Total Return vs other performance measures?

[Newroad]

Hi TJH.

That's not straight buy and hold, but it's close, I grant you. There was one recent post I saw where someone was straight buy and hold - I think it was MickeyPops and his 20 holdings.

I assumed you weren't straight buy and hold when you said "As was suggested, I choose shares from the HY350 index I have to pick a new entrant to replace one lost by takeover or very low yield.". Is the "very low yield" out of the HY into the LY, or a different bar? Also, if a share were dropped from the FTSE350 would you keep that all the time, some of the time (based on yield) or never?

I ask purely for interest.

Regards, Newroad

[Newroad]

Thanks, Mc2Fool.

That's a good find and, as you say, clarifies what they are showing - it also explains why one document said 1992 and another 1993.

It frustrates me that I can't seem to find that index anywhere that enables me to chart it etc over time and compare it to other things etc. C'est la vie. Given the information, Investing.com's annualised performance is maybe the best we can do.

Regards, Newroad

[tjh290633]

As a related aside, is your judgement of which stocks to buy, sell and hold from the FTSE 350 HY completely rule based (if so, are you able to explain succintly, if not, no bother, I don't want to waste your time on a purely academic matter) or do you exercise judgement? E.g. if a stock drops out of the FTSE350 HY, do you automatically sell it and if so, do you have a rule about what to replace it with?

Further, I wondered whether there was any similarity in your approach to the so-called "Dogs of the Dow"?

Regards, Newroad

I have looked at the Dogs of the Dow/Footsie in the past and used its principles to work out which shares of the FT30 to invest in, although I do not think that I followed it very much. My original ISA in 1999 contained:

Tate & Lyle plc
Royal & Sun Alliance Ins Gp plc
Allied-Domecq plc
British Airways plc
Blue Circle Industries plc
Stagecoach Holdings plc

of which I think the first 5 were in the FT30 index at the time. I was looking for shares which I didn't hold in my parallel PEP, and threw in Stagecoach as a wild card. ALLD, BCI and BAY went very quickly, two to takeover and BAY not paying dividends. I will not bore you with the rest of the saga, which was a little complicated.

I have set out my principles a few times in the past, but basically I trim by 25% if a share goes over 1.5 times the median holding weight. If the yield falls below about half that of the FTSE, then I sell out. I have rules for selecting candidates for topping up, which you will find in a thread on the HYP-Practical board, viewtopic.php?p=341678#p341678

I still hold Marstons which fell out of the FTSE350, and my rule about yield is not rigidly upheld, particularly at this time. If I need a new share, I often see what is available in the same sector as the departing share, so I replaced WMH with IGG. The new share ought to have a yield higher than the FTSE100. I would hope it to be higher than the departing share as well.

TJH

[tjh290633]

One thing that I have done is to look at the copies of the FT's "World Markets at a glance" which I download from time to time. I took 3 dates, from December 2015 to May this year, and compared the HIX TR and LIX TR indices:

Date       HIX    LIX    Ratio  
18/12/15   4955   3612   137.18%
04/06/18   7226   4816   150.04%
21/05/21   6908   5424   127.36%

This shows how the HIX TR grew more than the LIX TR from 2015 to 2018, and has fallen back since 2018. The dates were picked at random, and the charts which you showed indicated the peakiness of the HIX TR.

TJH

[Newroad]

Thanks, TJH.

Also, for answering the question (about what you replace them with) which I forgot to re-ask. Interesting stuff.

It's all academic to me, as my approach appears almost the opposite, in process at least, to your own - and also I am not yet retired. I make the macro choices (pretty simplistic - what percentage global equities vs global bonds and then which IT* to use for them, more or less) then let the fund managers do the rest for the 50% that is actively managed.

Whether that's reasonable or not, who knows? What I do know is I did the right thing by the kids for over a decade (for the first at least) by putting

All our money for them into FCIT (CTF then JISA)
All my parents money for them into FCIT (CTF then JISA)
All my in-laws money for them into MYI (standalone then imported into the JISA)

As you might imagine, this worked well - you can form you own view as to the relative components of luck vs judgement underpinning that choice.

Regards, Newroad

PS Yes, with respect to your post immediately above, I looked at the monthly numbers earlier - it appears that the FTSE350HY peaked around Dec 2017 IIRC

* or which ETF for the passively managed portion

[tjh290633]

What I do know is I did the right thing by the kids for over a decade (for the first at least) by putting

All our money for them into FCIT
All my parents money for them into FCIT
All my in-laws money for them into MYI

I have been doing something similar with my grandchildren. The first went into Witan, the second into FCIT, the third into Alliance and the last via British Assets into FCIT. There was also a a short inadvertent dalliance with FCI.

Start Date   21-Dec-01   27-Jun-03   05-Mar-10   15-Apr-04   07-Apr-11   02-Mar-15        
IRR             Witan       FRCL        FCI         ATST        BSET        FRCL             
IT              10.46%      14.42%       7.81%      11.02%       7.41%      12.18%   TR   
FTSE             1.48%       2.89%       2.10%       2.57%       3.49%       0.06%        
IT on SP         6.10%       9.12%       7.75%       8.03%       0.03%      10.31%        
Period           19.65       18.13        9.05       17.33        3.90        6.45   Years

The first row shows the TR performance over the various periods, the second that of the FTSE100 over the same period, the third the performance of the share price and the fourth the duration of the period. All use XIRR to calculate the return. BSET is the one which disgraced itself.

TJH

Note: Correction to the TR value for FCI.

[Newroad]

Hi TJH.

A lot of similarities between our choices - I wonder if our rationales were similar (decent trusts, regular investment plans, not wanting all to be the same etc). To expand slightly

FCIT into both kids CTF's, later to become JISA's
MYI into Aberdeen's "Investing for Children", later imported into the newly created JISA's
ATST into our respective SIPP's
WTAN into our respective ISA's

So, 3 of 4 choices the same.

FCIT and ATST remain core holdings of the JISA's and SIPP's respectively. MYI was swapped out for MNP in June. WTAN was swapped out for MWY in July.

Regards, Newroad

[1nvest]

What I do know is I did the right thing by the kids for over a decade (for the first at least) by putting

All our money for them into FCIT
All my parents money for them into FCIT
All my in-laws money for them into MYI

I have been doing something similar with my grandchildren. The first went into Witan, the second into FCIT, the third into Alliance and the last via British Assets into FCIT. There was also a a short inadvertent dalliance with FCI.

Start Date   21-Dec-01   27-Jun-03   05-Mar-10   15-Apr-04   07-Apr-11   02-Mar-15        
IRR          Witan       FRCL        FCI         ATST        BSET        FRCL             
IT              10.46%      14.42%       0.21%      11.02%       7.41%      12.18%   TR   
FTSE             1.48%       2.89%       2.10%       2.57%       3.49%       0.06%        
IT on SP         6.10%       9.12%       7.75%       8.03%       0.03%      10.31%        
Period           19.65       18.13        9.05       17.33        3.90        6.45   Years

The first row shows the TR performance over the various periods, the second that of the FTSE100 over the same period, the third the performance of the share price and the fourth the duration of the period. All use XIRR to calculate the return. BSET is the one which disgraced itself.

TJH

Which suggests that FCI first row value should have been 10.21% instead of 0.21% ?

[Itsallaguess]

What I do know is I did the right thing by the kids for over a decade (for the first at least) by putting

All our money for them into FCIT (CTF then JISA)
All my parents money for them into FCIT (CTF then JISA)
All my in-laws money for them into MYI (standalone then imported into the JISA)

Would they have been better advised to look at something like Scottish Mortgage, perhaps?



Source - https://www2.trustnet.com/Tools/Charting.aspx

Cheers,

Itsallaguess

[Itsallaguess]

My life is currently funded by rental income (taxable), withdrawals from a SIPP (taxable) and dividends from two Stocks and Shares ISAs. Obviously, the rent comes from a property which has a variable (but, hopefully with time, increasing) value. The SIPP is largely invested in a global tracker and two "wealth-preserving" Investment Trusts with the value having increased over the past twelve months net of the amount drawn down. The "excess" dividends in the ISAs are reinvested and both of these have increased in value net of the dividends withdrawn. I have a third ISA dedicated to more "growth" oriented stocks, which acts as a growing safety net. Next year, I will start to receive a small Civil Service pension from my brief time served many years ago. My State Pension won't kick in for another few years.

Of course I keep an eye on things, but I don't really measure performance as such - as long as it all ticks along and the income seems sustainable (by whatever combination of means) then I'm not quite sure how "Total Return" is relevant?

If somebody would like to explain how to go about "measuring my Total Return" then I may consider giving it a go out of curiosity, but, quite honestly, I struggle to see the point - all I'm bothered about is ensuring my ability to continue generating the income I require...

Such is life as the bumble-bee of the investment world CP....

Whilst the standard model of wings and flight in aerodynamics can't quite account for bumble-bees defying gravity and going about their lives, flying happily from flower to flower, I have long come to the conclusion that there's always going to be similar scepticism in the investment sphere, with some of a much more academic bent never quite grasping (and often, sadly, not even wishing to fully understand...) the non-measurable benefits of the particular approach you prefer, and that's delivered to your personal investment requirements for so long...

I wonder whether we should take more of a cue from the humble bumble-bee, who we never see having to justify or explain how they do things, and who seem to have taken the view to let those who scratch their heads on seeing them fly through the air carry on doing so, whilst they just get on with what makes them happy...

Cheers,

Itsallaguess

[Itsallaguess]

This, I think, is a thread about measuring portfolio performance, and the contention that “total return” is the most logical way of achieving this. It is certainly ONE way, but I prefer to look at the, to me, fundamental question. Has the portfolio achieved my objectives?

In my case this is the delivery of a stream of dividends that attain the yield the portfolio was constructed to achieve; which can match inflation over the long term. For this to happen it is reasonable to expect the capital value to also maintain its real value - this though is an outcome of achieving the primary income objective.

To me, the portfolio is simply a pot, a container within which a stream of dividends are delivered. Its exact value is only of theoretical interest.

From that I can state the the TR is not of major importance to me.

I sometimes wonder if there's a close-fitting mental analogy with owning a house, for those of us that place additional value on these types of non-measurable investment benefits?

I often come into contact with people who seem to have a very keen, perhaps even obsessive interest in the current value of their home, and who seem to spend quite a lot of time and energy keeping focussed on it, often even if they've no intention to ever move house again, and if I squint a bit, I can obviously see some sense in being interested in the current price of what is clearly one of the highest-value assets we're likely to own in our lives...

But then, I think of my own home, and even though I've got a son who will one day hopefully inherit it, and as such, that ultimate process inherently places some importance on the financial value of it over long periods of time, I can honestly say that I have almost zero interest in the financial value of it, so long as it continues to provide a roof over my head and a place for me to live my life....

To some observers, I can see that making no sense whatsoever. Why wouldn't I be concerned with the ongoing and changing financial value of one of my highest-value assets?

But I don't, as I place non-measurable benefits on it that far over-ride the monetary value that it consists of....

Those people that I hear talking about house prices all the time would think I'm mad, I'm sure, and I often get the feeling that there's an analogy somewhere in there against which we can view the oft-running discussions between income-investors and those of a more total-return bent...

Cheers,

Itsallaguess

[Newroad]

Hi ItsAllAGuess.

In specific terms, yes (to SMT) but that misses the general point - which I could summarise by saying it's better (to have been) approximately right rather than specifically wrong.

I could have picked something which tracked (or selected from) the FTSE100, or the FTSE350 or whatever. I didn't - I went for the Global Equity (or in the case of MYI, Global Equity Income) IT sector. It appears I got the over-arching macro choice reasonably right - and even if I had picked the best option from a lesser choice, it very likely would have led to a poorer outcome.

Within that macro choice, I didn't and probably still don't, have the expertise to ascertain which choice is likely to work out best, so I spread some hopefully decent choices around the family, avoiding the different investments types being in the same one - de-risking at a family level. In making those choices, I check them against MorningStar ratings, to hopefully minimise the chance of a truly poor one in context.

The final factor is that I chose from ones that easily allowed monthly modest top-ups (the first started at £76 per month - the child benefit I got for our first child). It may be that SMT did this too - I don't know - but the ones I chose did and made it easy.

Regards, Newroad

[tjh290633]

What I do know is I did the right thing by the kids for over a decade (for the first at least) by putting

All our money for them into FCIT
All my parents money for them into FCIT
All my in-laws money for them into MYI

I have been doing something similar with my grandchildren. The first went into Witan, the second into FCIT, the third into Alliance and the last via British Assets into FCIT. There was also a a short inadvertent dalliance with FCI.

Start Date   21-Dec-01   27-Jun-03   05-Mar-10   15-Apr-04   07-Apr-11   02-Mar-15        
IRR          Witan       FRCL        FCI         ATST        BSET        FRCL             
IT              10.46%      14.42%       7.81%      11.02%       7.41%      12.18%   TR   
FTSE             1.48%       2.89%       2.10%       2.57%       3.49%       0.06%        
IT on SP         6.10%       9.12%       7.75%       8.03%       0.03%      10.31%        
Period           19.65       18.13        9.05       17.33        3.90        6.45   Years

The first row shows the TR performance over the various periods, the second that of the FTSE100 over the same period, the third the performance of the share price and the fourth the duration of the period. All use XIRR to calculate the return. BSET is the one which disgraced itself.

TJH

Which suggests that FCI first row value should have been 10.21% instead of 0.21% ?

Thanks for pointing that out. It looked anomalous, and then I found a date with a typo giving it as AD 109.

Now corrected in the table above.

TJH

[CryptoPlankton]

Of course I keep an eye on things, but I don't really measure performance as such - as long as it all ticks along and the income seems sustainable (by whatever combination of means) then I'm not quite sure how "Total Return" is relevant?

If somebody would like to explain how to go about "measuring my Total Return" then I may consider giving it a go out of curiosity, but, quite honestly, I struggle to see the point - all I'm bothered about is ensuring my ability to continue generating the income I require...

Such is life as the bumble-bee of the investment world CP....

Whilst the standard model of wings and flight in aerodynamics can't quite account for bumble-bees defying gravity and going about their lives, flying happily from flower to flower, I have long come to the conclusion that there's always going to be similar scepticism in the investment sphere, with some of a much more academic bent never quite grasping (and often, sadly, not even wishing to fully understand...) the non-measurable benefits of the particular approach you prefer, and that's delivered to your personal investment requirements for so long...

I wonder whether we should take more of a cue from the humble bumble-bee, who we never see having to justify or explain how they do things, and who seem to have taken the view to let those who scratch their heads on seeing them fly through the air carry on doing so, whilst they just get on with what makes them happy...

Cheers,

Itsallaguess

Hi IAAG. It's an interesting analogy. All I would say is that, though generally happy to just buzz around, this bumble-bee is quite discerning about which nectar to collect and, as a species, I believe we are also endowed with pretty sophisticated navigation skills - I certainly feel I have a good sense of where I'm going...

But, more seriously, I would genuinely like to understand whether there is really any more purpose to "measuring Total Return" than it simply being an academic exercise or some kind of vanity project (meant in the nicest possible way!) comparing one's performance against an inevitably slightly inappropriate benchmark. Isn't one of the universally held truths of investing that past performance gives no reliable indication of future returns? The world is forever changing and we can't possibly know what is going to happen to our investments simply by looking at historical data. For instance, Unilever is often touted as having been a much better choice than higher yielding equities over the past decade or so - surely anyone can see that just by looking at its total return over that period? Well, if you'd been considering it in June 2008, you'd have been looking at a share with a lower share price than ten years previously and a consistently modest dividend yield - hardly a standout bargain. The SP of another favourite of the HY bashers, Diageo, did absolutely nothing for seven years from 2002 to 2009. Of course, both these shares have proved to be great investments since those dates, but measurement of TR up to then would have told you nothing about how they were going to take off - that would have required a completely different kind of insight into those companies.

Anyway, nobody seemed interested in responding to my request, so I guess I'll just buzz off now...

[1nvest]

But, more seriously, I would genuinely like to understand whether there is really any more purpose to "measuring Total Return" than it simply being an academic exercise or some kind of vanity project (meant in the nicest possible way!) comparing one's performance against an inevitably slightly inappropriate benchmark.

Dividends are just part of total return. Total return is actual £££'s reward. A x% dividend yield, £y dividend value without price appreciation/decline data in uninformative, non comparable other than to dividends alone.

If anything it is dividends that are irrelevant. Just part of total return, potential taxable events, where the amount and timing of the dividend payments likely do not match investors needs/timing. DIY dividends ... selling some of total return better matches most requirements.

Take the same capital from total return as otherwise paid in dividends and the investment reward is the exact same, prior to costs/taxes. There's also time lag factors, you might not be paid a dividend for a number of weeks, selling shares has T+3 lag. The X-div date sees the share price typically decline by the amount of dividends being paid, similar to having sold shares, but might takes weeks before being credited to your account (pay date). Banks and the taxman like 'em however. 'Free' in-transit capital and taxable events. Brokers also, perhaps some FX fees and reinvestment costs. £2Tn FT100 market cap, 3% dividend yield, 60Bn/year perhaps in transit for 4 weeks each year, like having £4.6Bn for a whole year of free capital.

[CryptoPlankton]

But, more seriously, I would genuinely like to understand whether there is really any more purpose to "measuring Total Return" than it simply being an academic exercise or some kind of vanity project (meant in the nicest possible way!) comparing one's performance against an inevitably slightly inappropriate benchmark.

Dividends are just part of total return. Total return is actual £££'s reward. A x% dividend yield, £y dividend value without price appreciation/decline data in uninformative, non comparable other than to dividends alone.

If anything it is dividends that are irrelevant. Just part of total return, potential taxable events, where the amount and timing of the dividend payments likely do not match investors needs/timing. DIY dividends ... selling some of total return better matches most requirements.

Take the same capital from total return as otherwise paid in dividends and the investment reward is the exact same, prior to costs/taxes. There's also time lag factors, you might not be paid a dividend for a number of weeks, selling shares has T+3 lag. The X-div date sees the share price typically decline by the amount of dividends being paid, similar to having sold shares, but might takes weeks before being credited to your account (pay date). Banks and the taxman like 'em however. 'Free' in-transit capital and taxable events. Brokers also, perhaps some FX fees and reinvestment costs. £2Tn FT100 market cap, 3% dividend yield, 60Bn/year perhaps in transit for 4 weeks each year, like having £4.6Bn for a whole year of free capital.

All very interesting I'm sure, but, sticking to the matter in hand: the purpose of measuring TR is...?

[1nvest]

All very interesting I'm sure, but, sticking to the matter in hand: the purpose of measuring TR is...?

Optional. Whether you'd like to see how well or not your investments may be performing (or not). Most will like to monitor such detail. The HYP philosophy is somewhat unique ... capital value is irrelevant mindset. At least not until the prime objective of income production fails and likely capital valuations will also be down a lot.

[Alaric]

the purpose of measuring TR is...?

To give the rate of return on your investments. This can give relative comparisons to other portfolios or other strategies and also absolute values. Is it above zero and by how much?

In its simplest form where no money is put in or taken out, periodically record the total market value and cash. Compare the end of period value to the start of the period and the change expressed as a percentage is the rate of return, hopefully growth rather than shrinkage. That's regardless of whether the change was income driven or capital gain driven or both.

[Itsallaguess]

If anything it is dividends that are irrelevant.

Just part of total return, potential taxable events, where the amount and timing of the dividend payments likely do not match investors needs/timing.

DIY dividends ... selling some of total return better matches most requirements.

There's also time lag factors, you might not be paid a dividend for a number of weeks, selling shares has T+3 lag.

I've lost count of the number of times I've explained to you that, for what I would imagine to be almost every single long-term income-investor, your made-up 'issue' regarding amounts and timings of delivered dividend payments not 'aligning perfectly' with their spending needs is almost guaranteed to be completely irrelevant as a valid criticism against income investing...

That's because almost all income-investors are likely to be using some form of 'holding account', where dividends will be allowed to build up to some level of buffer-capital before regular payouts are then taken from it...

As such, your regular argument regarding 'payment timings not matching investors needs' is so completely irrelevant, and has been explained to you so many times, that to see you repeating it can only be explained as being wilful misrepresentation at this stage...

If I tried to regularly dismiss TR-based share-sales that generated spending as being 'highly inefficient and costly', because to sell 500 shares, I'd incur 5 amounts of broker selling fees when I asked him to sell 100 shares 5 times in the same day, you'd be quite right in perhaps advising me that this isn't a valid argument against TR-based share sales, as no TR-investor would be likely to operate like that, and they would almost certainly only incur a single set of sales-costs, selling 500 shares instead of 5x tranches of 100, and you'd no doubt be right to dismiss my negativity as being unrealistic and mis-representing the real-life situation for the sake of promoting a different approach...

Why then, do you insist on mis-representing an unrealistic 'dividend-payment mis-match' scenario, when it's been regularly explained to you that such negativity is as equally unrealistic as my made-up 'sales-cost' issue above, in terms of it actually being a real-life issue?

Cheers,

Itsallaguess

[CryptoPlankton]

...The HYP philosophy is somewhat unique ... capital value is irrelevant mindset. At least not until the prime objective of income production fails and likely capital valuations will also be down a lot.

I'm sorry, but what has "the HYP philosophy" got to do with it?

To give the rate of return on your investments. This can give relative comparisons to other portfolios or other strategies and also absolute values. Is it above zero and by how much?

Thanks but, beyond satisfying curiosity, I still don't understand how a detailed historical comparison with other portfolios or strategies can tell me anything useful about their relative future prospects? I do keep an eye on the absolute value of my equity investments, but I don't calculate my TR.

In its simplest form where no money is put in or taken out, periodically record the total market value and cash. Compare the end of period value to the start of the period and the change expressed as a percentage is the rate of return, hopefully growth rather than shrinkage. That's regardless of whether the change was income driven or capital gain driven or both.

Well, I guess that by choosing arbitrary start and finish dates (like calendar or tax year?) it would be a fairly trivial task to add the gain in capital value and dividends/capital withdrawn to work out some sort of rate of return for the equity element (though I would imagine some form of unitisation would be needed to do it properly?). I've got to be honest, though, I'm not sure what I would do with that information other than perhaps go "hmm..."

But, genuinely, thanks for the reply.