Overall portfolio yield compared to a collective IT, such as CTY

[Gengulphus]

The natural question to ask myself (or at least one of the first) should be "if I can't do better than a managed (fund) investment trust, why bother with something else?).

Quite so RVF, and this is the question I feel can form the basis for some very practical advice to HYPsters: aim to buy or consistently hold a portfolio yielding more than an investment trust which picks shares from the same indexes. Anything less is the entry criterion for mandatory tinkering and ratcheting up of income. HYPsters are free to ignore that of course, but note that a well known poster (TJH) already does this regularly, albeit by a different method which does not consider portfolio yield rather the relative weights of holdings within.

That's reasonably sensible advice IMHO - but only on two conditions:

The first condition is that when doing the comparison of the HYP's yield with the investment trust's yield, the advice is to compare like with like. That can be done either by calculating the investment trust's yield on the basis of the dividends it receives from its underlying investments, not the dividends it pays out, or by allowing the HYP to use similar income-smoothing techniques to the investment trust - building up reserves in good times, paying them out in bad times, and judging its yield by the income its owner takes out of it rather than by the dividend income generated by its holdings. If however you insist on determining the HYP's yield by the dividend income generated by its holdings, without any use of income-smoothing techniques, and the investment trust's income by what it pays out after applying income-smoothing techniques, then in bad times when the investment trust is significantly supplementing the income it pays out from reserves, it might well end up advising the HYPer to try to ratchet up their income by selling shares with reasonably high yields and reinvesting the proceeds in shares with very high yields. That advice carries at least two risks, namely that the very high yields may well be being paid by companies whose dividends are clearly significantly unsafe, and that even if they aren't that unsafe, the companies with those yields may well be concentrated in just a few badly out-of-favour sectors.

The second condition only applies if you choose the second method of comparing like with like above, i.e. allowing the HYP to use similar income-smoothing techniques to the investment trust: it is that the portfolio's owner actually wants the amount of income-smoothing done by the investment trust.

Gengulphus

[Itsallaguess]

[My HYP] portfolio yield may be above or below that of the median holding because of holding weight distribution.

Currently the position is:

Median 3.62%
Mean 3.58%

Overall 3.69% (Portfolio yield)

The Portfolio yield is reduced because of the number of holdings either paying no dividend or a reduced dividend.

At the start of the year portfolio yield was 5.08%.

I wonder how that drop in your HYP yield would look in an 'income-per-unit' chart similar to the one Arb has posted recently, which was showing the income-per-unit of his own share-based HYP approach, and comparing it to his income-IT-based ARBIT parallel strategy, given that he's been running both parallel income-strategies for many years now -



Source - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=26214&start=120#p358283

I think Gengulphus made a good point earlier regarding the built-in income-smoothing capabilities of income-IT's, and I think it's clear from the above chart that the pink income-IT income-units are persistently delivering on the necessary 'income-predictability' that most of us are surely looking for to help provide a long-term future income stream...

So in relation to this thread, where the original discussion is looking at comparing a potential HYP portfolio yield with that of an income-collective like CTY, or even maybe a portfolio of such income-collectives, it seems clear to me that the question being asked maybe shouldn't even be 'is the yield of a HYP lower than CTY', but maybe instead it should be 'is the yield of a HYP high enough above CTY to be able to also provide an equivalent income-smoothing aspect as well as the actual regular income needed'....

Cheers,

Itsallaguess

[Dod101]

G's post is of course the point that I was making earlier and which so far moorfield has not acknowledged. I reckon applying it to CTY at the moment would bring its yield down from about 5.3% to more like 4%. That is hardly surprising considering that it is investing mostly in HYP like shares.

CTY and its like will always win if they are allowed to add to their natural yield the income smoothing techniques such as supplementing their dividend by drawing on Revenue Reserves and even realised capital gains and the HYP not. That negates the whole comparison.

Dod

[Arborbridge]

G's post is of course the point that I was making earlier and which so far moorfield has not acknowledged. I reckon applying it to CTY at the moment would bring its yield down from about 5.3% to more like 4%. That is hardly surprising considering that it is investing mostly in HYP like shares.

CTY and its like will always win if they are allowed to add to their natural yield the income smoothing techniques such as supplementing their dividend by drawing on Revenue Reserves and even realised capital gains and the HYP not. That negates the whole comparison.

Dod

As you say, it's a huge advantage the ITs have in smoothing. If I quoted my "smoothed" yields from HYPs in a similar way (if that were possible), I am sure posters would point out I was cheating.
Nevertheless, a payout is a payout, and that give the yield I "feel" - the only question then becomes how sustainable is it? - the same question one asks of any company.

For the moment, let's enjoy the artificially inflated yield for as long as it lasts. I would judged my HYP income thrown off is not easily going to catch up with that from my Arbit - by the time my dividends improve, the ITs' coffers will also be filling up enabling their dividends to carry on flowing. I will keep you posted about what happens, naturally!

Arb.


Arb.

[moorfield]

That's reasonably sensible advice IMHO - but only on two conditions:

The first condition is that when doing the comparison of the HYP's yield with the investment trust's yield, the advice is to compare like with like. That can be done either by calculating the investment trust's yield on the basis of the dividends it receives from its underlying investments, not the dividends it pays out, or by allowing the HYP to use similar income-smoothing techniques to the investment trust - building up reserves in good times, paying them out in bad times, and judging its yield by the income its owner takes out of it rather than by the dividend income generated by its holdings. If however you insist on determining the HYP's yield by the dividend income generated by its holdings, without any use of income-smoothing techniques, and the investment trust's income by what it pays out after applying income-smoothing techniques, then in bad times when the investment trust is significantly supplementing the income it pays out from reserves, it might well end up advising the HYPer to try to ratchet up their income by selling shares with reasonably high yields and reinvesting the proceeds in shares with very high yields. That advice carries at least two risks, namely that the very high yields may well be being paid by companies whose dividends are clearly significantly unsafe, and that even if they aren't that unsafe, the companies with those yields may well be concentrated in just a few badly out-of-favour sectors.

The second condition only applies if you choose the second method of comparing like with like above, i.e. allowing the HYP to use similar income-smoothing techniques to the investment trust: it is that the portfolio's owner actually wants the amount of income-smoothing done by the investment trust.

I'm not particularly interested in the internal mechanics of how an investment trust such as CTY sustains its dividend, rather that it does. I'm aiming for a more simplistic view than that (which is why I'm ignoring Dod's comments), and one which (I hypothesize) is shared by many income investors including perhaps several old ladies who have blind spots with money.

What options are open to a newly retired income seeker tomorrow morning? There are a very large number, which could include buying portfolios of differing yields - lets say 3.7%, 4.0%, 4.4%, 5.2%, or more. I'm suggesting the default option would be to buy CTY, which offers the attraction of a decent commencing yield (5.2%), the likelihood that it will grow, and the likelihood also that over longer periods the capital may grow as well (*) :

The Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange.

https://www.janushenderson.com/en-gb/in ... trust-plc/

It seems peculiar to me that the newly retired income seeker would want to buy less income than that default option of 5.2% in the first year of their retirement. And by extension, it seems peculiar that any income seeker would want to continue holding a portfolio paying less income than that over the next twelve months - 3.7%, 4.0% or 4.4%, which happen to be the overall yields of HYP1 (last month), rhinestone's portfolio, and my own portfolio respectively.

So all I'm suggesting here is that overall yield comparison against an investment trust is a simple metric that can be used periodically (annually) as a warning signal that something is malfunctioning within a HYP. (And having written that I'm now less obsessed that every holding within a HYP necessarily needs to yield more.) It's obvious why HYP1 is yielding less than CTY today - Intercontinental Hotels, Mitchell & Butlers, Lloyds, Dixons Carphone are all deadwood that a more active HYPster would recycle - although it is a "never sell" experiment. Similarly rhinestone holds Centrica amd TUI (as do I) and has somehow amassed 50 holdings - as I commented initially on that thread I do believe that portfolio's income over the next twelve months can be significantly improved by recycling those into 15-20 higher yield holdings.


(*) left as an exercise for the reader here is to find the article which contains the same sentence as my bolded.

[tjh290633]

I wonder how that drop in your HYP yield would look in an 'income-per-unit' chart similar to the one Arb has posted recently, which was showing the income-per-unit of his own share-based HYP approach, and comparing it to his income-IT-based ARBIT parallel strategy, given that he's been running both parallel income-strategies for many years now -

It would take me some time to dig out all the information, which is on paper for that particular bit of data. Actually it needs working on, but I have now done that. So you have both the dividends in the 12 months to that date, and the dividends received in that month. See below:

Month        Div/unit   Div/unit/mth
31-Dec-18       28.82           1.20
31-Jan-19       29.58           2.68
28-Feb-19       29.80           1.78
29-Mar-19       29.75           2.71
30-Apr-19       30.70           2.26
31-May-19       31.65           4.24
28-Jun-19       31.11           2.97
31-Jul-19       31.33           3.04
30-Aug-19       30.75           2.01
30-Sep-19       31.35           6.04
31-Oct-19       31.23           1.31
29-Nov-19       31.34           1.87
31-Dec-19       31.63           1.50
31-Jan-20       30.86           1.87
28-Feb-20       30.80           1.72
31-Mar-20       30.78           2.74
30-Apr-20       29.84           1.28
29-May-20       26.92           1.19
30-Jun-20       26.18           2.20
31-Jul-20       24.16           0.94
28-Aug-20       24.11           1.96
30-Sep-20       21.98           3.85
30-Oct-20       21.79           1.11
30-Nov-20       21.04           1.09
20-Dec-20       24.76           0.71

It's not graphical, but you can see the effect in both factors. The final figure shows the start of the recovery as dividends begin to be restored. Note, special dividends were included.

TJH

[Arborbridge]

offers the attraction of a decent commencing yield (5.2%), the likelihood that it will grow, and the likelihood also that over longer periods the capital may grow as well

Well, I can't find the article, but I've no doubt it's a description of HYP by Stephen himself.

Failing that, perhaps I wrote it since it is more or less how I would describe my HYP target.

Arb.

[Gengulphus]

For the moment, let's enjoy the artificially inflated yield for as long as it lasts. I would judged my HYP income thrown off is not easily going to catch up with that from my Arbit - by the time my dividends improve, the ITs' coffers will also be filling up enabling their dividends to carry on flowing. I will keep you posted about what happens, naturally!

Yes, it's highly likely that the ITs' dividends will carry on flowing. But the HYP income thrown off will be increasing by as much as company payouts are increasing, and the ITs' income thrown off will be increasing by less than that because a significant fraction of the companies' increased payouts will be being diverted into refilling their coffers. So I'm pretty certain the HYP income thrown off will do some significant catching up with the ITs' income thrown off - what I'm uncertain of and will look out for over the coming years (it seems likely to play out over a timescale of years rather than months) is how much it will catch up by, which could end up being the amount it's fallen behind by, less than that or more than that.

As a case that has played out by now, the financial crisis caused HYP1's income to fall from £5,040 to £3,187 between its years to November 2008 and November 2009, an income fall of 36.8%. Meanwhile, CTY's dividends rose from 2.96p+2.96p+3.08p+3.08p = 12.08p for the four quarters to December 2008 to 3.08p+3.08p+3.08p+3.08p = 12.32p for the four quarters to December 2009, a rise of 2.0%. To catch up on the amount that its dividend had fallen relative to CTY, HYP1's income then needed to rise by a factor of (1+2.0%)/(1-36.8%) = 1.614 more than CTY's did, i.e. it needed to catch up by 61.4%. It successfully completed that catching up in 2017: HYP1's income in the year to November 2017 had risen from its 2009 low of £3,187 to £7,327, a 129.9% rise, and CTY's dividends in the four quarters to December 2017 had risen from 2009's 12.32p to 4.3p+4.3p+4.3p+4.3p = 17.2p, a 39.6% rise. So relative to CTY's, HYP1's income had risen by a factor of (1+129.9%)/(1+39.6%) = 1.647, i.e. a 64.7% rise relative to CTY. Or looked at another way, overall between 2008 and 2017, HYP1's income had risen 45.4% from £5,040 to £7,327, slightly more than CTY's dividend increase of 42.4% from 12.08p to 17.2p.

A couple of comments about the chart of yours that Itsallaguess reposted above:

* For the HYP income thrown off to catch up with the IT income thrown off, the increase needed is from about 5.4 to about 8.3, i.e. the HYP income-per-unit increases need to outstrip the ITs' income-per-unit increases by about 54% to completely catch up - a fairly daunting task. But the visual impression given by the chart is that outstripping by several hundred percent is required, making catching up completely a far more daunting-looking task. That visual impression is deceptive and created by the vertical axis of the chart not starting at zero - something we discussed in the earlier thread that Itsallaguess took the chart from. No need to repeat that discussion here - I'm just alerting readers of this thread to the fact that while the amount of catching up required is large, a casual look at the chart makes it look vastly greater than it actually is. In particular, the above example of HYP1 in the financial crisis shows that although increasing by 54% relative to CTY is a fairly daunting task, it's within the bounds of possibility over the next several years. Several hundred percent would be a different story!

* Such charts comparing different portfolios do have a problem about the choice of starting date. The problem is most pronounced when the starting date is deliberately chosen to be a time when one of the portfolios is particularly high relative to the other - in this case, the comparison could be made to look even worse for HYP by deliberately choosing to start them at equal levels in June 2012 (when the HYP line on the above chart is quite a bit above the ITs line) or considerably better for HYP by similarly choosing a June 2018 starting date (when the opposite was the case). I'm pretty certain that hasn't been done here, but when the two portfolios tend to behave rather differently in the short term, creating a fair amount of volatility of the difference between them, there's a considerable chance that any rather arbitrary choice of starting date will happen to hit a starting date that significantly favours one portfolio over the other.

Basically, the only way I know to properly avoid that problem is only to compare two portfolios which have been given the same cash deposits on the same dates (each cash deposit date effectively being the starting date for part of the portfolio), and if applicable, have had the same cash withdrawals taken from them on the same dates (cash withdrawals effectively being negative cash deposits). That is of course most unlikely to happen unless the two portfolios are deliberately set up right from the start to be used for such comparisons... In particular, in the normal situation where someone wants to compare two normally-run portfolios after the fact, they're practically certain to run into this starting date problem of not really knowing whether the starting date used significantly favours one portfolio over the other, and if so, which portfolio is favoured and by how much.

This 'starting date' problem is least problematic for portfolios which quickly change their holdings in response to what shares are available on the market - basically, if what the portfolio holds on any given date is close to what it would hold if it were run by the same strategy but starting on that date rather than earlier, then any date can be treated as the starting date without distorting the comparison all that much. Of course, by the same token, it's particularly problematic for portfolios run according to LTBH strategies, since they don't change their holdings at all readily...

What one can do to avoid the problem is compare a real portfolio with a 'paper portfolio' one sets up now to run a different strategy which has been given the same cash deposits and had the same cash withdrawals taken from it as the real portfolio. The main potential problem with that is hindsight bias: if the different strategy uses human discretion in any of its investment decisions, it becomes open to suspicions that those decisions are made differently now than they would have been at the time due to knowing more now. To avoid those suspicions, the only really effective method is for the different strategy to be entirely mechanical - and even then, if the different strategy is one of a large number of similar entirely-mechanical strategies, it's open to suspicions that hindsight is involved in the choice of exactly which one of them is used.

That makes it a good idea to make the entirely-mechanical strategy that one uses as simple as possible, to reduce the number of aspects of it that can be varied and hence the number of similar strategies as much as possible. By far the simplest entirely-mechanical strategies are single-investment, fully-invested ones, i.e. ones that use just a single investment, buying it with all the available cash whenever there is cash available and selling as much as needed of it whenever cash is needed. The only variable aspect of that is the choice of the single investment it uses...

I'd imagine that people will recognise that process of comparing a real-life portfolio against a paper portfolio run with the same cash deposits and withdrawals according to an entirely-mechanical, single-investment, fully-invested paper strategy: it's what is more commonly (and much more briefly) known as "benchmarking". For example, using the FTSE100 as a benchmark is basically such a comparison with the single investment being an idealised FTSE100 tracker. So if one wants to compare two real-life portfolios, especially if one (or both) of them is run according to an LTBH strategy, I would consider the best technique to be the somewhat indirect one of comparing each of them over its entire history against a suitable benchmark (the same benchmark for each) and see how their outperformances or underperformances of that benchmark compare.

All of which is not to say that charts like the one of Arborbridge's that Itsallaguess reposted are useless - rather, they're useful provided one takes them with a pinch of salt. Specifically, keep their potential problems of the vertical axis not starting at zero and which starting date happens to have been chosen in mind, and think about whether any conclusion one draws from them is real or has simply been created as a result of one or both of those problems.

Gengulphus

[Arborbridge]

[
All of which is not to say that charts like the one of Arborbridge's that Itsallaguess reposted are useless - rather, they're useful provided one takes them with a pinch of salt. Specifically, keep their potential problems of the vertical axis not starting at zero and which starting date happens to have been chosen in mind, and think about whether any conclusion one draws from them is real or has simply been created as a result of one or both of those problems.

Gengulphus

Thanks for the detailed guidance. As regards the vertical axis, I did redraw that in the way you suggested for the original, but omitted to do so when I was asked to redraw it as income in £s. I'll go back and do that before I forget again!

As for the start date, I know the problem as it is used in marketing leaflets, barely disguised.
For my own charts, unless there's a particular reason (such as wanting a more detailed look at some period), I would always start a comparison near the start of my HYP unitisation. Which effectively means Jan1 2010 or after four quarters of data had been collected, which makes more sense for moving averages. The chart you mention was therefore started around new year2011.

[Gengulphus]

That's reasonably sensible advice IMHO - but only on two conditions:

The first condition is that when doing the comparison of the HYP's yield with the investment trust's yield, the advice is to compare like with like. That can be done either by calculating the investment trust's yield on the basis of the dividends it receives from its underlying investments, not the dividends it pays out, or by allowing the HYP to use similar income-smoothing techniques to the investment trust - building up reserves in good times, paying them out in bad times, and judging its yield by the income its owner takes out of it rather than by the dividend income generated by its holdings. If however you insist on determining the HYP's yield by the dividend income generated by its holdings, without any use of income-smoothing techniques, and the investment trust's income by what it pays out after applying income-smoothing techniques, then in bad times when the investment trust is significantly supplementing the income it pays out from reserves, it might well end up advising the HYPer to try to ratchet up their income by selling shares with reasonably high yields and reinvesting the proceeds in shares with very high yields. That advice carries at least two risks, namely that the very high yields may well be being paid by companies whose dividends are clearly significantly unsafe, and that even if they aren't that unsafe, the companies with those yields may well be concentrated in just a few badly out-of-favour sectors.

The second condition only applies if you choose the second method of comparing like with like above, i.e. allowing the HYP to use similar income-smoothing techniques to the investment trust: it is that the portfolio's owner actually wants the amount of income-smoothing done by the investment trust.

I'm not particularly interested in the internal mechanics of how an investment trust such as CTY sustains its dividend, rather that it does. I'm aiming for a more simplistic view than that (which is why I'm ignoring Dod's comments), and one which (I hypothesize) is shared by many income investors including perhaps several old ladies who have blind spots with money.

Unless such old ladies (and men) have a large safety margin of the income their capital can supply over the income they need, so that they'll still be receiving income sufficient for their needs if company payouts take a substantial nose-dive, they need income-smoothing. A HYP run without income-smoothing is therefore completely unsuitable for them - so only HYP-vs-ITs comparisons that compare HYPs with income-smoothing with portfolios of ITs that do income-smoothing (it's much more common among ITs than among individual companies, but not universal) are relevant to them. So if they're your concern, you shouldn't even be considering the comparison you're making...

Indeed, I'd go further and say that anyone who has a "blind spot with money" needs to do one of three things: overcome it, get someone they can trust who doesn't have such a blind spot to take care of their share investments for them, or avoid all forms of share investment including ITs and other funds (other than possibly for capital that's a great deal in excess of their needs, should they be fortunate enough to have such capital). Together, those say that HYPs are likely to be unsuitable for most such people.

What options are open to a newly retired income seeker tomorrow morning? There are a very large number, which could include buying portfolios of differing yields - lets say 3.7%, 4.0%, 4.4%, 5.2%, or more. I'm suggesting the default option would be to buy CTY, which offers the attraction of a decent commencing yield (5.2%), the likelihood that it will grow, and the likelihood also that over longer periods the capital may grow as well (*) :

The Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange.

https://www.janushenderson.com/en-gb/in ... trust-plc/

It seems peculiar to me that the newly retired income seeker would want to buy less income than that default option of 5.2% in the first year of their retirement. And by extension, it seems peculiar that any income seeker would want to continue holding a portfolio paying less income than that over the next twelve months - 3.7%, 4.0% or 4.4%, which happen to be the overall yields of HYP1 (last month), rhinestone's portfolio, and my own portfolio respectively.

And I would suggest that:

* More needs to be known about the "newly retired income seeker" before one can say anything much about what their default option should be. In particular, how much capital they have relative to their income needs is important: e.g. if a 5.2% yield is enough and say a 4.4% yield isn't, then CTY can do the immediate job and a HYP probably cannot - though if I were them, I would be worried about the fact that CTY's incoming dividends aren't enough to fund its payouts, making a period of income stagnation a distinct possibility, or even of income shrinkage if their incoming dividends take a long time recovering. At present, HYP owners have experienced the pain of reduced company payouts, while IT owners are largely yet to experience it. With luck, their experience of it will take the form of low or no dividend growth compared with what HYP owners get as company payouts recover, but that luck isn't guaranteed... Basically, one of the things that matters about the "newly retired income seeker" is how much they value income growth prospects compared with immediate income.

* None of HYP1, rhinestone's portfolio, my portfolio, tjh290633's portfolio, etc, are sensible as proposed investment choices for the "newly retired income seeker", who is buying now, because all of those portfolios were at least very largely bought in the past under significantly different market conditions (and I strongly suspect your portfolio was as well, but don't know that for certain). If you want to do a sensible HYP-vs-CTY comparison for a "newly retired income seeker", you need to do it for a HYP that is selected now. Furthermore, I'm afraid it should highly preferably not be a HYP selected by you, because if it is, there will be no way that you will be able to escape the suspicion that consciously or unconsciously, your selection was influenced by your belief that CTY is a superior investment choice...

Gengulphus

[Alaric]

If you want to do a sensible HYP-vs-CTY comparison for a "newly retired income seeker", you need to do it for a HYP that is selected now.

There's a "selected in March/April 2019" HYP documented elsewhere on this site. Given the absence of shouts of pain, presumably no newly retired income seekers were unwise enough to follow its complete stock selection.

[IanTHughes]

If you want to do a sensible HYP-vs-CTY comparison for a "newly retired income seeker", you need to do it for a HYP that is selected now. Furthermore, I'm afraid it should highly preferably not be a HYP selected by you, because if it is, there will be no way that you will be able to escape the suspicion that consciously or unconsciously, your selection was influenced by your belief that CTY is a superior investment choice...

As many here may know, I am currently managing a "virtual" HYP set up by Stephen Bland (pyad) on Stockopedia, the details of which can be seen here: viewtopic.php?f=15&t=24237&p=345490#p345490

As this portfolio progressed I decided to set up a comparison with the same amount invested in The City of London Investment Trust Plc (CTY). I then set up a "virtual" portfolio of IT's, assuming funds being invested on the same dates as selected by pyad for the HYP. The two virtual portfolios are now running forward, as of course is the comparison between the HYP and CTY.

I should state that there is a caveat that should be noted. The IT Portfolio was set up about a year after the start of the HYP. I do not believe that hindsight bias has been introduced because I simply picked up IT's whose price and dividend details were easily available however, I did not check at the time whether the IT's selected would have been selected by an income seeker, which is obviously important when comparing with HYP

Anyway, I am enjoying the data that is coming out of this little experiment


Ian

[IanTHughes]

If you want to do a sensible HYP-vs-CTY comparison for a "newly retired income seeker", you need to do it for a HYP that is selected now.

There's a "selected in March/April 2019" HYP documented elsewhere on this site. Given the absence of shouts of pain, presumably no newly retired income seekers were unwise enough to follow its complete stock selection.

I guess that is the "virtual" HYP set up by pyad, which I am managing. You will I know be happy to receive the news that its income is currently ahead of The City of London Investment Trust Plc (CTY) and well ahead of a "virtual" portfolio of IT's, both set up with the same cash inputs.

It is only about 20 months and it does look as if the dividends from CTY will surpass that of the HYP in 2021. Of course whether that is continued into the future remains to be seen. With regards to the IT portfolio, its income is well behind that of the HYP and I doubt it will surpass the HYP in the next two years. Of course only when the future unfolds for sure will I really know


Ian

[Itsallaguess]

All of which is not to say that charts like the one of Arborbridge's that Itsallaguess reposted are useless - rather, they're useful provided one takes them with a pinch of salt.

Specifically, keep their potential problems of the vertical axis not starting at zero and which starting date happens to have been chosen in mind, and think about whether any conclusion one draws from them is real or has simply been created as a result of one or both of those problems.

Valid points Gengulphus, of course, but missing one key component of 'usefulness' that I've actually found to be one of the most important aspects of Arb's great income-unit charts (https://i.imgur.com/IG10Ai3.jpg)

As an income-investor, I would hope to see an initial income that's 'good-enough' from a broadly diversified portfolio of investments, and after that I want to see that income generally rise, reliably and predictably, over long periods of time...

The pink ARBIT line (IT-income-portfolio) on Arb's chart clearly delivers on those expectations, and the dark blue ARBHYP line (HYP) clearly doesn't, or at least doesn't to my eyes - others may have different views, of course...

Inevitably for income-investors over the years on these boards, we've often got an echo of Pyad's original HYP proposals in our thoughts (https://tinyurl.com/y9xqt37e), and it's difficult to shake off the well-intended remit that was set out in the original HYP strategy writings, but I'm sorry to say that if something like Arb's chart was included in those early writings, I think we might well have expected the pink ARBIT line to be the one Pyad was trying to propose as the simple income-investment-strategy that the 'man-off-the-street' could both pick up, and then benefit from over long periods, with Pyad perhaps pointing at the dark-blue ARBHYP line as the type of volatile income-strategy that he might be proposing to actually get away from....

Of course it's valid to discuss total-return over long periods, and of course it's valid to talk about peak-level incomes and recovery rates over many years, if those aspects do carry a lot of weight to income-investors, but those aspects were in the main significantly absent in the original HYP strategy proposals, and it was being proposed as a simple income-strategy that would deliver a long-term income over many years, and I think if I could re-wind to the year 2000 and read the HYP strategy proposals for the first time again, with a copy of Arb's chart in my hand but with no portfolio-identifiers on it, then I've got to say that someone would be very hard-pushed to convince me that Pyad was talking about an income-strategy that would deliver any other line than that pink ARBIT one...

Cheers,

Itsallaguess

[Gengulphus]

If you want to do a sensible HYP-vs-CTY comparison for a "newly retired income seeker", you need to do it for a HYP that is selected now. Furthermore, I'm afraid it should highly preferably not be a HYP selected by you, because if it is, there will be no way that you will be able to escape the suspicion that consciously or unconsciously, your selection was influenced by your belief that CTY is a superior investment choice...

As many here may know, I am currently managing a "virtual" HYP set up by Stephen Bland (pyad) on Stockopedia, the details of which can be seen here: viewtopic.php?f=15&t=24237&p=345490#p345490

As this portfolio progressed I decided to set up a comparison with the same amount invested in The City of London Investment Trust Plc (CTY). I then set up a "virtual" portfolio of IT's, assuming funds being invested on the same dates as selected by pyad for the HYP. The two virtual portfolios are now running forward, as of course is the comparison between the HYP and CTY.

I should state that there is a caveat that should be noted. The IT Portfolio was set up about a year after the start of the HYP. I do not believe that hindsight bias has been introduced because I simply picked up IT's whose price and dividend details were easily available however, I did not check at the time whether the IT's selected would have been selected by an income seeker, which is obviously important when comparing with HYP

Anyway, I am enjoying the data that is coming out of this little experiment

That seems to be a perfect example of what I described in my previous post:

What one can do to avoid the problem is compare a real portfolio with a 'paper portfolio' one sets up now to run a different strategy which has been given the same cash deposits and had the same cash withdrawals taken from it as the real portfolio. The main potential problem with that is hindsight bias: if the different strategy uses human discretion in any of its investment decisions, it becomes open to suspicions that those decisions are made differently now than they would have been at the time due to knowing more now. To avoid those suspicions, the only really effective method is for the different strategy to be entirely mechanical - and even then, if the different strategy is one of a large number of similar entirely-mechanical strategies, it's open to suspicions that hindsight is involved in the choice of exactly which one of them is used.

That makes it a good idea to make the entirely-mechanical strategy that one uses as simple as possible, to reduce the number of aspects of it that can be varied and hence the number of similar strategies as much as possible. By far the simplest entirely-mechanical strategies are single-investment, fully-invested ones, i.e. ones that use just a single investment, buying it with all the available cash whenever there is cash available and selling as much as needed of it whenever cash is needed. The only variable aspect of that is the choice of the single investment it uses...

I'd imagine that people will recognise that process of comparing a real-life portfolio against a paper portfolio run with the same cash deposits and withdrawals according to an entirely-mechanical, single-investment, fully-invested paper strategy: it's what is more commonly (and much more briefly) known as "benchmarking". For example, using the FTSE100 as a benchmark is basically such a comparison with the single investment being an idealised FTSE100 tracker. So if one wants to compare two real-life portfolios, especially if one (or both) of them is run according to an LTBH strategy, I would consider the best technique to be the somewhat indirect one of comparing each of them over its entire history against a suitable benchmark (the same benchmark for each) and see how their outperformances or underperformances of that benchmark compare.

I.e. you're using CTY as a benchmark. And since the HYP you're benchmarking with CTY is not one selected now, I'm a bit bemused by your choice of quote to reply to...

Not a big problem, though, just a wish on my part to avoid muddling up the rather different issues of using CTY as a benchmark and selecting a HYP now.

Gengulphus

[Arborbridge]

If you want to do a sensible HYP-vs-CTY comparison for a "newly retired income seeker", you need to do it for a HYP that is selected now. Furthermore, I'm afraid it should highly preferably not be a HYP selected by you, because if it is, there will be no way that you will be able to escape the suspicion that consciously or unconsciously, your selection was influenced by your belief that CTY is a superior investment choice...

As many here may know, I am currently managing a "virtual" HYP set up by Stephen Bland (pyad) on Stockopedia, the details of which can be seen here: viewtopic.php?f=15&t=24237&p=345490#p345490

As this portfolio progressed I decided to set up a comparison with the same amount invested in The City of London Investment Trust Plc (CTY). I then set up a "virtual" portfolio of IT's, assuming funds being invested on the same dates as selected by pyad for the HYP. The two virtual portfolios are now running forward, as of course is the comparison between the HYP and CTY.

I should state that there is a caveat that should be noted. The IT Portfolio was set up about a year after the start of the HYP. I do not believe that hindsight bias has been introduced because I simply picked up IT's whose price and dividend details were easily available however, I did not check at the time whether the IT's selected would have been selected by an income seeker, which is obviously important when comparing with HYP

Anyway, I am enjoying the data that is coming out of this little experiment


Ian

That's good news. As you know, I have been running a HYP and IT basket side by side for about ten years now - started at near enough the same time. This is no paper exercise, but a real life practical investment on which I depend for my pension.

However, such examples are rare, and each will fare differently, so I welcome your joining me with this type of data collection. Such ideas won't provide any final answers (because each case is unique in date and personal input) but they do provide indications of what might happen for other people.

Arb.

[Arborbridge]

Of course it's valid to discuss total-return over long periods, and of course it's valid to talk about peak-level incomes and recovery rates over many years, if those aspects do carry a lot of weight to income-investors, but those aspects were in the main significantly absent in the original HYP strategy proposals, and it was being proposed as a simple income-strategy that would deliver a long-term income over many years, and I think if I could re-wind to the year 2000 and read the HYP strategy proposals for the first time again, with a copy of Arb's chart in my hand but with no portfolio-identifiers on it, then I've got to say that someone would be very hard-pushed to convince me that Pyad was talking about an income-strategy that would deliver any other line than that pink ARBIT one...

Cheers,

Itsallaguess

Before concluding that, I should point out a caveat (and one you are aware of, so excuse me for mentioning it ) and that is, that each HYP is an individual created and run by an individual. Mine is but one example and I daresay if we added HYPs from others, the picture would be quite different in those cases. That's before we even think about the differences between epochs....

In the end, I might simply be exposing my incompetence and bad luck as a manager rather than testing the HYP method. Though, I suppose one might conclude that if it were that simple (which is how it was sold), even I should be able to succeed!

There's another point too: HYP had some specifications on the tin, so to speak. My HYP has so far satisfied the promise it gave until 2020 but with some sensible money management (IR,SM) has provided me with the income I need. I'll just note that it was never said that HYP would accomplish more, such as outperforming a basket of ITs.

Arb.

[Itsallaguess]

Of course it's valid to discuss total-return over long periods, and of course it's valid to talk about peak-level incomes and recovery rates over many years, if those aspects do carry a lot of weight to income-investors, but those aspects were in the main significantly absent in the original HYP strategy proposals, and it was being proposed as a simple income-strategy that would deliver a long-term income over many years, and I think if I could re-wind to the year 2000 and read the HYP strategy proposals for the first time again, with a copy of Arb's chart in my hand but with no portfolio-identifiers on it, then I've got to say that someone would be very hard-pushed to convince me that Pyad was talking about an income-strategy that would deliver any other line than that pink ARBIT one...

Before concluding that, I should point out a caveat (and one you are aware of, so excuse me for mentioning it ) and that is, that each HYP is an individual created and run by an individual. Mine is but one example and I daresay if we added HYPs from others, the picture would be quite different in those cases. That's before we even think about the differences between epochs....

In the end, I might simply be exposing my incompetence and bad luck as a manager rather than testing the HYP method. Though, I suppose one might conclude that if it were that simple (which is how it was sold), even I should be able to succeed!

There's another point too: HYP had some specifications on the tin, so to speak. My HYP has so far satisfied the promise it gave until 2020 but with some sensible money management (IR,SM) has provided me with the income I need. I'll just note that it was never said that HYP would accomplish more, such as outperforming a basket of ITs.

Agreed Arb - although I think I've got a good enough feel from other HYP-income anecdotes to perhaps think that your recent ARBHYP income performance volatility is not at all unusual for a FTSE-focussed share-holding HYP...

We've also got the HYP1 income-stream to look at too, of course, which I'm sure won't look too different from your own ARBHYP income-per-unit either in terms of long-term volatility...

I think ultimately it'll come down to a judgement call for income-investors as to how they might prioritise things like long-term-predictability, volatility, total-return, peak-income, etc.

For me personally, beyond a level of income being 'good-enough' at any given time, I put a high emphasis on the type of long-term predictability, both in income-per-unit and volatility, that's highlighted by the type of outcome delivered by your ARBIT chart - it's as simple as that. If I squint, I can draw a fairly straight visual line through your pink ARBIT income-per-unit performance over many years, and that carries a lot of weight for me when considering the suitability of an income strategy as being one I might want to take on to help provide an investment income-stream for a potential retirement ahead..

If others want to place a higher emphasis on inter-year total-returns, or peak-incomes, or income-recovery-rates following multiple periods of nearly 50% loss of dividend-income, then of course people are quite at liberty to do so, but I do think it's worth highlighting these types of potential trade-offs between different income-investment approaches, because then more informed decisions can be made as to the potential suitability of those approaches to individuals, who might well place their own higher emphasis on some of those diverse areas themselves...

Cheers,

Itsallaguess

[Alaric]

You will I know be happy to receive the news that its income is currently ahead of The City of London Investment Trust Plc (CTY) and well ahead of a "virtual" portfolio of IT's, both set up with the same cash inputs.

I thought the distributed income had collapsed to a considerable extent with all the cancelled dividends. That's been the case, has it not, for all portfolios following some form of unmitigated high dividend strategy? It's certainly happened to the underlying market many of these shares form part of, as witnessed by the cuts in distributions by FTSE 100 ETFs.

[Gengulphus]

All of which is not to say that charts like the one of Arborbridge's that Itsallaguess reposted are useless - rather, they're useful provided one takes them with a pinch of salt.

Specifically, keep their potential problems of the vertical axis not starting at zero and which starting date happens to have been chosen in mind, and think about whether any conclusion one draws from them is real or has simply been created as a result of one or both of those problems.

Valid points Gengulphus, of course, but missing one key component of 'usefulness' that I've actually found to be one of the most important aspects of Arb's great income-unit charts (https://i.imgur.com/IG10Ai3.jpg)

As an income-investor, I would hope to see an initial income that's 'good-enough' from a broadly diversified portfolio of investments, and after that I want to see that income generally rise, reliably and predictably, over long periods of time...

The pink ARBIT line (IT-income-portfolio) on Arb's chart clearly delivers on those expectations, and the dark blue ARBHYP line (HYP) clearly doesn't, or at least doesn't to my eyes - others may have different views, of course...

I don't agree that they indicate anything useful about your first expectation: it's an income-per-unit chart, with the initial capital value of the units chosen to make the initial income-per-unit figures identical, or equivalently, with identical initial capital values of the units, but the income-per-unit figures rescaled to start at the same level. To be useful for that, it would have to choose the same initial capital value per unit for each portfolio and not rescale the income-per-unit figures, making it effectively a yield-on-amount-invested chart. (I suppose it's just possible that the portfolios were carefully designed to have identical initial portfolio yields, making the chart both an income-per-unit chart and effectively a yield-on-amount-invested chart. But I don't remember anything indicating that's the case, and even if it is the case, that would itself imply potential problems about the various strategies having been distorted to achieve those identical initial portfolio yields - and it still wouldn't clearly say anything in general about whether the common initial portfolio yield was 'good-enough', though it would for any specific investor because they would know how good a starting yield would need to be for it to be 'good-enough' for them.)

However, I entirely agree that the lines on Arb's chart indicate delivery on your second expectation, and that what they indicate is that the IT portfolio has delivered on it and that the HYP hasn't, which I think is the main point you are making. That makes the chart useful - as I indicated, the chart is not useless. Such charts basically have both useful and useless aspects - the trick to using them well is to know which is which, and deliberately ignore the useless ones. For example, whether one line is better than another at sloping generally upwards from left to right is a useful aspect, and the fact that the pink IT line is clearly better at that than the dark blue HYP line is useful information. Whether one line is generally higher than another is a useless aspect, due to the starting-date issue I mentioned previously (which is basically the same issue as the one above about the chart being an income-per-unit chart with highly-likely-to-differ initial unit values, not a yield-on-amount-invested chart which basically has identical initial unit values).

One other comment is that knowing which aspects are useful and which useless can help one design charts that show the useful aspects better and with less risk of being fooled by the useless aspects. For example, for your aim of seeing that the income generally rises reliably and predictably, I think I would use a chart of annualised percentage income changes - the things being looked for being that the line stays above 0% as much as possible, that when it does go below 0%, it doesn't do so by much or for long, and subject to those two, that a generally higher line is better than a generally lower one. That would generally behave quite variably for changes over short periods - e.g. annualised percentage changes from one quarter to the next are likely to be very variable, both because of dividend seasonality and because annualisation will magnify them - and behave more smoothly for changes over longer periods. So plotting a number of lines for different periods over which the income change is taken and annualised, seeing which becomes sufficiently smooth for one's taste is a possible way of getting a handle on how much income-smoothing one wants. And if one compares the sufficiently-smoothed lines for different strategies, one line being generally higher than the other does tell you something useful, namely that its strategy achieves a generally-higher income growth rate. (I should add that such a chart still doesn't tell one anything about whether the initial income is 'good-enough' - that really needs to be checked separately. The main gain is that since it's all about changes to income and not about income levels, it no longer appears to tell one anything about whether the initial income is 'good-enough'.)

Inevitably for income-investors over the years on these boards, we've often got an echo of Pyad's original HYP proposals in our thoughts (https://tinyurl.com/y9xqt37e), and it's difficult to shake off the well-intended remit that was set out in the original HYP strategy writings, but I'm sorry to say that if something like Arb's chart was included in those early writings, I think we might well have expected the pink ARBIT line to be the one Pyad was trying to propose as the simple income-investment-strategy that the 'man-off-the-street' could both pick up, and then benefit from over long periods, with Pyad perhaps pointing at the dark-blue ARBHYP line as the type of volatile income-strategy that he might be proposing to actually get away from....

Of course it's valid to discuss total-return over long periods, and of course it's valid to talk about peak-level incomes and recovery rates over many years, if those aspects do carry a lot of weight to income-investors, but those aspects were in the main significantly absent in the original HYP strategy proposals, and it was being proposed as a simple income-strategy that would deliver a long-term income over many years, and I think if I could re-wind to the year 2000 and read the HYP strategy proposals for the first time again, with a copy of Arb's chart in my hand but with no portfolio-identifiers on it, then I've got to say that someone would be very hard-pushed to convince me that Pyad was talking about an income-strategy that would deliver any other line than that pink ARBIT one...

I do have an issue with pyad's original articles along those lines - I've mentioned it a few times before, though not recently and I doubt that I could track those mentions down, and furthermore I think it's generally just been a mention rather than going into very much detail. It's basically to do with what the articles say about the risks of running a HYP and how big they are. The main thing the first article says is:

I wish to stress, though, that anybody considering this approach must be made aware that there are risks. Neither the income nor the capital is guaranteed. If you cannot live with that then, clearly, don't do it. I believe, however, that the risks are less than many people imagine.

and the main thing the second article says is:

It is almost the perfect investment for an income player, as long as the person can accept the risks involved -- and I do stress that point. This is not for those who will lose sleep if the portfolio plunges in value. It is for those who can ignore the fluctuations in capital value and accept that there is a risk that the income will not, in fact, rise. But I consider that latter risk quite small.

The issue is that the statements about the size of the risks are qualitative and subjective, not quantitative and objective. They're about what pyad believed/considered the size of the risks to be, and both of the phrases "less than many people imagine" and "quite small" are liable to be interpreted very differently by different readers, depending on how risk-averse the reader is, and even on how risk-averse the reader believes other people to be... I think it's been clear that the income risks are not what many retirees would consider "quite small" ever since the financial crisis - this year has simply reinforced that conclusion - but was pyad simply mistaken about how big they are, or was he unusually risk-tolerant (a theory that the fact that elsewhere, he espoused a "bet the farm" Value strategy might suggest...), or was there some other reason? One possibility is that he wasn't envisaging a HYP as a major component of a retiree's income - he said near the start of the first article that:

Let's say you have retired with a lump sum available from your pension plan, or maybe have been made redundant with a payoff. Alternatively ,perhaps you have been saving hard for a long time and have created a fund to invest for income. What should you do? What options are open to you as an income seeker? ...

At least for the first of those scenarios, which is the only one that mentions the investor being a retiree, the investor could typically expect to also have a state pension (either immediately or in the reasonably near future) and due to the pension rules at the time, to have an annuity purchased with three times the lump sum they were able to invest freely. In that situation, a HYP bought with the available lump sum could probably be expected to produce less than 20% of the retiree's income, and a 1/3rd reduction in the HYP income would be less than a 7% reduction in the retiree's total income - which makes a big difference to how reasonable it is for someone to consider it a "quite small" risk. That theory about the investment circumstances in which pyad was imagining a HYP being used also fits in with the size he chose for HYP1 several months later - the originally forecast 4.8% yield on a £75k investment would have produced £3.6k annual income - which in that link's words is a "useful income", but by no means sensible as someone's entire retirement income.

Anyway, I cannot answer that question about whether pyad was mistaken about the size of the risks, or unusually risk-tolerant, or was envisaging a HYP as only contributing a fairly small fraction of a retiree's total income, or indeed something else. But I do agree that whatever the reason, those original articles are liable to end up downplaying the size of the risks in many readers' minds by more than is really justified.

Gengulphus