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What’s the share trading strategy for the Monevator demo HYP?

Trade shares or do nothing?

A question about the demo high-yield portfolio (HYP) I set up back in May 2011:

“I found the portfolio for income you did for your blog and have been following your website since but as far as I can tell you haven’t told us any trades since then.

I think it would be better if you told us what trades you are doing for this portfolio (and what is your overall trading strategy / aim).

Thanks and understood if you don’t want to disclose your strategy /  trades for privacy reasons.”

A simple query, with a simple answer: I haven’t done any trades in the portfolio.

All 20 of the shares I initially chose remain in place today.

This isn’t sheer laziness on my part (although my inner editor should have thought a bit harder about whether a demo portfolio that wasn’t traded would make for gripping blog fodder!)

Rather, the idea of this sort of HYP – into which I invested £5,000 of my own money to ‘keep it real’ as the kids used to say – is that you enjoy the dividend income, while leaving your shares to do the business.

If there is a trading strategy, it’s pretty straightforward…

Don’t trade!

Doing nothing is not nothing doing

People get hung up on seeking the best investments, beating the market, avoiding blow-ups, and maximizing their dividend income.

Never mind that every one of those aims – to “beat” and to be “best” – will prove impossible for most people.

It wasn’t always like this. In the old days, a wealthy gentleman or lady about town held a clutch of blue chip shares (and bonds) for income, and scarcely had any idea there was a market that they could fail to beat.

There were no index trackers to make things even simpler, but equally there was no CNBC to tell them they had to get out of Monkey Brain Holdings by teatime or they were toast. They might have reviewed their holdings with their accountant or banker if they should come into more money – or perhaps at family milestone, such as a coming of age or a death – but that was about it.

Obviously things could and sometimes did go wrong. But often enough, over the long-term, it seems to have gone right, too. And I think the approach still has some merit today, especially for those who distrust the paradoxes inherent in index tracking.1

I obviously didn’t notice this alone. Motley Fool UK writer Stephen Bland, for example, is just one of several writers to make a similar point. He’s done it best in his pieces about a fictional dowager called Doris, who enjoyed her dividend income oblivious to the huge wodge of shares that provided it.

Bland optimistically calls such HYPs ‘eternity’ portfolios.

Perhaps he eats a lot of vitamins. I wouldn’t dare expect my portfolio or its owner to live forever without a trade. But I wouldn’t wait up.

Practical reasons not to trade shares

Besides striking a blow for old-fashioned rentierism, there are other reasons why I don’t have a trading strategy for my demo HYP:

  • Research suggests the more you trade, the worse your returns. By reducing my opportunities to make boneheaded decisions, I’ll hopefully increase the chances of success.
  • I’ve also no plans to trade because the demo portfolio can’t afford it. I set it up with £2-a-pop dealing fees in a Halifax Sharebuilder account. However it costs £11.95 to sell a share. That’s a huge amount compared to the £250 invested in each company, making dealing very expensive.2 (Any comparison between the cheap price of entry to Sharebuilder and the tactics of your local drug dealer would probably be libelous, so I’ll say nothing more.)
  • I also have no trading strategy because I’ll make it up on the hoof. In my view, once you’ve decided to go to the dark side and buy individual shares rather than passive funds, you must do it your way. I believe active investment is at best an art not a science (at worst it’s an illusion) so no firm rules.

Others take a different tack. Rules that work for some people include:

  • Sell a shareholding if the dividend is cut.
  • Sell half of a shareholding if its share price doubles.
  • Reduce a holding if it becomes greater than 10% of the total.
  • Reduce if its annual dividend stream is more than 10% of the total.

But not here.

Why I will end up trading in the portfolio

Ideally I won’t ever trade these shares. The total dividend payout will increase faster than inflation, and by 2020 we’ll be as shocked at how well things have turned out as any parent when their grumpy, smelly teenage boy turns up in his 20s with a nice new girlfriend and a haircut.

In reality, something will need to be done sooner or later.

A company will be taken over. I’ll need to reinvest the proceeds if it’s a cash offer, or possibly sell the shares if it’s a dividend-threatening merger. There will be rights issues, too, and maybe demergers. And while I’ve no rules, I may sell a shareholding if a company cuts its dividend or – more controversially – if I judge it’s likely to.

In addition, I will probably not ignore diversification, even if Doris does.

The danger with very long-term buy-and-hold is that one or more companies does particularly well. It then dwarfs the rest of the portfolio, which increases the risk. A related danger is that the dividend income stream from a particular company become a very large percentage of the total, leaving your income stream vulnerable to one bad blow.

When (not if) this skewing happens, it will be tempting to reduce the outsized holdings.

This is a tricky area. In long-standing buy-and-hold portfolios, it’s often a few big winners that deliver most of the returns. If you start trimming them too soon, you risk a mediocre outcome.

On the other hand, old portfolios that are never pruned can become fantastically lop-sided or top-heavy (as well as making their owners look like geniuses if you put too much weight into why they first picked a big winner in the first place).

The typical dabbler in shares asks if they should sell because a share has gone up 20%. In veteran buy-and-hold portfolios, you might find one that’s gone up 2,000%.

There are emotional factors to keep in mind, too, especially as this mini-portfolio is meant to be being run as if it was a significant-sized one – perhaps the bulk of somebody’s equity investments.

While it might be mathematically sensible to run your winners, in practice few people can handle having most of their money in 2-4 companies, with the rest of their holdings tagging along like gulls following a trawler.

Onwards and hopefully upwards

Remember that this demo HYP portfolio is meant to explore (for me as much as anyone else) the ups and downs of holding blue chip shares for income.

I’m not claiming to have a secret method for picking the best 20 shares you could want on any particular Thursday. And I am certainly not saying that buying and holding blue chips for income will beat the market.

I used real-money to keep it realistic, and because I’m curious as to how it will turn out. Do note though that while there are similarities – I like dividends, and I don’t trade most of my portfolio much – this demo HYP is not even close to a mirror of my own wider investments.

Finally, because somebody always asks, I should say again I’m not reinvesting the dividends – see my previous post on why I’m withdrawing the income.

Right, back to the metaphorical hammock!

  1. I am not saying they are right to find index funds distasteful. I am saying I have met many people who do, and I have failed to convince them otherwise. []
  2. If I ever do trade I will possibly rebate most of the dealing fee with new money. This is meant to be a scaled-down model of a more practically-sized portfolio after all. We will see. []
{ 17 comments… add one }
  • 1 gadgetmind January 10, 2013, 2:16 pm

    My wife holds a 25 share HYP but I bet she can’t remember more than a couple of the constituents. (And she doesn’t know the online password for the account!)

    I have done exactly one sell in there in two years and that was when BAE Systems announced the EDS deal. I decided that others wanted the shares more than I did and sold for a tidy profit. They then called the whole thing off so I rebought within 30 days so my profit for CGT purposes is much smaller, which is nice.

    I do reinvest dividends but not always in HYP shares as I also dabble in preference shares and ITs. I tend to steer the money wherever looks good when around £2k-£3k has accumulated, some of which is from dividends, some from regular savings, and some from me grabbing the wife’s debit card when she’ not looking.

    I recently showed her the total in the account and she said “Oooo, where did that come from!” I assured her that I’d magicked it out of thin air and she seemed happy.

  • 2 John H, Kidsgrove January 10, 2013, 3:09 pm

    As ever, great article TI.

    It would be good to see how the portfolio has fared since May 2011 and how it might compare to returns on, say, the slow and steady passive portfolio.

    Returns on my own shares porfolio this past year were around 12% and dividends increased by an average of 9%.


    John H

  • 3 John @ UK Value Investor January 10, 2013, 3:23 pm

    HYP is fine, although many investment trusts do more or less the same thing of producing a relatively reliable stream of dividends. I think personally if I was going for a zero-tinkering portfolio I would just use trusts.

    For those investors who have large enough portfolios so that trading costs aren’t going to drag on performance too much (my minimum is £1,000 per stock), and who are also willing to do some tinkering, I think HYP is overly restrictive.

    With zero trading there is no opportunity to capture capital gains from price swings, which means that a lot of potential returns are left on the table. If investors can make even half reasonable guesses at when a share is attractive (which they must be able to do otherwise they wouldn’t have added it to their portfolio) then they should be able to say when it is not attractive, and therefore should be sold and replaced with something better.

    This doesn’t mean trading every day, or even every week. Personally I just make one trade each month and it only takes a couple of days of research to choose what to buy or what to sell.

    However, for those who really don’t want to trade, ever, then HYP is fine (although I’d still probably say just buy an investment trust or index tracker because that’s even easier, especially with the half decent yield on offer from the FTSE 100 at the moment).

  • 4 The Investor January 10, 2013, 3:24 pm

    @John – Glad you enjoyed it. The portfolio is currently valued at £5,287, or 5.7% on the initial investment, including all costs. That compares to £4,670 at the one year anniversary in May 2012, so quite a nice bounce back.

    I’ll be doing a full review in May, including the much more important full-year dividend income review — the point of this strategy, after all.

    A full-on comparison with the S&S is going to be tricky, as the latter reinvests all income. I will probably try to fudge an ongoing reinvesting approximation with the FTSE, however.

    Please note though, as I say in the article, this isn’t about beating the market or any other system. If it does or doesn’t do better, it doesn’t prove anything — it’s just one sample of 20 potential shares. I might have chosen others.

    All it’s meant to demonstrate is the viability of investing directly in a portfolio of shares for income. 🙂

    p.s. There was an error in the article as first published concerning the size of each investment. It was of course £250 (before costs) as updated above.

  • 5 The Investor January 10, 2013, 3:33 pm

    @John — Thanks for your thoughts. I don’t disagree at all about investment trusts (and indeed benchmark this HYP against them). They definitely reduce risks further, albeit by introducing a couple of new ones (manager risk, for example) as well as fees. Their capital reserves are a very attractive feature, too.

    With zero trading there is no opportunity to capture capital gains from price swings, which means that a lot of potential returns are left on the table. If investors can make even half reasonable guesses at when a share is attractive (which they must be able to do otherwise they wouldn’t have added it to their portfolio) then they should be able to say when it is not attractive, and therefore should be sold and replaced with something better.

    I don’t agree with this personally, and I think it’s a bit of a fallacy — albeit an extremely common one in HYP circles.

    When you buy say 20 shares initially, you are basically taking on the aggregate risk/reward of that basket of shares. If there’s a mispricing towards value/yield or similar, you might be expected to capture it.

    This is a different sort of bet to picking one share at any particular point in time to replace another.

    Secondly, when you buy a basket of initial shares, you are following a semi-automated procedure. You have to buy 20 shares, they have to be diversified, they have to have reasonable qualities (not too much debt, decent prospects, well covered dividend).

    Later on, trading individual shares, you will likely be making specific decisions about either quantitative or qualitative factors, likely with considerable emotional baggage, too. (The fear of losing a big gain, or the pain of looking at a loss, say). These are extremely well-known psychological biases that most people suffer from, as I’m sure you’re aware.

    Some people will doubtless trade their HYPs profitably, and good luck to you if you’re one of them. I pick stocks, so obviously I’d fancy myself, too! (But I know I don’t know that for sure).

    Most people will probably sell low and buy high and rack up higher costs, and all the usual things they suffer from that are proven to reduce returns, IMHO.

    This demo portfolio is designed to show what happens if you avoid that path.

  • 6 gadgetmind January 10, 2013, 3:55 pm

    I looked at income ITs before starting my HYP but too many of them were on premiums. As I don’t need the income smoothing of the reserves, I went for the HYP.

    I will keep looking at income ITs with an eye to picking them up when I see nice discounts. If I have to wait a few years then so be it.

  • 7 Jane Savers @ The Money Puzzle January 11, 2013, 2:06 am

    I am taking the same approach but I have my dividends automatically reinvested in the stock. While I do follow the companies that I hold I have no plans to sell for at least 5 to 10 years and the stock portfolio is the major part of my retirement income.

    I am new to investing. I bought my first shares in 2012 but I am trying to save more to invest more.

    First time here. Found you on Wise Bread.

  • 8 Moneyman January 11, 2013, 9:15 am

    Hi Investor,

    Well done on your disciplined approach. A couple of comments, though:
    – sometimes you need to act, for example when the company ‘goes bad’
    – because so much of the added value of HYP shares is in the dividend, I don’t expect large increases in share price: when this happens, reducing the current yield, I do look at whether there are better yields available. (I usually wait until the price increase is equivalent to 5-years’ worth of income)
    – a portfolio of just HYP dividend shares is too volatile: I also hold 50% high-yield fixed-income (like corporate bonds, prefs, Pibs, etc.)
    – if you hold your portfolio in an ISA or SIPP, this will encourage you to reinvest the income: together with new contributions this provides me with around 20% of new investment each year, allowing me to rebalance
    – this particular approach has (perhaps luckily) led to a portfolio gain of 33% in 2012, total return

  • 9 The Investor January 11, 2013, 11:54 am

    @Moneyman — Thanks for your comments. A few quick replies.

    First off, absolutely agree everyone should reinvest dividends as long as possible. I concluded the post with a mention of this, but I think I’m doomed to having to say it again whenever I write these updates! This is a *demo portfolio*, run to see how a portfolio of shares can deliver an income. Reinvesting every year would produce a bigger pile that distorts that aim and would make comparisons with alternative yields in the market (from say cash or bonds) increasingly difficult over time. But for those trying to grow their wealth, absolutely reinvest all the way. I do with my own money!

    I agree that I’ll sometimes need to act. I state that in the copy. 🙂 I do think that ‘going bad’ is very subjective though, and likely to lead the average investor astray, selling when scared and so forth. Many will do better doing nothing.

    I know many DIY income investors do what you suggest, but I suspect a policy of continually chasing higher yields and selling down winners could lead to you doing worse over time. I have no evidence to back this up, it’s my gut feeling. Obviously if you’re an excellent stock picker, that might subvert that risk.

    But if you look at long term income managers like Neil Woodford, they have lower yielders in their portfolio, too. You don’t want to end up with a portfolio of duds (or less obviously to catch a dud every couple of years, and insidiously reduce your return).

    A portfolio of any shares is clearly volatile, agreed. However the income from those shares is much less volatile. Even in the big payout cuts of a few years ago, income suffered far less of a lurch than capital — and those were very unusually big years for dividend cuts.

    One will pay a long-term price for mixing in 50% fixed income when it comes to total return, I believe (which is not to say you shouldn’t do it — most people probably should, I agree, because the volatility of capital will unnerve them. Plus of course you don’t want all your eggs in one asset class basket. I prefer a lesser holding of cash for my cushion currently, as much discussed elsewhere. But regardless, this portfolio is meant to show how income shares perform, not a total approach to investing).

    Thanks for stopping by!

  • 10 Oliver January 11, 2013, 8:52 pm

    @Moneyman – A large price rise which depresses the dividend could (should?) be immaterial for a HYP, I think. Such a price rise is likely to be caused a) by the company doing well, and b) the market noticing it. So any price rise is likely to be accompanied by increases in the actual _dividend_, even if the _yield_ were to fall. Since the shares were bought already, extra dividend means, well a good result, regardless of whether the market has overpriced that or not. You could have bought a share yielding 4%, which by the time the market notices it success, is effectively yielding much more than that, _for you_. Would you find a higher yield on a new purchase? Maybe, maybe not. I think this is one of the things that this model portfolio is likely to test.

  • 11 Passive Investor January 11, 2013, 10:27 pm

    You mention diversification in the context of a couple of your 20 stocks vastly outperforming the other 18. This is relevant to my concern that a significant risk of the 20 stock HYP portfolio is that it won’t be adequately diversified. In other words there is a significant risk that to 20 stock HYP portfolio will underperform the index.

    William Bernstein has written a relevant interesting piece on the number of stocks necessary for diversification – “The 15 stock diversification myth” :


    In a nut shell the problem arises because just as the return of a portfolio of 20 stocks is not distributed evenly between all 20 stocks (as you describe), so in an index of 100 stocks as few as 5 stocks could be responsible for a significant (much more than 5%) of returns .

    Consider a simple index which doubles (100% return) over the investment time scale. However, suppose 5 of 100 stocks are between them responsible for 20% of returns and therefore the other 95 stocks are responsible between them for only 80% of returns. Suppose that 20 stock portfolio’s are selected at random (I am a passive investor!).

    Using the above assumptions approximately 30% of the randomly selected 20 stock portfolios will not contain a single of the ‘supercharged’ 5 high-return stocks. This unlucky 30% of investors will underperform the index.

    With the slightly extreme example figures given, instead of doubling in value (the 100% index return) the return on a portfolio with none of the 5 high-return stocks will be only 68%.

    The flip side of this of course, is that some investors will significantly out-perfom the index and the roughly 1 in 5,000 who get all 5 high return stocks in their 20 stock portfolio will make over 4 times their initial investment rather than just index return of doubling their investment.

    Any way , the figures don’t really matter but the important point is that there is a significant chance that a 20 stock portfolio will significantly underperform the index. For those who don’t want to gamble with their life savings this is a significant downside to the 20 stock portfolio in my view.

  • 12 The Investor January 11, 2013, 11:02 pm

    @Passive Investor — I don’t disagree with most of what you’ve written, and have of course read the research. (I’ve seen estimates as high as 50 stocks as being required to be in with a near certain shot of a winner).

    However, clearly, this isn’t a tracker.

    If a HYP-constructer wanted the market’s yield and the market’s constituents and a guaranteed close approximation of the market’s return, she should buy a FTSE 100 ETF and pay a derisory TER and get on with life.

    Anyone buying a HYP wants a higher yield, and must be prepared to take on higher risk to get it. There’s no other reason to buy this portfolio.

    Another thing to keep in mind is these are deliberately huge companies. In a way, they’re almost several companies rolled into one in many cases. They also share other similarities, such as strong cash flow, yield and low debt. This correlates them more than a random 20 stocks from the index, for good or ill.

    (Incidentally, one thing you don’t mention, too, is that there’s also a “risk” of out-performance. 😉 Such is the world of the academic definition of “risk”.)

    Finally, I think “gamble with their life savings” is a bit strong.

    I’m as pro-trackers for most people as anyone, but it’s not like they can’t soar and lurch 50% over a year like any other equity portfolio. Indeed, I’d bet much of the time an income portfolio of big blue chips will be less volatile, though I can’t prove it. (It certainly was the case in the 2000 crash. I’m not so confident about the last one, though, due to the hit the banks took).

    As I write above, for much of the time investing existed, people didn’t care about “the market”. They bought investments to meet a need, such as income. Buffett’s early partnership letters are fascinating on this — he chastises the (then tiny) fund management industry for not even benchmarking itself properly. It was a different world.

    If this portfolio delivers a high income and it rises at least ahead of inflation, I’ll judge it a success accordingly. That’s what it’s meant to do.

    Thanks for your thoughts.

  • 13 Passive Investor January 12, 2013, 8:52 am

    @investor. Thanks for your considered reply. Your point that the HYP portfolio isn’t a tracker is a fair comment. My angle on this as a passive investor was that after reading your posts I was considering putting some of my portfolio at some stage into HYP (or similar). In the back of my mind I had the figure that 20-30 stocks would give a low standard deviation. I hadn’t realised until a read the article I attached thoughhow big the risk of deviating from the index was though. I did mention that there is a ‘risk’ of out performance but for me at least losses against the index would hurt more than gains would bring pleasure.

    And sorry ‘gambling with life savings’ was too strong. It wasn’t meant to offend and I hope it didn’t.

    Thanks as ever for all the insight on your site. I will follow HYP with interest. I haven’t been back to the post but out of interest are you going to benchmark its total return against FTSE100?

  • 14 The Investor January 12, 2013, 12:33 pm

    @Passive Investor — No offence taken. I will be benchmarking against an iShares FTSE 100 ETF and a trio of income investment trusts, as detailed at the first anniversary. May 2013 will be the first full year of income for the HYP, so it will be the first ‘proper’ review.

  • 15 Jonny January 29, 2013, 6:48 pm

    For the passive (lazy) amongst us, who don’t believe in their own ability to pick shares, is there a passive/index tracking option to get a high yield portfolio fund/tracker, with low management costs?

    I suspect that with high yielding shares being more of a specialism (i.e. not just wanting to track the market), that there are two choices:
    1) Pick a FTSE (100, 250, All-share) or World tracker, and reap a smaller yeild – or
    2) Pay a fund manager to do it for you

    I’d love to hear if there is another option, however, or any decent (low cost, consistent high-yield funds).

  • 16 The Investor February 3, 2013, 1:06 am

    @Jonny — There are some options, but they are pretty untested.

    The US version of the new “UK Dividend Aristocrats” ETF is pretty well regarded:


    It holds a pretty weird selection of shares, however, compared to what a typical UK blue chip hyp-er would buy. (Click ‘holdings’ to see).

    I also happen to like income investment trusts. As a class they have a great record and the TERs aren’t too bad:


    Watch out for premiums at present though.

    Note that in general yield has been in a lot of demand in the past few years. Unless you have a pressing need for income now, you might do better to invest in the broad indices and tilt towards income when it’s less in fashion.

  • 17 Jonny February 3, 2013, 11:04 am

    Thanks for that it’s good to know.

    I’m in no desperate need for income. It was more a desire to see actual dividends hitting my account, to see they actually exist!

    I’ve read the post on looking up dividends for accumulation funds, but it’s just not the same as seeing cold hard cash appearing.

    I guess I’ll wait for savings rates to get back up to the 7-8% levels before investigating this again (at which point I’m guessing the investment trusts would hopefully be trading at a discount).

    Thanks again for the info.

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