HYP Strategy Total Return Performance 4 Year Review

[HYPMonkey]

Have just done my annual performance review of my HYP and a further review after 4 years compared to other strategies.

On a total returns basis, the TR including new contributions with all income re-invested was a total of 31% over the 4 years. Income yield is running at a pretty constant 5.85% (JB's winter portfolio yields 5.7% and his dividend portfolio yields 5.3%).

This also includes disasters with CLLN,TSCO, and IRV. My HYP has all the usual suspects along with a few ITs that focus on sectors not covered with the HYP - a total of 34 holdings. Capital value of my HYP is approx £800k.

For a strategy comparison, I have compared my numbers with those on John Baron's IT-based website as a lot of his portfolios were created only 1 month earlier from when I began my HYP journey - so its good to see how another approach goes up against the HYP method. I started my HYP in Feb 2014, with many of his portfolios beginning Jan 2014.

To say I am extremely disappointed would be a understatement.

My HYP total return performance is *less then half* that in JB's Thematic and Spring portfolios and 7% less than the Winter portfolio which is the most conservative. The nearest match to HYP is his dividend portfolio which has the same TR but in 2 years not 4.

Finally I have looked at Gadge's GIP Global IT portfolio and although its way too early to make a meaningful comparison, it looks good so far and will probably outperform my HYP by some margin in time.

I accept that its an income strategy where capital was treated secondary and its income matches (not exceeds by that much) what's possible via well planned IT portfolios. As a strategy to build retirement wealth, for me, its has not met the wealth objectives I have set. One reason is that its based on UK markets, which have performed terribly over time as well as the various activities in the City eg profit warnings, epic mis-management (CLLN,TSCO), cut dividends etc.

I started my HYP journey with 8 years to go to retirement. Four years out, the capital target (needed to buy a house in Europe when I retire) is still far way -- it has effectively delayed my retirement by at least 2 possibly 3 years which is very disappointing as well.

Once upon a time I have no doubt it's design and purpose was solid but I think times have now changed and its no longer as good as it was and I have to say in closing that the HYP strategy is looking like its no longer for me. I am seriously researching other options, namely some combination of John Baron's work and what Gadge is attempting with his GIP method before it is too late.

[OLTB]

Thank you for your detailed posting HYPMonkey - as a relatively new investor, this insight is very useful information.

Cheers, OLTB.

[DiamondEcho]

I started my HYP journey with 8 years to go to retirement. Four years out, the capital target (needed to buy a house in Europe when I retire) is still far way

I think one thing needs pointing out; HYP isn't about creating a target capital sum to cash-in at a future date, it's about creating a desired annual income.

[Itsallaguess]

I started my HYP journey with 8 years to go to retirement. Four years out, the capital target (needed to buy a house in Europe when I retire) is still far way

I think one thing needs pointing out; HYP isn't about creating a target capital sum to cash-in at a future date, it's about creating a desired annual income.

Agreed - It wouldn't be out of place as a Daily Mash headline -

"This strategy doesn't work!!" says man using completely inappropriate long term income strategy for his short-term financial capital requirements.....

Cheers,

Itsallaguess

[ADrunkenMarcus]

I think one thing needs pointing out; HYP isn't about creating a target capital sum to cash-in at a future date, it's about creating a desired annual income.

I think the original poster acknowledged that. However, reinvesting dividends in the accumulation stage is surely entirely appropriate and a good way to compound before taking the natural dividend yield?

Best wishes

Mark.

[kempiejon]

I think one thing needs pointing out; HYP isn't about creating a target capital sum to cash-in at a future date, it's about creating a desired annual income.

I think the original poster acknowledged that. However, reinvesting dividends in the accumulation stage is surely entirely appropriate and a good way to compound before taking the natural dividend yield?

Best wishes

Mark.

Ah yes indeed but it's the increasing natural yield, well the income actually that is compounded and the OP said

I started my HYP journey with 8 years to go to retirement. Four years out, the capital target (needed to buy a house in Europe when I retire) is still far way -- it has effectively delayed my retirement by at least 2 possibly 3 years which is very disappointing as well.

[ADrunkenMarcus]

I'd assume any strategy which involved buying something in Euros, which was devised before Brexit, would have gone somewhat off course by the subsequent exchange rate movements in any case.

I noted that:

I accept that its an income strategy where capital was treated secondary and its income matches (not exceeds by that much) what's possible via well planned IT portfolios.

From my perspective, the higher dividend yield may turn out to be less sustainable than the alternative.

Best wishes

Mark.

[HYPMonkey]

I think one thing needs pointing out; HYP isn't about creating a target capital sum to cash-in at a future date, it's about creating a desired annual income.

I think the original poster acknowledged that. However, reinvesting dividends in the accumulation stage is surely entirely appropriate and a good way to compound before taking the natural dividend yield?

Best wishes

Mark.

Ah yes indeed but it's the increasing natural yield, well the income actually that is compounded and the OP said

I started my HYP journey with 8 years to go to retirement. Four years out, the capital target (needed to buy a house in Europe when I retire) is still far way -- it has effectively delayed my retirement by at least 2 possibly 3 years which is very disappointing as well.

Many thanks to all for the replies so far.

In hindsight, I totally now agree with comments about the purpose of the HYP strategy versus capital sum.

I'm big enough to realise my mistakes in both strategy selection and mistakes made executing the strategy. I also accept that picking the wrong strategy at the wrong time is very unhelpful.

At the time when I decided on HYP, I read up on it extensively and read the TMF debates for and against HYP and the benefits of compounding the dividends on total portfolio wealth over time. I also was seduced by strategic ignorance and being a Doris -- all good things, but for later on. What caught me out is that I didnt know the capital return differences would be so stark and the concentrated effects of management mis-behaviour in a HYP.

For what its worth, I now have a real-life experience case.

Lessons learnt and other musings:

1. Plan retirement to have 2 pools of funds (i) Capital pool for asset purchases (house, car etc) run with a more conservative capital strategy and (ii) Income pool using a HYP or IT Income portfolio to live off natural yield. Sizes of the pools naturally depend on personal preferences.
2. In the wealth building phase, leave it to the experts who know more than you but at the best cost benefit tradeoff -- well planned IT growth portfolios with real life records seem to be the choice here. I have looked at ETFs and still think ITs have the edge due to active management and leverage.
3. By using ITs, you become less of a first-hand victim of the City crooks (CLLN,IRV,TSCO etc) and other spivs that either prey on retail investors or are just plain incompetent - at least with ITs you are sheltered somewhat to a degree by proactive managers that know more than you, are in specialist sectors and other world markets besides the poorly performing UK markets with the sharp practices.
4. Capital growth absolutely does matter.
5. Two to three years out from retirement is about the right time to consider HYP or another solid income strategy for carving off capital to create the income pool and then running a HYP or similar.

Had I done the above, my overall capital would be in a way better position by at least double the capital growth over HYP, likely much more and looking forward to setting up the income part of the project.

What to do now?

Well, it seems I have done things in reverse but all is not lost yet. Over the next couple of months research the best IT approach and then abandon the HYP as I have enough income. Re-balance the HYP by selling the dogs and other undesirables and devote to a capital pool which will also receive dividends and future contributions. I am still of the opinion that the best configuration for the capital pool will be a combination of parts of John Barons Summer portfolio, Gadges GIP and maybe some other pieces.

Thanks to all for your views.

[Prof103]

"TR of 31% over 4 years for £800k portfolio"

Happy Easter Everyone,

I think that you are way too hard on yourself as to performance over the last four years, a short period. It is not bad. Also, to many of us you have a goodly amount of capital. You have a lot to be grateful for.

You have not yet experienced the downside of investing over such a short time period. In 2009, many HYP investors, and others, experienced a 40% drop in the capital value of their portfolio; I've met some. If that happened to you, that would be a £320k loss of capital available to you for your retirement plans: ouch! Which is why as a value investor I carry non-performing cash in my portfolio which costs me some TR performance, an insurance cost if you like.

So I would keep going as you are, learning along the way, and relax.

The only thing that you might consider further since the FTSE 100 has become so concentrated these days is to extend to FTSE 250 stocks and some European stocks.

One last thing: I don't worry about people who do better than me in TR. I am happy that I do as well as I do. Let me give you an example. Since 2009, the FTSE has roughly doubled but the FTSE 250 has trebled. Guess who has been largely invested in the FTSE 100 over that period?

Hope that helps,

Prof103

[dspp]

What to do now?

Well, it seems I have done things in reverse but all is not lost yet. Over the next couple of months research the best IT approach and then abandon the HYP as I have enough income. Re-balance the HYP by selling the dogs and other undesirables and devote to a capital pool which will also receive dividends and future contributions. I am still of the opinion that the best configuration for the capital pool will be a combination of parts of John Barons Summer portfolio, Gadges GIP and maybe some other pieces.

Thanks to all for your views.

Well done for posting outcomes (interim or otherwise) that are not 100% positive. That takes guts. It is very important that it is done so that the many lurkers can form a more rounded view. HYPs have their place, but they also have risks and limitations.

You have not made an argument as to why you think that a basket of ITs outperforms the corresponding basket of passive index trackers. Nor for that matter has Gadge. I raised the point a few years ago when Gadge went his route (and I mine) and did not get a satisfactory answer to support the "IT are best hypothesis" then, or since. I have yet to see a study that gives the better outcome to the ITs on a like-for-like basis unless one cherry picks with hindsight. So you may head off in another suboptimal direction again.

I have run companies invested in by IT managers. I saw no special sauce, quite the reverse ......

Selling the poorer performers now is in general a classic buy-high / sell-low mistake. Are you really sure.

If you want to rebalance you may find my reviews helpful. I waited a day or so before commenting on your posts as I knew that there would be data in my two annual reviews that would be informative for you. I've now done them, see here:
viewtopic.php?f=56&t=4396

There are many paths to heaven. You have a pot that has not done too badly (so don't beat yourself up too much), and is big enough to absorb mistakes. Take care when making a course correction not to get carried away by emotion. Good luck.

regards, dspp

[Hariseldon58]

Its a very sensible move to examine what you do and make comparisons with other approaches, its the only way to learn and make improvements.

I'd make any changes slowly....perhaps introduce a new approach and use it as part of your portfolio.
I've gone from Investment Trusts (strong bias to UK Equity Income) to Passive ETF's over the last 30 years, trying HYP ,individual shares along the way.

I'd suggest Vanguard Life Strategy 100 as an excellent benchmark for an equity portfolio.

My portfolio is akin to an imaginary Life Strategy 90 ( a different mix but similar)

The last 4 years have had 2 down years for me but this is after all living costs, moving house (sideways but a lot of costs !) a lot of cruising but net of these costs +50% and with just 8 major investments ,its low maintenance.

The yield is low around 2% but I reinvest all dividends and live off the assets as a whole ( the portfolio size is such that the yield probably covers most of my living costs, the portfolio yield has halved over the last 11 years since I retired early but the total return approach has been so successful that parking the lot in gilt's is a viable but boring option !)

What works for me might not suit you, but the Vanguard Life Strategy is a great benchmark, if you can't beat this why bother with your own approach ?

[colin]

In hindsight, I totally now agree with comments about the purpose of the HYP strategy versus capital sum

Yes but john Baron's income portfolio of investment trusts still trounced your stock picking skills.
The question is can one really emulate John Baron's performance, I have a vague recollection of a post somewhere from someone who had tried without enjoying JBs succes.