F&C) £48 per year) can be a major deterrent for investors making relatively small monthly investments, but I’m guessing that with over 200 holdings this isn’t going to be an issue for you!

If you want to cut down on the administration, having over 200 holdings is not the way to do it, particularly when you have to deal with your tax return (especially capital gains tax (CGT) and foreign income). When I had 50 holdings the admin was bad enough, so in the last two years this has become 32 by selling the smaller holdings (16 investment trusts, 16 operating companies, 40/60 split by value at the moment).

Of course reducing your holdings to this sort of level is probably going to crystallise a lot of CGT liability that you might wish to avoid for now. I found that the smaller holdings took up a disproportionately large amount of time for the amount that they were worth, so I sold them though I did top up one substantially rather than sell it.

Investment trusts offer instant diversification with much less work. Something like City of London is close to being a one-stop HYP, judging by its current portfolio. Typically just two (sometimes four) dividend payments to record every year, compared with two (sometimes four) for every operating company, and a very low chance of a takeover forcing you to do the CGT calculations. Most of my investment trusts, except for the savings plans, are certificated; no platform fees for me.

[StepOne]

Otherwise things have been going well. IRR is showing at close to 18%pa since 2006 so some things did go well (I also used mild gearing). I also made stupid mistakes along the way. ...

The major headaches have been on the admin front: I absolutely don't pay any attention what happens to shares after I buy them and have to often reconstruct what happened, when they get taken over or demerged or liquidated etc...It's sometimes a pain to find any info at all.

Hi vi,

An IRR of 18% is incredible, so I think you should carry on doing whatever you are doing. But if you don't pay any attention to demergers etc. (I guess things like share splits and consolidations are the same), then how do you know what your IRR is? I track mine using the Excel XIRR function, but for that I need decent record-keeping of all dates and cashflows. Sounds like you are not recording this info. Or was this HYP a single lump sum invested in 2006 without any further cash additions and so you are simply looking at the current value and the numbers of years invested to get your IRR? Or is it possible that you have added new cash over the years and this is inflating the 18% figure?

Thanks,
StepOne

[pendas]

Arb and me need to go back to school!

I have similar total return figures to Arb from 2006. My total return is just 4% more than the dividends received during the period.

I do recognise the comment that the majority of shares give a lacklustre performance. Unfortunately the really good performers have been counter balanced by the really bad ones in my case.

[77ss]

....

What about you?

Over the years, more about myself, than about the stock market.

Major lesson:

Don't get cocky!

Making two or three good decisions in a row doesn't mean that you have cracked it.

[tjh290633]

I guess that we all have had different experiences, with different starting points and differing tactics. I started long ago with unit trusts, using a number of savings plans and the odd life assurance linked plan. I realised fairly quickly that I got better results from income generating funds than from those aimed at capital growth. This was in the 1970s, long before the HYP concept had been formulated. I had a few individual shares, including some of the privatisation issues.

When PEPs came in, they were restricted to shares plus a small portion of unit funds, 25% I think, so I started building a portfolio of individual shares with an emphasis on those paying decent dividends. I also moved my existing holdings into the PEP tax shelter. With annual subscriptions starting at £2,400 it had to be a gradual business. When 100% funds became permissible, I moved my major funds into PEPs, rather than add to the share portfolio for a while. During all these years, the importance of reinvesting dividends became obvious, not least in one unit linked assurance, where the dividends rose to several times the monthly premiums. It also convinced me that bear markets are a normal phenomenon, and it was better to stay fully invested, rather than try to trade the effects away.

In 1997 my portfolio became unbalanced, which led me to limit the weight of any one share, by trimming back overweight shares and reinvesting in shares with higher yields. This gives a ratcheting effect on income, above the natural growth rate. My maximum number of holdings has been 37, now 35, driven by spin-off shares and restricted by getting rid of non-yielders. After 2008 I had to rebuild my portfolio, getting rid of holdings which were not paying dividends. That experience led me to some larger capitalisation shares in place of minnows.

The one essential lesson is not to panic. Shares do not always fall because the company is heading for failure. There is no need to jump on every bandwagon that comes along. If you get swept along by one, make sure that you take profits along the way.

TJH

[Itsallaguess]

Arb and me need to go back to school!

I have similar total return figures to Arb from 2006. My total return is just 4% more than the dividends received during the period.

Before you both start with the self-flagellation, I'd make sure you're comparing apples with apples....

With 200+ holdings, and a username of 'valueinvestor123', I suspect he may use an investment approach that could well be seen to be at the 'riskier' end of the HYP neighbourhood, and might even be seen to be in the next town along....

Hopefully valueinvestor might be able to expand on that, if indeed it is the case?

Cheers,

Itsallaguess

[Arborbridge]

Before you both start with the self-flagellation, I'd make sure you're comparing apples with apples....

With 200+ holdings, and a username of 'valueinvestor123', I suspect he may use an investment approach that could well be seen to be at the 'riskier' end of the HYP neighbourhood, and might even be seen to be in the next town along....

Hopefully valueinvestor might be able to expand on that, if indeed it is the case?

Cheers,

Itsallaguess

Indeed, the point of my earlier post was that the two results are so far apart that one has to consider some difference in how the numbers were arrived at - and above that a fundamental difference in the investment focus. We can see something of the sort looking at various ITs in which some - who might be considered "HYP-like" produce much lower TR's than other approached - such as that by Finsbury Growth and Income.
My HYP approach has been fairly vanilla and encompassing a fair share of disasters and near misses on the way, but on the whole a pretty typical HYP. Yet here is a portfolio apparently producing a TR of almost three times the rate of my HYP and at the top end of similar ITs. We need to find out why.

Arb.

[Bubblesofearth]

My HYP approach has been fairly vanilla and encompassing a fair share of disasters and near misses on the way, but on the whole a pretty typical HYP. Yet here is a portfolio apparently producing a TR of almost three times the rate of my HYP and at the top end of similar ITs. We need to find out why.

Arb.

This from the OP may offer a clue;

(I also used mild gearing)

BoE

[valueinvestor123]

Sorry to come back late to reply to this thread - i will do so properly shortly, been too busy.

The latest update is that, by the looks of it, the (overall) return/net worth will be significantly impacted by the peer2peer portion of my investments (where I parked some of the money while waiting for market dips). So that's a pain (you can't win'em all)...But it will probably take many years to know for sure...
Maybe PYAD's advice was best: just stick the money back in as soon as you have it. It's just that in my experience, at market highs, there are so many pseudo-high yield shares (that offer high yield but for a very good reason as well), that it is difficult to find quality and not get disappointed.
It seems easier when the markets are generally lower or off their heights (they don't need to be low - you obviously can't know when this is the case except with hindsight - but you know when they enter a correction or a bear market).
I wish I stuck to what I know but that's life. Always something going on...and when it's not, it means you are probably dead

[Itsallaguess]

Sorry to come back late to reply to this thread - i will do so properly shortly, been too busy.

The latest update is that, by the looks of it, the (overall) return/net worth will be significantly impacted by the peer2peer portion of my investments (where I parked some of the money while waiting for market dips). So that's a pain (you can't win'em all)...But it will probably take many years to know for sure...

Maybe PYAD's advice was best: just stick the money back in as soon as you have it.

It's just that in my experience, at market highs, there are so many pseudo-high yield shares (that offer high yield but for a very good reason as well), that it is difficult to find quality and not get disappointed.

It seems easier when the markets are generally lower or off their heights (they don't need to be low - you obviously can't know when this is the case except with hindsight - but you know when they enter a correction or a bear market).
I wish I stuck to what I know but that's life.

I wouldn't kick yourself too much for parking some money out of the market when it seems that where you really went wrong was what you did with it....

I think it would be a shame to allow one particular aspect of that approach to put you off the approach altogether, and it might just be worth considering a less risky alternative home for such parked money next time you feel it's the right thing to do....

It seems that some investors have such a fear of inflation that they allow themselves to place cash in a much riskier situation than it would be if it were to simply stay in cash, and only be attacked by the clear and known enemy...

Premium bonds are likely to return somewhere around 1%, so I make sure to utilise that allowance in similar situations, and even then I'd have no real qualms carrying parked cash itself where I think it's right for me to do so....

Cheers,

Itsallaguess

[valueinvestor123]

I see I never replied to it properly...(apologies).
My work is currently very light so I have more time to reply/think about stuff...(not sure this is a such a good thing, to have thoughts...).

I agree with almost all your points regarding the benefits of investment trusts. A few things that make me hesitate is that When I I’ve a healthy chunk of cash to invest, I am almost always able to get around 1% more income from buying shares (and I am not talking about buying ultra high yielders, but just the regular kind) than from buying investment trusts.
However there are times where I would prefer an IT over shares:
- if the reinvestment sum is not large enough (less than 10-15k) to buy at least 8-10 different shares
- if the discounts look good on an income IT (then I get more ‘value’ from same shares)
- if it’s an area that would be difficult for me to access with direct share investments

Can I ask how many different ITs are you comfortable holding to substitute an HYP? I worry that if I only go for 2-3 income ITs (and there seem to always only be a handful at a time, which meet the criteria, eg of being large enough, have a decent yield and discount etc).

There are also times when I want to overweigh myself a bit more towards a particular sector or two (not always a good idea..).

Overall, I think I might worry if a manager may mess up and it would affect a great proportion of my assets since I would clearly be holding less of them. If you look at the ranking table on citiwire or wherever over 10 years, the returns discrepancy is actually quite large and i can’t explain why, if they all invest in the same shares/sectors etc so they must be taking bets and sometimes getting it wrong. Sometimes badly wrong.

I don’t know. Basically I’m still undecided (and have been, for the last 20 years..).

What I do know is that buying only one or two shares at a time is definitely a bad idea (majority of them underperform). And one should leave out top 10% of the highest yielders as they will probably cut anyway. (As you say, value traps).
Teatime...will write more later.

What about you?

Hi there,

Good to see you - it's been a while...

I tend to share your approach to investing on market dips, and also avoiding what we might see as 'ultra high-yielders', that are clear outliers from the general market.

Where I've not followed that second point in my early investment period, my record was poor, to the point where I nearly walked away from the market. Since taking the view that ultra high-yielders are often value-traps, my investments have taken on more balanced results...

It doesn't look like your scattergun approach, where you might be invested in a very large number of holdings, aligns at all with the periods where you might be 'away from the markets' either in a physical or 'mental' sense, or in fact both at once. Coupled with what sounds like a simple inability to manage such a large number of holdings from an admin point of view, this suggests that there is a fundamental mismatch between your current strategy, and your ability to manage it....Reading between the lines of your post, it sounds like you've perhaps come to the same conclusion.....

I've tended to move away from 'single-company' income investments following many years of using a mainly HYP approach, and have now come to the conclusion that income Investment Trusts tick almost all of the investment boxes that I personally look to tick, and I think it's telling that you mention them yourself in your post...

I find that buying income IT's, especially if done during market-dips, delivers everything I need from my investments, and does so in a way that is acutely aligned with my psychological needs as an income-investor, who has come to the conclusion that holding a portfolio of 20 or 30 individual HYP shares delivers enough regular 'issues' that I simply want to hide them all behind an Investment Trust shaped curtain....

The fact that they also deliver a level of diversity that I would struggle to achieve whilst still wanting a low level of 'active management' is a welcome bonus.

The fact that they can reach global markets, and areas of the markets, that I would struggle to reach using individual investments is a welcome bonus.

The fact that they use portfolio management options that offer trust managers methods of portfolio control during times where they can be an advantage, and hold revenue reserves that are likely to deliver smoother income-flows for me as an income-seeker, is a welcome bonus.

The fact that, if buying on general market dips, they give me a good entry into a high number of investments using a small number of purchases is a welcome bonus.

The fact that they remove large amounts of 'individual share admin' from my investment processes is a welcome bonus...

Off-setting the above, the fact that they often deliver slightly lower yields than some of the options that might be available via individual income-investments is one of the minor downsides, but this is a price I am absolutely willing to pay to achieve the above wider benefits.....

Reading the above, these Investment Trusts might seem to remove almost all of the issues that you seem to be currently struggling with, except for the hurdle that seems to point to you 'needing' to have 'active control' over a huge number of active-investments, and the problem you seem to have, in my view, is a clear misalignment between that 'active management' need, and the desire not to have to deal with the admin down-sides...

Something needs to budge there, it seems...

Cheers,

Itsallaguess

[Alaric]

I am almost always able to get around 1% more income from buying shares (and I am not talking about buying ultra high yielders, but just the regular kind) than from buying investment trusts.

General reasoning suggests that's quite plausible.

Two reasons, the first being that the IT will extract an annual fee. Some are higher than others, but at least 0.5% I would think. The other being that in some circumstances, they are only distributing 85% of the income, the balance being retained as an Income Reserve.