HYP1 is 23 - Total Return

[Lootman]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years.

Exactly that. Pyad appears to believe that we are all smart enough to select which shares to buy, but not which to sell. It is as if our skills are asymmetric in that way.

Now psychologically it can sometimes be harder to sell than to buy. But does anyone seriously believe that they are much better at buying than selling? And that the portfolio we have right now is the exact same one we would choose to buy from scratch today if we were starting out?

[Arborbridge]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years.

Exactly that. Pyad appears to believe that we are all smart enough to select which shares to buy, but not which to sell. It is as if our skills are asymmetric in that way.

Now psychologically it can sometimes be harder to sell than to buy. But does anyone seriously believe that they are much better at buying than selling? And that the portfolio we have right now is the exact same one we would choose to buy from scratch today if we were starting out?

Actually, I don't quite agree. He thought the investor wasn't that great at buying, either, which is why he codified a system with safeguards to mitigate the amateur investor's lack of genius!

Arb.

[dealtn]

Exactly that. Pyad appears to believe that we are all smart enough to select which shares to buy, but not which to sell. It is as if our skills are asymmetric in that way.

Now psychologically it can sometimes be harder to sell than to buy. But does anyone seriously believe that they are much better at buying than selling? And that the portfolio we have right now is the exact same one we would choose to buy from scratch today if we were starting out?

Actually, I don't quite agree. He thought the investor wasn't that great at buying, either, which is why he codified a system with safeguards to mitigate the amateur investor's lack of genius!

Arb.

No. He codified a system that creates an issue of overly riskiness knowing of that "lack of genius". He could have solved much of that asymmetry, and its need, with a few additional rules around rebalancing. Why he didn't he would need to explain. It could be lack of foresight that it would be an issue, arrogance, or laziness, or that the additional costs in time and £s didn't compensate.

As has been pointed out already, though, that risk and need for diversification was recognised at inception, so strange it wasn't considered over the long time frame such a portfolio was designed to last.

In practice many have realised they can avoid the worst features of the system, and do.

[kempiejon]

Trading damages your wealth.
https://faculty.haas.berkeley.edu/odean ... _final.pdf
Like the story that the best investors are dead.

He thought the investor wasn't that great at buying, either,

I think that was the attraction of the HYP for me you don't need to think about buying or selling.
Of course that attractive idea didn't pan out in practice as an accumulator I buy every month. Most my selling is tax planning and shortly I won't need to do that as my money should be sheltered in a new tax year. When I start drawdown I wont need to worry about buying either. Except for corporate freeing of cash which I could just spend or accumulate. I do look forward to becoming a Doris like character though I might miss the research and pickering.

[moorfield]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years.

This is a paradox of (Pyadic) HYP. As an aside, you could equally say here:

It seems to me that if high yield is a Good Thing at the start, then it must be the same after a number of years.

For example, one of these is a long held HYP, one is a new HYP bought today. Except that it isn't, because HYP "rules" wouldn't strictly allow it. But if you apply Moorfield's Equivalence Principle - a share held today is the same as a share bought today - then it should be. Er what?

Can you spot which one is which?

Portfolio A
GSK
ULVR
DGE
BA
ADM

Portfolio B
GSK
ULVR
DGE
BA
ADM

[tjh290633]

Mine is currently over 9%, but at the turn of the century it was about 13%. It obviously varies with starting points. Those figures are from 1987.

TJH

I sort of started in 97 with a demutualisation purchase of Norwich Union, but only really started the HYP in 2000 with purchases of SCTN, IVYS and LLOY. My XIRR was also much better in ~2000 at about 9% (I haven't kept a record of how the XIRR has varied with time). Looks like my performance is mirroring yours, but 3-4 percentage points to the poorer.

It might be helpful to show my XIRR values from annual start dates:

Since        Acc Unit   IRR   
26-Dec-96        3.39    8.97%
01-Jan-98        4.86    7.83%
31-Dec-98        5.89    7.33%
30-Dec-99        6.85    6.97%
31-Dec-00        6.68    7.40%
31-Dec-01        6.43    7.94%
31-Dec-02        5.23    9.40%
31-Dec-03        6.38    8.81%
31-Dec-04        7.59    8.30%
30-Dec-05        9.69    7.31%
31-Dec-06       12.25    6.28%
31-Dec-07       12.41    6.60%
31-Dec-08        7.41   10.81%
31-Dec-09       10.24    9.08%
31-Dec-10       12.32    8.26%
31-Dec-11       13.45    8.18%
31-Dec-12       15.80    7.37%
31-Dec-13       19.56    5.84%
31-Dec-14       20.34    6.05%
31-Dec-15       21.42    6.14%
31-Dec-16       24.37    5.08%
29-Dec-17       26.70    4.35%
31-Dec-18       24.06    7.50%
31-Dec-19       28.84    4.57%
31-Dec-20       27.01    8.58%
31-Dec-21       32.61    2.78%
31-Dec-22       33.22    3.76%

This is based on the accumulation unit valuation. So, from a startpoint of the market peak in December 1999, it has been 6.97% to date. The best result would have been obtained by starting at the end of 2008, just after the GFC.

I have the converse, starting in April 1987 and finishing at successive year ends. as follows:

Year End    Acc Unit   IRR from start   Years
                       to year end           
21-Apr-87       1.00                        0
20-Apr-88       0.92           -8.00%       1
16-Apr-89       1.24           11.42%       2
11-Apr-90       1.39           11.70%       3
28-Mar-91       1.69           14.26%       4
28-Mar-92       1.75           12.00%       5
27-Mar-93       2.13           13.58%       6
22-Mar-94       2.50           14.15%       7
26-Mar-95       2.55           12.52%       8
01-Apr-96       3.13           13.59%       9
28-Mar-97       3.62           13.81%      10
28-Mar-98       5.72           17.28%      11
31-Mar-99       6.12           16.37%      12
31-Mar-00       6.13           15.02%      13
31-Mar-01       6.32           14.13%      14
31-Mar-02       6.76           13.63%      15
31-Mar-03       4.85           10.40%      16
31-Mar-04       6.56           11.73%      17
31-Mar-05       8.10           12.36%      18
01-Apr-06      10.57           13.24%      19
31-Mar-07      13.20           13.80%      20
31-Mar-08      11.21           12.22%      21
31-Mar-09       6.46            8.87%      22
31-Mar-10      10.86           10.95%      23
31-Mar-11      12.76           11.21%      24
30-Mar-12      14.19           11.21%      25
28-Mar-13      17.41           11.64%      26
31-Mar-14      18.88           11.51%      27
31-Mar-15      21.84           11.66%      28
31-Mar-16      21.91           11.25%      29
31-Mar-17      25.47           11.41%      30
30-Mar-18      24.66           10.91%      31
31-Mar-19      26.64           10.81%      32
31-Mar-20      21.64            9.77%      33
31-Mar-21      29.07           10.43%      34
31-Mar-22      33.87           10.56%      35
05-Apr-23      34.18           10.32%      36

The actual portfolio figure is 9.22%, which takes account of cash withdrawals and inputs, which involve the nominal sale of or purchase of units.

TJH

[1nvest]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years.

Rebalancing is widely accepted as being a risk reduction exercise, not a reward enhancement process. On the basis that HYP doesn't generally yield greater reward, just increases risk, then not rebalancing further increases the risk that presumably those that seek out such risk strive for. All sorts. Some like playing chicken with trains

Used to be a standard practice to pick a diverse bunch of stocks and stick with them long term due to the cost of trading being high, way back and £100 broker fees per trade were common, multiple hundreds in present day inflated money. Some bought/sold via postal trades and market makers made a killing, often with 10%+ spreads. Things have changed.

[Arborbridge]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years.

Rebalancing is widely accepted as being a risk reduction exercise, not a reward enhancement process. On the basis that HYP doesn't generally yield greater reward, just increases risk, then not rebalancing further increases the risk that presumably those that seek out such risk strive for. All sorts. Some like playing chicken with trains

Used to be a standard practice to pick a diverse bunch of stocks and stick with them long term due to the cost of trading being high, way back and £100 broker fees per trade were common, multiple hundreds in present day inflated money. Some bought/sold via postal trades and market makers made a killing, often with 10%+ spreads. Things have changed.

On the basis that HYP doesn't generally yield greater reward, - a sweeping statement if ever... HYP does generally produce a greater yield, and if that's the reward you are after, then it is "yielding a great reward".
And if you accept that you will be holding that capital for ever, then it is also virtually risk free.

I know the concept takes some getting used to - indeed, in my case it was at least three years before I "got it", so obsessed was I will the usual idea of capital growth.

Arb.

[Itsallaguess]

HYP does generally produce a greater yield, and if that's the reward you are after, then it is "yielding a great reward".

And if you accept that you will be holding that capital for ever, then it is also virtually risk free.

I've got to be honest Arb, and say that I'm surprised to see someone that I consider to be a very sensible investor find themselves able to make that final 'virtually risk free' statement.

No market-facing strategy is 'virtually risk free', and I've been an income-investor for long enough now to know that it's a strategy that's pack-full of highly expensive traps for the unwary or unaware...

Cheers,

Itsallaguess

[BullDog]

HYP does generally produce a greater yield, and if that's the reward you are after, then it is "yielding a great reward".

And if you accept that you will be holding that capital for ever, then it is also virtually risk free.

I've got to be honest Arb, and say that I'm surprised to see someone that I consider to be a very sensible investor find themselves able to make that final 'virtually risk free' statement.

No market-facing strategy is 'virtually risk free', and I've been an income-investor for long enough now to know that it's a strategy that's pack-full of highly expensive traps for the unwary or unaware...

Cheers,

Itsallaguess

I have a feeling there might be a bit of back pedalling on that one.

[Arborbridge]

HYP does generally produce a greater yield, and if that's the reward you are after, then it is "yielding a great reward".

And if you accept that you will be holding that capital for ever, then it is also virtually risk free.

I've got to be honest Arb, and say that I'm surprised to see someone that I consider to be a very sensible investor find themselves able to make that final 'virtually risk free' statement.

No market-facing strategy is 'virtually risk free', and I've been an income-investor for long enough now to know that it's a strategy that's pack-full of highly expensive traps for the unwary or unaware...

Cheers,

Itsallaguess

I've had write-offs, as you know. But at the portfolio level, HYP is virtually risk free. As has been already pointed out, if a basket of market leading large companies go bust, then it isn't just our income we will be worrying about. You need confidence in the stock market to continue to come up with the goods, and then relax about it. I'm not selling until I am absolutely forced to, so I can afford to be sanguine about capital values.

If you are expecting a total write off of a HYP or IT investing in similar, I think you will have a long wait.

[kempiejon]

I've had write-offs, as you know. But at the portfolio level, HYP is virtually risk free. As has been already pointed out, if a basket of market leading large companies go bust, then it isn't just our income we will be worrying about. You need confidence in the stock market to continue to come up with the goods, and then relax about it. I'm not selling until I am absolutely forced to, so I can afford to be sanguine about capital values.

I don't see what in a small drop in price would absolutely forced you to sell VOD, the dividend continues, there might well be risk of income wobble but that's share investing. Why are you no longer sanguine?

[Itsallaguess]

I've had write-offs, as you know. But at the portfolio level, HYP is virtually risk free.

As has been already pointed out, if a basket of market leading large companies go bust, then it isn't just our income we will be worrying about. You need confidence in the stock market to continue to come up with the goods, and then relax about it. I'm not selling until I am absolutely forced to, so I can afford to be sanguine about capital values.

If you are expecting a total write off of a HYP or IT investing in similar, I think you will have a long wait.

Well there's a lot in there that I'd agree with, as you'd expect, but I do think there's rather a large gap between 'I am happy with the risk of a HYP approach' and 'HYP is virtually risk free', and I'd hate to think that *any* investment strategy might ever be declared to be 'virtually risk free' on a public forum like this where we can never be aware how such phrases might be taken up...

Cheers,

Itsallaguess

[1nvest]

I've had write-offs, as you know. But at the portfolio level, HYP is virtually risk free.

As has been already pointed out, if a basket of market leading large companies go bust, then it isn't just our income we will be worrying about. You need confidence in the stock market to continue to come up with the goods, and then relax about it. I'm not selling until I am absolutely forced to, so I can afford to be sanguine about capital values.

If you are expecting a total write off of a HYP or IT investing in similar, I think you will have a long wait.

Well there's a lot in there that I'd agree with, as you'd expect, but I do think there's rather a large gap between 'I am happy with the risk of a HYP approach' and 'HYP is virtually risk free', and I'd hate to think that *any* investment strategy might ever be declared to be 'virtually risk free' on a public forum like this where we can never be aware how such phrases might be taken up...

Cheers,

Itsallaguess

A November 2000 HYP1 retiree saw the initial (nominal) income decline over the first few years, so would have had to sell some shares to fill the shortfall, at a time when share prices were down quite sharply. Dividends are just one element of total return, like for like you could draw the exact same income from a total return source that paid no dividends to equal overall effect/outcome. Dividends aren't a free-lunch. Disregard capital at your peril, if/when dividends falter capital value and timing of having to sell shares can become a critical factor. Income declines alongside lower share prices tend to go hand-in-hand. By the time you may realise that you'd been drawing a mid/longer term unsustainable amount more likely you'll already be over the cliff edge. The nature of HYP is that it tempts you towards drawing more. There have been cases of 10 years of zero (or even lower) total (real) returns from stocks, every penny drawn was eating capital, no matter how that total return was formed (price appreciation only or combined price appreciation and reinvested dividends).

[funduffer]

This is an interesting thread, as it is about HYP total return, which is not the first think HYPers worry about.

I have had a HYP for nearly 10 years, which I bought outright at the start, and only added to when I got new capital.

My comments on total return and risk are:

1. I have seen no evidence HYP is the best vehicle to accumulate capital, prior to drawing income. Indeed, pyad only proposed HYP as a mechanism for drawing income from a portfolio. Whilst I can see sense in setting up a HYP prior to requiring the income as a means of learning, this could be done with a small fraction of the available capital until drawdown time comes. A better total return in the accumulation phase, with less risk, would be a world tracker fund I would suggest.

2. Once drawdown starts, total return is less relevant compared to security of income or income volatility. The risk to income is that it falls significantly causing distress to the investor if they rely on this income for daily living. To quantify this risk, you would need to compare HYP to the risk and reward from alternative drawdown investment vehicles. These might be an annuity, a personal pension, or selling down an investment portfolio regularly. For the latter, there are umpteen articles on the so-called Safe Withdrawal Rate (SWR). Many of these have looked over many durations and start times, and different stock markets, to establish the risk of running out of capital (and hence income). Broadly, the conclusion is a SWR is probably a bit less than 4%.

3. So how does this compare to the risk from a HYP? I don't know the answer, and there are so few well documented HYP's that it is impossible to quantify the risk. However, HYP's generally yield more than 4%, so you could say they are riskier than regularly selling down a portfolio with a 4% WR. So I would describe HYP risk as the risk of losing x% of income year on year (after inflation). To some a 10% year-on-year reduction in income would be nothing to worry about, to others it would be very painful. Thus level of HYP risk tolerance is personal.

4. One can reduce the risk in falls in income by 'de-risking' as Luniversal would call it - i.e. keeping some of the income back each year in a cash buffer to mitigate for years where dividend income falls. The level of cash buffer must relate to how 'painful' a loss of income would be to the investor. On the face of it, I would have thought re-balancing a HYP would reduce the risk of income volatility, but again there are too few examples to be certain.

5. What about total wipe-out (100% loss of income)? It is possible that selling down a portfolio for income at a 4% withdrawal rate can lead to wipe-out of the capital. So presumably, this is also possible for a HYP, particularly one yielding >4%. But as arb says, if the HYP capital fell to zero, we would have to worry about other things than HYP income as the UK stock market would have become more or less extinct!

If we had a large universe of HYP examples we could probably establish the risk in HYPs, but we don't, so we will end up debating them endlessly!

FD

[tjh290633]

5. What about total wipe-out (100% loss of income)? It is possible that selling down a portfolio for income at a 4% withdrawal rate can lead to wipe-out of the capital. So presumably, this is also possible for a HYP, particularly one yielding >4%. But as arb says, if the HYP capital fell to zero, we would have to worry about other things than HYP income as the UK stock market would have become more or less extinct!

If we had a large universe of HYP examples we could probably establish the risk in HYPs, but we don't, so we will end up debating them endlessly!

FD

It has never happened, has it? Here is the record of mine since 1987:

.   Inc Units
         .   Ordinary 
Year to      Divs/unit
05-Apr-88         2.83
05-Apr-89         2.25
05-Apr-90         3.40
05-Apr-91         4.67
05-Apr-92         5.94
05-Apr-93         5.52
05-Apr-94         5.31
05-Apr-95         6.45
05-Apr-96         6.27
05-Apr-97         7.13
05-Apr-98         7.55
05-Apr-99         7.92
05-Apr-00        10.79
05-Apr-01        11.39
05-Apr-02        12.46
05-Apr-03        11.68
05-Apr-04        11.13
05-Apr-05        13.03
05-Apr-06        14.21
05-Apr-07        15.18
05-Apr-08        18.73
05-Apr-09        21.60
05-Apr-10        11.91
05-Apr-11        15.12
05-Apr-12        17.78
05-Apr-13        19.93
05-Apr-14        20.34
05-Apr-15        21.35
05-Apr-16        21.68
05-Apr-17        25.40
05-Apr-18        27.02
05-Apr-19        26.36
05-Apr-20        29.71
05-Apr-21        19.24
05-Apr-22        25.81
05-Apr-23        32.13

There are falls, the worst being in 2009-10, and I have checked, these figures exclude special dividends.

There was a rapid recovery after 2010. In the early years the amount can be affected by timing of purchases, as cash was added to the portfolio.

TJH

[Arborbridge]

I've had write-offs, as you know. But at the portfolio level, HYP is virtually risk free. As has been already pointed out, if a basket of market leading large companies go bust, then it isn't just our income we will be worrying about. You need confidence in the stock market to continue to come up with the goods, and then relax about it. I'm not selling until I am absolutely forced to, so I can afford to be sanguine about capital values.

I don't see what in a small drop in price would absolutely forced you to sell VOD, the dividend continues, there might well be risk of income wobble but that's share investing. Why are you no longer sanguine?

An interesting question, and I don't have an answer. I suppose in the back of my mind is a more general more into ITs as I proceed on the conveyer belt to gagaland. And I've not had a good relationship with VOD throughout.

I put my hand up and say what I did certainly not HYP-like and not very characteristic of me as an investor - although I do have wobbles along the way.

Maybe I need a session on the couch with HYP doctor.

Arb.

[Alaric]

And I've not had a good relationship with VOD throughout.

A typical HYP selection method invariably throws up VOD and has done for several years. With the benefit of hindsight were the purchasers content with what has been delivered? That's a level dividend following the cut a few years ago and a mostly declining share price.

[Arborbridge]

And I've not had a good relationship with VOD throughout.

A typical HYP selection method invariably throws up VOD and has done for several years. With the benefit of hindsight were the purchasers content with what has been delivered? That's a level dividend following the cut a few years ago and a mostly declining share price.

Answer: NO

My dividends have been expensively bought. I guess I shall have to be satisfied with a sub RPI return of my capital.

[Lootman]

A typical HYP selection method invariably throws up VOD and has done for several years. With the benefit of hindsight were the purchasers content with what has been delivered? That's a level dividend following the cut a few years ago and a mostly declining share price.

Answer: NO

My dividends have been expensively bought. I guess I shall have to be satisfied with a sub RPI return of my capital.

The Faustian bargain that is at the centre of HYP. The FTSE-100 has basically behaved like a bond for the last 25 years and, at times, like an annuity.

By the way, I agree with you that using stop losses and limit orders is not in contradiction with HYP, any more than which broker you use to buy and sell. I use them a fair amount myself although I often have a preference for using options to prompt trades as they enable you to get paid whilst you wait to hit your strike price.