Better alternatives to HYP

[vrdiver]

HYP was set up as an alternative to annuities but there are now much better off-the shelf alternatives. HYP is past its sell-by date, it is obsolete because it has been eclipsed by better alternatives created by the evidence accumulated and demonstrated over the last 100 years.

From viewtopic.php?f=15&t=8516&start=49

As a HYPer I'm also interested in better High Yield strategies. Over to you ONNA!

VRD

[BarrenWuffett]

Yield is just one aspect of the return from investments, the other main element being capital growth which is regarded as a side issue by hypers.

The quest for a high yield from a relatively small basket of individual shares which are in turn restricted to a relatively small geographic area (UK) is extremely high risk for small investors. Time and time again we read comments relating to holdings which, despite careful selection, do not deliver - dividends slashed or suspended not to mention share prices plummeting - Tesco, Centrica, Provident Financial etc.

I have tried the approach some years back and, after some 3 yrs or so, decided the strategy was too high risk for the tenuous rewards offered.

I am retired and rely on income from my investments as not yet at state pension age. My strategy in recent years consists of a blend of investment trusts - Finsbury Gr & Inc, Aberforth Smaller, City of London, Scottish Mortgage combined with Vanguard Lifestrategy 60. Obviously, with the exception of CTY, none are providing much natural yield but as a portfolio, they are providing a total return just over 10% per year on average (now 5 yrs in).

I hold a cash buffer equivalent to 3 yrs income or 10% of the portfolio. I withdraw all the natural income yield which is around 2% and make up the other 2% from opportune sales of VLS and/or top slice shares in my ITs. For example, the SP of FGT has increased by 50% over the past 3 yrs and I recently sold 15% of my holding. Likewise with Scottish Mortgage, the SP has doubled in just under 2 yrs and again a sale of 20% of the shares to provide some 'income'.

I think there are many strategies to put bread on the table which are less risky and more suitable for the average small investor than a hyp. I look forward to reading strategies from others...should be interesting.

[Dod101]

I answer this to defend a HYP. I have lived off my investment income for over 20 years. I have no pension other than the State pension (which I use only as a travel fund, and frankly accumulate about 50% of it each year and give away the balance at year end as charitable giving) My HYP is therefore very important to me. I have lived through the tech bubble of 2000 and the financial crisis of 2008/9 and am still here to tell the tale. I have about three years equivalent of capital in index linked savings certs which is my backstop and have used that only to buy a new car occasionally.

My HYP consists of around 17/18 individual shares supplement by 3/4 income producing ITs. It works for me (or at least has so far) I only very occasionally feel the need to sell but if I do I have no concerns about that. I get about 4.5% yield but I will give you this year's figure at year end.

So please tell me about these alternatives to a HYP. Selling capital from the likes of Scottish Mortgage (which I hold outside of the HYP) to live off I would not contemplate.

Dod

[Lootman]

I think there are many strategies to put bread on the table which are less risky and more suitable for the average small investor than a hyp. I look forward to reading strategies from others...should be interesting.

Far from being a controversial statement, I think that is merely the reiteration of the consensus view. HYP is an eclectic, fringe strategy that is unknown outside of the UK, and pretty much unknown outside of TMF and TLF. You will find precious few mentions of it in the general financial media, and none outside the UK. It's not considered to be a mainstream solution and so Ohno/Munro's point has merit, even if there is always the lingering feeling that everything he says is tainted by trying to subliminally market his eponymous fund.

I also thinks that HYP targets a fairly narrow demographic segment. If you have little or no capital, which is probably two thirds of the country, then it's moot. Likewise if you are fairly wealthy (say a few million) then you'd have no need of it either. You would probably choose a strategy that doesn't generate a lot of taxable income, and for that matter you could retire happily without any income at all, just spending the cash.

So who does that leave? Well, that depends on how much capital you have and how much income you need. If you need 35K a year and have a million quid, I'd buy an index fund. The market has an overall yield of about 3.5%, so why take on any more risk than that for income you don't need, especially when you always have the capital to fall back on?

Where HYP does seductively appeal is the class of people who don't quite have enough to retire on, but by pushing up the headline yield then they can. So if I still need that 35K a year, but only have 700K then I might normally think I have to carry on working. But push the portfolio yield up to 5% and, bingo, there's my 35K a year.

So the question remains, if not HYP for that demographic, then what?

[Breelander]

As a HYPer I'm also interested in better High Yield strategies. Over to you ONNA!

ONNA cannot reply, being 'in the trade'. If he could, he would probably say 'Smart Beta'...
https://www.investopedia.com/terms/s/smart-beta.asp

[UnclePhilip]

What suits each investor depends very much upon individual circumstances, so what briefly follows may not have a very wide relevance

We are now semi-retired, so beginning to live off investments. I'm also much iller than I was, and decided to move some investments to managed funds for the ease of a widow who isn't interested in the mechanics of investing

So, we are now about 1/3rd pensions, 1/3rd rent from investment properties, and 1/3rd equities

Of the equities, we are about 60% in a global managed fund targeting total return, with sale of units as needed for income. The other 40% is a high yield portfolio as recognised here.

To have more than our current circa 13% income from a HYP would worry me because:

(i) I know I know less than the fund managers I use
(ii) I am strongly of the view that Global is more likely to be better and less risky than only UK
(iii) I cannot understand the idea that selling units of a total return fund is in any way inferior to restricting income to dividends

Oh, and capital protection for inheritance purposes is important for us, so

(iv) My energies are better spent investigating IHT mitigation than fundamental ratios of individual UK stocks

Uncle

[vrdiver]

Yield is just one aspect of the return from investments, the other main element being capital growth which is regarded as a side issue by hypers.

Can't speak for the other HYPers, but capital growth absolutely does matter, because without it dividend growth is unlikely to happen over any sensible time-frame!

The quest for a high yield from a relatively small basket of individual shares which are in turn restricted to a relatively small geographic area (UK) is extremely high risk for small investors.

I'm not so worried about which exchange a company lists on, more about avoiding over-concentration of shared risk. Most of the FTSE100 are international companies so the charge of being limited to a small geographic area is a little unfair IMHO.

I have tried the approach some years back and, after some 3 yrs or so, decided the strategy was too high risk for the tenuous rewards offered.

I am now living entirely off of my HYP dividends, and find the strategy works for me. The rewards are substantial and land in my bank account at regular intervals.

I withdraw all the natural income yield which is around 2% and make up the other 2% from opportune sales of VLS and/or ...

I struggle with the concept of consuming capital, rather than dividends. Like you, I've retired before access to pensions is possible. I hope to pass my HYP on after a long and disrespectful retirement, so capital consumption in the early years causes me unease, but I respect that your plans may not only work for you, but actually leave you wealthier than my current route, but I sleep well, which I'm not sure I'd do with consuming capital. It's also not an "off the shelf" strategy, which I was hoping ONNA would elaborate on.

[vrdiver]

To have more than our current circa 13% income from a HYP would worry me because:

(i) I know I know less than the fund managers I use
(ii) I am strongly of the view that Global is more likely to be better and less risky than only UK
(iii) I cannot understand the idea that selling units of a total return fund is in any way inferior to restricting income to dividends

Oh, and capital protection for inheritance purposes is important for us, so

(iv) My energies are better spent investigating IHT mitigation than fundamental ratios of individual UK stocks

Uncle

(i) agree (I am in the same position) but fund managers may not represent my objectives, or be constrained as to what they can do. However, I am looking at migrating my HYP, or at least a portion of it, into a basket of ITs so that my future widow will have clear instructions along the lines of "sell all the individual shares and reinvest the money in the ITs, in the following percentages..."

(ii) With the FTSE100 being largely global, I'm not too worried, but my research into ITs has started to open my eyes a little!

(iii) this is where we may disagree! Unless the funds held are quite large, selling a proportion of each (so as to maintain a reasonably balanced portfolio) is a) a hassle compared to just sweeping up the dividends and b) expensive in terms of dealing costs and c)subject to being a seller in a depressed market, thus consuming a greater % of capital than planned.

I am a little in awe of those who can manage their desired income through selling capital - I would have sleepless nights worrying about it!

[vrdiver]

As a HYPer I'm also interested in better High Yield strategies. Over to you ONNA!

ONNA cannot reply, being 'in the trade'. If he could, he would probably say 'Smart Beta'...
https://www.investopedia.com/terms/s/smart-beta.asp

My concern here is that this is just another marketing angle:

Not all smart beta funds have outperformed their market-cap weighted counterparts. Further, they usually have slightly higher expense ratios and many also come with higher trading costs due to lower volumes.

https://seekingalpha.com/article/409543 ... rns?page=2

[Itsallaguess]

HYP was set up as an alternative to annuities but there are now much better off-the shelf alternatives. HYP is past its sell-by date, it is obsolete because it has been eclipsed by better alternatives created by the evidence accumulated and demonstrated over the last 100 years.

From viewtopic.php?f=15&t=8516&start=49

As a HYPer I'm also interested in better High Yield strategies. Over to you ONNA!

I think it might be worth setting the context of the above statement regarding HYP by reminding ourselves of the statement that prefaced it -

Equal weighting was also just a practical consequence for a small investor due to the lack of any alternative. It has no investment merit whatsover and the results of that can be seen in the very unbalanced portfolio that HYP1 has now become. No new portfolio would replicate that, so why continue with it when it is so risky?

HYP was set up as an alternative to annuities but there are now much better off-the shelf alternatives. HYP is past its sell-by date, it is obsolete because it has been eclipsed by better alternatives created by the evidence accumulated and demonstrated over the last 100 years.

So on the face of it, the whole HYP concept is being judged on the current state of HYP1.

I don't think that's a particular fair position to take, as HYP1 is an outlier portfolio - an experiment that no-one would utilise in the real world, I imagine......

Cheers,

Itsallaguess

[Wizard]

I answer this to defend a HYP. I have lived off my investment income for over 20 years.

Interestingly I have never really thought of you as an HYPer Dod. Based on what I have read of your posts you very actively monitor your investments ("watch like a hawk" I think is how you put it on the Practical board), not exactly Doris. If I read you correctly you consider your 'HYP' to incorporate 4 ITs (not REITs, but 'real' ITs), which is very much an HYP no-no. You have strong views on certain sectors and would not consider buying into them to further diversify your holdings, no Strategic Ignorance there.

Don't get me wrong I greatly respect your success over many years and am always interested in any of your posts. But I never saw you as the defender of HYP as, to me anyway, the way you invest for income is not an HYP.

But moving on, I have just checked an old post and in August you listed your income portfolio as consisting of...

Unilever
HSBC
Shell
Legal & General
Imperial Brands
BAT
SSE
Primary Health Properties
British Land
Phoenix Group
Chesnara
National Grid
Vodaphone
AstraZeneca
Glaxo
Segro
Schroders N V

The ITs are
Edinburgh
Temple Bar
Murray International
Murray Income

One think I would be very interested to hear about, if you are happy to share, is what percentage of your investment portfolio is in each of those holdings? More specifically, do you treat an IT as a share equivalent in terms of weighting, or is the portfolio split 50:50 between shares and ITs? I would e very interested to see a rough percentage against each of the above.

Having seen a big chunk of capital in my newly invested HYP I am not looking to make any further investments in it until I have balanced it with some IT purchases, but am interested in what sort of balance others have between directly held equities and ITs.

Terry.

[eyeball08]

Dod101 and Dod1010
Are these 1 or two separate posters on this site?

[PinkDalek]

Dod101 and Dod1010
Are these 1 or two separate posters on this site?

The same poster who lost the log-in for his original moniker.

[Wizard]

So on the face of it, the whole HYP concept is being judged on the current state of HYP1.

I don't think that's a particular fair position to take, as HYP1 is an outlier portfolio - an experiment that no-one would utilise in the real world, I imagine......

But that leads me back to my fundamental question, if it is not the rule set behind HYP1 then what is the "HYP concept"? Is HYP in 2017 nothing more than a broadbrush statement saying 'buy some equities that yield on average more than a chosen benchmark, buy at least 15 of them in roughly equal proportions and spread them between a reasonanle number of sectors'. It increasingly seems to me that other than these broad statements there is no such thing as HYP, but rather almost as many versions of HYP as there are people saying they follow it.

This is not meant as a criticism of any individual and how they invest, but it does mean that a statement such as the title of this thread is almost pointless, because there is no definitive thing as HYP. Nor is it in anyway an attempt to curtail any debate about other options.

Terry.

[Itsallaguess]

Having seen a big chunk of capital in my newly invested HYP I am not looking to make any further investments in it until I have balanced it with some IT purchases, but am interested in what sort of balance others have between directly held equities and ITs.

My HYP contains 68% directly-held equities and 32% Investment Trusts.

As the value of my HYP has grown over recent years, I've nudged the Investment Trusts into the relatively prominent position they are now, and to be honest I wish I had made that move a few years earlier than I did.

Cheers,

Itsallaguess

[Itsallaguess]

So on the face of it, the whole HYP concept is being judged on the current state of HYP1.

I don't think that's a particular fair position to take, as HYP1 is an outlier portfolio - an experiment that no-one would utilise in the real world, I imagine......

But that leads me back to my fundamental question, if it is not the rule set behind HYP1 then what is "the HYP concept"?

Is HYP in 2017 nothing more than a broadbrush statement saying 'buy some equities that yield on average more than a chosen benchmark, buy at least 15 of them in roughly equal proportions and spread them between a reasonable number of sectors'.

It increasingly seems to me that other than these broad statements there is no such thing as HYP, but rather almost as many versions of HYP as there are people saying they follow it.

Well I think agreeing that there's many versions of HYP would be preferable to someone coming along and making out that HYP1 is HYP, and criticising the whole strategy on the back of that position....

Cheers,

Itsallaguess

[Dod101]

First simple answer, Dod101 and Dod1010 are the same poster. I simply could not get past the log in "you have had too many tries" or whatever it says and so simply reregistered, which of course mucks up my stats but I do not care.

To Wizard, it depends I guess what we mean by a HYPer. I am certainly not a pyadic HYPer but I have a requirement for a decent income from my share portfolio and so it is basically a High Yield Portfolio, hence I call it a HYP and myself a HYPer. I do not believe in Strategic Ignorance which I think is an excuse for laziness , I would say intellectual laziness if that did not sound too grand. Neither do I believe in never selling although am no trader and this year I have only changed my portfolio because I lost London and St Lawrence IT when it was wound up. (I replaced it with Primary Health Properties, Murray Income Trust and I think I put a bit more into BAT)

I will be happy to post my weightings but I am going off to N Ireland for the weekend and will not be able to do such a post until the middle of next week, but my top holdings are Unilever (because of its big rise this year) HSBC, Shell, Legal and General and then the two tobaccos.

As I have said before my portfolio is unbalanced and I tend to have a bigger holding in shares I like best and feel most confident with, but these are simply my feelings and no-one should take them as gospel or any guarantee of success!

Dod

[Wizard]

I will be happy to post my weightings but I am going off to N Ireland for the weekend and will not be able to do such a post until the middle of next week, but my top holdings are Unilever (because of its big rise this year) HSBC, Shell, Legal and General and then the two tobaccos.

Thanks Dod, whenever you can it would be much appreciated. Have a good weekend in NI.

Terry.

[Wizard]

Having seen a big chunk of capital in my newly invested HYP I am not looking to make any further investments in it until I have balanced it with some IT purchases, but am interested in what sort of balance others have between directly held equities and ITs.

My HYP contains 68% directly-held equities and 32% Investment Trusts.

As the value of my HYP has grown over recent years, I've nudged the Investment Trusts into the relatively prominent position they are now, and to be honest I wish I had made that move a few years earlier than I did.

Cheers,

Itsallaguess

Thanks Itsallaguess, very helpful input.

Terry.

[OLTB]

Having seen a big chunk of capital in my newly invested HYP I am not looking to make any further investments in it until I have balanced it with some IT purchases, but am interested in what sort of balance others have between directly held equities and ITs.

Terry.

Hi Terry

I have a HYP portfolio, IT portfolio and passive fund portfolio (although portfolios are a rather grand way of stating what is a relatively small amount of cash!). In value terms, the split is roughly 1/2 HYP, 1/4 IT and 1/4 passive. The reason I have chosen the split is that I don't know ultimately what method will be best longer term, I want to see how a HYP works in a practical sense before I land at retirement and I am terrible at making decisions so thought this would suit me. IT portfolio is John Baron's 'Summer' ITs and the passive funds are broken down into assets as set down by Tim Hale. I'll update them once a full year has been experienced and will try to keep the three different portfolios balanced (as far as I can) in cash terms as I trot on towards retirement.

Cheers, OLTB.