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The Monevator demo HYP: One year on

The Monevator demo high yield portfolio is already a year old.

A year ago, I thought it would be a good idea to sink £5,000 of my own money into a high-yield portfolio (HYP).

I know, what was I thinking?

Almost as soon as I set-up this demo portfolio – by buying into 20 shares via a low-fee Halifax ShareBuilder account – the markets turned south. And despite a brief flirtation with north in early 2012, south is pretty much where they’ve stayed.

Buying an income portfolio is a long-term game, however, so I have no regrets about setting up this demo when I did.

Firstly, I don’t believe it was obvious a year ago that equities would do poorly. We could just as easily be up as down.

Sure, Europe already looked about as attractive as a busload of Greek pensioners dressed up as 1930s German showgirls, but things also looked grim in 2009. Valuation counts most, and they didn’t (and don’t) look too stretched to me.

Secondly, as I discussed in my follow-up article on benchmarking the demo HYP, the alternatives for income seekers didn’t look exactly attractive. Real yields on cash were negative in May 2011, even if you locked away your money.

True, with hindsight an investor would have done better sticking with cash for the past year, as we’ll see. But you can’t invest with hindsight!

A more sensible conclusion from the mediocre past year for shares is that you shouldn’t put all your eggs in one basket. A mix of cash, bonds, equities, and other asset classes will provide a smoother ride. This demo portfolio is meant to show how a pure HYP performs over time. I don’t mean to suggest you should put your worldly worth into 20 shares!

Still, a 7% fall isn’t a big deal compared to the spanking you’ll get in properly bad years. Also, none of the 20 shares I bought have cut their dividend payouts, as far as I’m aware. On the contrary, they’ve raised them. And that’s what counts most when buying an income.

Income streams can be expected to be far smoother than capital fluctuations, which is why I think targeting income is a better goal for many private investors.

The HYP valuation, one year on

So where do we stand after a year? Good question, and I wish I’d asked the same thing when the portfolio turned one a fortnight ago.

Regular readers may recall I bought the HYP with real money, partly to make it easier to track. However I didn’t have time to write this post on the HYP’s birthday – and I forgot to note down the valuation. I’ve therefore had to reconstruct it in a spreadsheet.

Here’s where the HYP stood at the end of trading on the 10th May 2012, using prices from Yahoo:

Company Price Value Gain/Loss
Aberdeen Asset Management £2.57 £274.62 9.9%
Admiral £11.48 £163.10 -34.8%
AstraZeneca £26.78 £214.46 -14.2%
Aviva £3.03 £170.71 -31.7%
BAE Systems £2.78 £211.75 -15.3%
Balfour Beatty £2.70 £204.13 -18.4%
BHP Billiton £18.72 £195.16 -21.9%
British Land £4.92 £205.82 -17.7%
Centrica £3.10 £246.09 -1.6%
Diageo £15.35 £308.10 23.2%
GlaxoSmithKline £14.06 £266.63 6.7%
Halma £3.91 £263.17 5.3%
HSBC £5.57 £211.67 -15.3%
Pearson £11.63 £255.66 2.3%
Royal Dutch Shell £21.31 £239.57 -4.2%
Scottish & Southern Energy £13.21 £249.17 -0.3%
Tate £6.94 £283.24 13.3%
Tesco £3.20 £193.90 -22.4%
Unilever £20.64 £259.73 3.9%
Vodafone £1.71 £253.33 1.3%
£4,670.03 -6.6%

Note: The portfolio was purchased on the morning of 6th May 2011, with £250 invested into each of 20 shares. All costs (stamp duty, spreads, and dealing fees) are included.

It’s never nice to see your shares down when you’re not going to be buying any more – my £5,000 investment is the lot for this experiment – but there we are.

Turning to the performance of individual companies, “what was I smoking?” comes to mind most when I look at the two insurers, Admiral and Aviva. They are in slightly different sectors (and Admiral was also hit by company-specific worries) but both do suffer a lot when capital markets are unnerved. I probably went a bit overboard here.

The big surprise for me was Tesco, which I thought of as a stalwart addition. I would never have guessed it’d be the third-worst performer in capital terms.

Alternative 1: The iShares FTSE 100 tracker

As outlined in my benchmarking article, I’m going to compare this HYP against two alternatives – a cheap ETF, and a trio of investment trusts.

For the ETF, I’ve selected the iShares FTSE 100 ETF (Ticker: ISF), which is safe1, popular, and liquid. I’ve assumed I bought it for the same low dealing fees as the HYP, and that there’s no stamp duty to pay.

However due to the uncertainty over when exactly a Halifax Sharebuilder deal would have gone through on the day of purchase, I can’t be sure exactly what price I’d have paid.

I’ve therefore averaged the opening and closing price of the ETF, which seems the fairest solution. (I’ve ignored the tiny spread, too).

A hypothetical £5,000 was invested on 6th May 2011. Here’s where it would have stood at close of 10th May 2012.

Company Price Value Gain/Loss
iShares FTSE 100 ETF £5.60 £4,678.36 -6.4%

Note: Prices from Yahoo.

I’m pretty surprised by how similarly the HYP and this tracker have performed in year one, given all the turbulence and the higher fees of buying the HYP (20 lots of dealing fees plus stamp duty and higher spreads). It shows the power of horizontal diversification.

Still, it’s very early days.

Alternative 2: A trio of income trusts

As further discussed in the benchmarking article, I’ve chosen three income investment trusts to track as an alternative to the HYP.

Once again, I assumed they were bought via Halifax Sharebuilder, and again I averaged the opening and closing prices on 6th May 2011. Stamp duty and a penny spread on each trust’s share price were also factored in.

Here’s where a hypothetical £5,000 split between the three trusts stood on 10th May 2012.

Trust Price Value Gain/Loss
City of London IT £2.86 £1,567.02 -6.0%
Edinburgh IT £4.79 £1,688.03 1.3%
Merchants Trust £3.65 £1,430.84 -14.2%
£4,685.89 -6.3%

Note: Historical prices were not available from Yahoo for Merchants, so were taken from Google.

A similar capital performance here to the HYP and the iShares ETF. Clearly my choice of trusts has been a big factor in the short-term though, so it’s even more important to wait a few years before we overstate any findings.

I personally think investment trusts are a good halfway house between being an enthusiast who fancies managing a portfolio of shares (and perhaps daydreaming of outperformance) and a passive investor who invests via an ETF or fund.

So far, so good.

Income comparison

So much for capital, what about the all-important income?

One snag is that the timing of payments (and of ex-dividend dates) means none of the three alternatives received all the income you’d expect them to get in a normal calendar year. This is a first-year problem, and it won’t happen again.

For the hypothetical ETF and trust holdings, I went through the dividend records (via the Digital Look and iShares websites) and manually totaled the payments due, taking into account ex-dividend and payment dates.

For the HYP, I simply added up all the dividends I received over the period.

Here’s what each system earned between 6th May 2011 and 10th May 2012.

Income Yield on £5,000
HYP £181.95 3.6%
ETF £155.05 3.1%
Trusts £183.56 3.7%

Note: Yields are rounded to one decimal place.

As you might expect, the FTSE 100 ETF is lagging the two more specialist income vehicles. But these are very early days.

The next 12 months will provide our first full-year run of capturing all payments due to each strategy. And in the long-term, we’ll see whether biasing for income at the start is still generating a higher income versus the market in 5-10 years time.

First year total returns

Adding the capital valuations to the dividends received gives us the total return earned (or the lack of it) over the year.

Here’s where total returns stood as of close of play on 10th May 2012.

Total return Gain/Loss
HYP £4,851.58 -3.0%
ETF £4,833.42 -3.3%
Trusts £4,869.44 -2.6%

Note: Gain/loss is rounded to one decimal place.

Did I hear someone at the back shout “Efficient Market Hypothesis?” The results from our first year of following the strategy do suggest a lot of faff to generate much of a muchness.

But you know what I’m going to say, don’t you?

Early days!

Given all the short-term factors I’ve mentioned above, I wouldn’t draw any conclusions from these total return figures yet.

In theory, the fact we’re targeting income from the HYP and income trusts will eventually be reflected in slightly lower capital gains versus the market (the ETF). The total returns should be roughly equivalent.

In practice, I’ve seen high-yield strategies beat the large-cap market even on a capital-only basis, perhaps because they avoid a lot of temporarily overpriced companies that don’t care much about their shareholders. (*cough* Facebook. *cough*).

That’s heresy of course, but we’ve plenty of passive articles to offset the balance! Also, I don’t think the market was at all frothy when the HYP was set-up, so I think there’s less chance of a value-based strategy outperforming, anyway.

We’ll see what the next year holds.

Note: Apologies in advance for any typos. Copying from spreadsheets and then working manually with WordPress’ clumsy table formatting means it’s all too easy to slip up. Please let me know if you spot anything.

  1. In terms of how it is constructed. As an equity investment it can go up and down as wildly as any other. []

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{ 24 comments… add one }
  • 1 maria@moneyprinciple May 24, 2012, 11:15 am

    Sorry! Still not bad considering and it is likely that once we know what the Greeks will do (and what will be done to them) shares will go up. Or am I completely off the mark here.

  • 2 ermine May 24, 2012, 11:25 am

    Commiserations on the timing of the start. It would have complicated the illustration to have entered the market spacing your purchases over a year to gain some temporal smoothing I guess.

    Interesting to see what the volatility on the income is here, because people drawing an income from their portfolio will find their lifestyle modulated by the income. That’s where the trusts come in, reducing that variation. I’m still very happy with the trusts I bought some time ago after reading this article of yours and look forward to some decent discounts opening up in the sturm und drang that may lie ahead. I couldn’t be bothered with all the trading hoo-hah implied here – buy, leave in ISA and catch income twice a year. I’ll do market timing, and valuation, but trading I’ll leave to those more talented than me 😉

  • 3 The Investor May 24, 2012, 11:51 am

    @ermine — Thanks for your thoughts. I’m not really interested in smoothing here for this demonstration. If I recall the maths correctly, most of the time you’ll do better to invest a lump sum straight in if you have it, because markets historically tend to go up. (I know it doesn’t feel like that these days, but that’s the case!).

    Regularly saving in is a good option when (a) you’d rather risk losing some gains to reduce the risk of making bigger losses, and/or (b) you don’t have any choice! 😉

    Yes, the trading option in that article (your last link) was really a special circumstance due to the market sell-off taking income ITs to double digit discounts (as opposed to today’s premiums…)

    Generally I think the big income investment trusts are a good buy and leave alone investment, especially given how they are allowed to carry a dividend reserve to cover any temporary falls in income from their investment companies – in most cases the big ones have over a year’s full payment in reserve!

  • 4 John H, Kidsgrove May 24, 2012, 12:55 pm

    A year gone by already!

    There was an interesting thread on TMF last week discussing the returns over the past 8 years between a basket of ITs , share hyps and cash and the ITs were clearly the winners so it will be interesting to follow this comparisson.

    Personally, I run both hyp and ITs for income split 50:50.

  • 5 Guy May 24, 2012, 12:56 pm

    This is a great prompt to compare my HYP with the baseline – suspect it’ll be much the same, with the poor performers (in terms of capital) pulling the whole thing to a loss. Off the top of my head though, I think the yield should just about offset that, although I haven’t checked it for a couple of weeks and recent news doesn’t like it’ll have done any good!

    Like you, Tesco surprised me, and I realised what a blessing a sharebuilder-style account would have been for Aviva and one or two others (AZN and BLND have drifted lower and lower).

    Best regards,


  • 6 gadgetmind May 24, 2012, 1:43 pm

    Small typo – “no tax duty to pay”.

  • 7 Alex May 24, 2012, 4:09 pm

    Thanks for another useful analysis. The performance of retail juggernaut Tesco is indeed instructive: eggs…basket…

  • 8 gadgetmind May 24, 2012, 4:14 pm

    I deferred to my wife regards which grocer to hold in “my” HYP. She said that Tescos was a dump, and you can’t buy shares in Waitrose, so it was M&S or Sainsburys. We dithered and then bought both. We also added N Brown a while back, and that’s plenty enough retail for now!

  • 9 Niklas Smith May 24, 2012, 5:40 pm

    Nice to be reminded about the HYP and to follow it up. I look forward to future year’s reports.

    Here in Sweden many of the leading investment trusts still trade on substantial discounts. Take Investor, the Wallenberg-controlled trust that is Sweden’s most famous. On March 31 Investor had a NAV of 220 SEK per share, but a share price of 146.70 SEK – a discount of 33%! That brings to mind Warren Buffett’s famous comment about price being what you pay and value being what you get….

    I’m in the process of moving my savings from UK savings accounts to Sweden and starting to invest properly. At the moment I’m looking to put my spare capital in a permanent portfolio but I intend to save in shares for the (very) long term instead of contributing to a private pension (since state and occupational pension coverage in Sweden is pretty good). For my long-term saving I am very attracted by your idea of targeting an income and so am thinking about investing in high-yielding shares and investment trusts. (The small amounts of money I can start with suggest I should buy a only few ITs first to avoid paying unnecessary amounts of commission.)

    Interestingly, an independent fund management company has recently set up a low-cost passive fund (0.2% AMC) which invests in a portfolio of Swedish investment trusts. Given the passive management and low cost I’m seriously tempted to put the shares portion of my permanent portfolio in that rather than a standard index fund. What do you think?

  • 10 RetirementInvestingToday May 24, 2012, 8:28 pm

    Hi TI

    My prediction. Over the long term like investing for retirement I woldn’t be surprised to see your HYP win, the ETF second followed by Trusts. Why? Expenses and fees.


  • 11 Compounder May 24, 2012, 10:10 pm

    Great article, and I too like investment trusts like MRCH and HHI. However, I prefer IUKD because of the TER and you can keep the fund managers away from your money with all their convoluted performance fees. Another point about the supposed advantage of the income smoothing of investment trusts – has it occurred to anyone that the trust charges its management fee on the total asset value. So would I be right in thinking that they are charging you interest on YOUR money that they are keeping in reserve? Any ideas? Moreover, I would like to make a point on the time value of money – isn’t it best to have the trust’s dividends paid as and when they are realised, so that you can compound them? Food for thought, perhaps.

  • 12 The Investor May 25, 2012, 11:25 am

    Thanks for the comments everyone, glad this ongoing project is of interest.

    @John H — I like ITs, but I wouldn’t put too much store on returns from point A to point B, as they’re clearly distorted by end effects (when you start measuring). In general I think you should buy to address a need, such as the expectation of a high and growing dividend without too much need for fiddling about on the part of the investor, in the case of ITs. Hopefully the out-performance will follow, but it may not. That’s not why I’d be buying them.

    @Guy — I think most diversified portfolios across the usual big cap shares would report similar findings over the past 12 months. That’s the ‘risk on / risk off’ correlation for you. Everything moves up and down with the tides!

    @Alex — At least if they’re Tesco Value eggs it wouldn’t be so painful. 😉

    @Gadgetmind — I don’t think the opportunity with Tesco is UK based anyway, it’s clearly done as much as it can here. You’re buying for overseas growth, but perhaps that was greedy in an income strategy and I should have plumped for Morrisons or Sainsbury. Thanks for the typo (corrected).

    @Niklas — Nice to hear from you, sounds like you’ve a lot going on.

    As you know, I can’t give personal advice. However I would say that if I was investing with a 40-50 year horizon, I might not want to overweight income too heavily. For instance, you can get about 3.5% from the FTSE 100 currently, and that can be expected to grow, and you can do it very cheaply (see our article on the cheap Vanguard ETFs coming). If you plan to retire in 40 years, you’ll benefit from a lot of dividend growth there as well as hopefully multi-bagging capital gains.

    If I were aiming for financial freedom well before that — say 10-20 years — then that’s where I think the income-focused strategy really comes into its own, as you effectively prepare your post-work income stream in advance, ignore volatility, and simply switch to spending money when you’re ready.

    Having said that, as I’ve written many times before focusing on income has IMHO discipline and psychological advantages also, so I think for many there’s a case for following it from day one, anyway.

    Re: Swedish investment trusts, I am not familiar with that market. You can get big discounts on some UK trusts currently (Caledonia, Hansa) although some would say their recent performance warrants the discount. I’d hope for mean reversion. It’s rare that income investment trusts go for big discounts due to the beneficial affect on the yield of a steep discount, but it does happen sometimes (such as late 2008: http://monevator.com/should-you-swap-your-shares-for-an-investment-trust-on-a-discount/).

    @RIT — Thanks for stopping by. You may be right. I don’t think that would *prove* anything, as the outcome would clearly be weighted by my personal choice of 20 shares (and that’s equally true if it lags). But zero holding costs aren’t to be dismissed! (Did you get my email, incidentally? I’d really like to have a quick email chat with you if possible!)

    @Compounder — Yes, the retention of cash by Investment Trusts is a well-discussed debating point. Personally I think the smoothing is part of their decades-old charm and if it’s fixed why break it, but there are others who want all the cash today. IMHO investing, especially active investing, is not all about the most efficient capital structures etc. There is a discipline and culture in an income investment trust that guides their hand, and retention of cash and commitment to smooth payouts is part of that I feel.

  • 13 Alex May 25, 2012, 3:24 pm

    A pedant writes (again): Tesco has recently rebranded its ‘Value’ range – it’s now called ‘Everyday Value’. Softer, less garish. But that’s enough about me.

  • 14 The Investor May 25, 2012, 3:55 pm

    @Compounder — I forget to say that I don’t think of IUKD as an income vehicle at all. On the contrary, it’s record is all over the place. It’s more like a contrarian value play, though that hasn’t really worked either (as from memory it’s lagged the FTSE 100 from the trough). I’m not a fan, personally, though doubtless it’ll have its day again.

    There is a UK income ETF that’s based more along the lines of the ‘dividend aristocrats’ US index, which IMHO would be a better income vehicle. (http://www.spdrseurope.com/product/fund.seam?ticker=SPYG%20GY)

    Please note that this is NOT personal advice to you. I have no way of knowing whether one will do better than the other, either. I’m just pointing out it looks more like an IT’s methodology to me. 🙂

  • 15 ermine May 25, 2012, 11:02 pm

    > However I would say that if I was investing with a 40-50 year horizon,

    Blimey TI, just *how long* are you aiming to live? There’s three score years and ten allotted you. You may bend that by twenty years, busting it by thirty plus and you’re into the Kurzweil Singularity.

    It’s probably doable, but vegan teetotal clean living has its price 😉 There’s the journey to think about as well as the destination…

  • 16 The Investor May 25, 2012, 11:50 pm

    @ermine — Niklas is in his early 20s from memory… So 40 years takes him to below the current state retirement age, and 50 gets it to where it’ll probably be as he rounds the bend. And then he’ll probably live for another 20-30 years. 🙂

  • 17 ermine May 26, 2012, 12:12 am

    @TI crikey, a 50 year working life, heck I only made it for ~30. Good luck to him, it looks harsh when stated like that. I suppose my gran almost made it to 20+50+30 so it’s not impossible. And she wasn’t teetotal 😉

  • 18 The Investor May 26, 2012, 12:55 am

    @ermine — Well, it was a throwaway comment and I’m not an actuary, and you’re taking all the extremes of my ranges. 🙂 Let’s say you’re 21 or 22, just leaving university and starting work. 40-45 years gets you to you early-mid 60s. I haven’t poured over the tables, but most people who are young now who make it to 65 should expect to live for another 20 years or so — and have some contingency in case they’re the outliers who make it to 100.

    As you say they should also spend some money en-route / have some fun in case they’re the wrong sort of outliers! 🙂

  • 19 RetirementInvestingToday May 26, 2012, 9:13 am

    Hi TI

    I think it would be prove that choosing the right shares that will out perform is a mugs game and involves more luck than skill. Your 20 shares have as much chance of success as those of the so called “experts” and only time will tell. 20 shares is a reasonably diversified number across multiple sectors. In the long run I wouldn’t be surprised to see you simply achieve the market average. What you can be sure of though is that fees and charges will certainly drag down your HYP performance less than the others and this is why I think your HYP will win.

    BTW. Have used your contact form to send you an email address. Look forward to hearing from you.


  • 20 Niklas Smith May 26, 2012, 12:26 pm

    @ermine @TI: Haha! I am indeed in my early/mid twenties. Swedish pensioners retiring today at 65 can expect to live 20.7 years after that, so by the time I’ve reached that age life expectancy will no doubt have gone up. And our Prime Minister recently caused a bit of a storm by suggesting that it time it might become normal to work until you’re 75. Of course whether a 50-year working life is bearable depends on whether the work is enjoyable. All the more reason to save for financial independence just in case work loses its charm….

    The thing that attracts me about income ITs is that you can more or less ignore volatility of the capital (even celebrate share price falls because they give you more shares for the same monthly investment). The problem with traditional pensions investing in both the UK and Sweden* is that the idea of building a “pension pot” to buy an annuity upon retirement exposes investors to two major risks: 1) a market crash reducing the value of your capital just before planned retirement and 2) interest rate risk – if the long interest rate falls just before retirement you get a smaller income for your money even if your capital is undiminished.

    That said, the OMXS30 index (Sweden’s equivalent of the FTSE100) also has a decent yield at the moment and gives exposure to some companies that investment trusts do not have shares in. Another plus is that OMXS30 index funds are the cheapest way of investing in shares in Sweden – there is even one with a TER of 0% offered by one of the internet brokers (only to its own customers). Even low fees compound to a sizeable reduction in your savings over long periods – have a look at this excellent (and scary) calculator on the impact of costs on investments from the Swedish Pensions Agency: http://www.pensionsmyndigheten.se/kostnaden.html (Maybe a link for your next Weekend reading?)

    *Well, in Sweden people buy a with-profits policy, but the returns on those are dependent on the long interest rate too.

  • 21 Ca$h Money May 27, 2012, 3:40 pm

    It’s been a really tough year for higher-yielders in the UK, despite all this talk about there being a dividend “bubble”. I also bought into Tesco near 400p and similarly didn’t think it would be one of my portfolio’s worst performers a year in. Admiral is less of a surprise, though still disappointing. I still think both of those shares will do fine over a five-year period.

    What were your trading costs to set up the shares HYP? I reckon it had to be at least 2% (including stamp duty), so your returns are rather good versus the market when you take that into consideration. Going forward, you won’t have those sunk trading costs weighing you down, either.

    Here’s to a better Year 2!

  • 22 The Investor May 28, 2012, 11:05 am

    @RIT — Personally I wouldn’t recommend anyone buy a HYP unless they are keen to try investing directly in shares for whatever reason — fun, education, challenge, the *chance* of outperformance. That potential outperformance may come through fortunate (/skilful) share selection or via lower costs. But equally, one constituent could blow up and eviscerate those excess returns. Most people are probably going to better off choosing the lower risk/return profile of the income ITs if they need income or the ETF if they’re building capital.

    That said, I don’t at all discount the reasons I listed for buying a HYP — I’m *exactly* that sort of investor (I find it fun, challenging, educational, and occasionally financially rewarding!) But you do need to have your eyes open.

    Will reply to your email ASAP this week — thanks for getting back. 🙂

    @Ca$hMoney — Good to hear your thoughts. To an extent 2011 was a poor year for yield stocks, though I don’t recall it being a bonanza year for cyclical and higher beta names, either. Hence the convergence no doubt between the three strategies I’ve listed here.

    To your point on costs, initial costs were definitely lower than 2% because I used a Halifax Sharebuilder account. At the time I think I paid £1.50 per deal (it’s £2 now) with the downside that I had to take the market price on the morning, and wouldn’t know exactly when/what price I’d pay. So costs are more like 20*£1.50+0.5% stamp = £55, plus some tiny spreads. I’d say c.1.25% at most.

    I could go back and calculate the exact costs paid, but it’s tricky because what Halifax does is wraps your costs into your effective price per share, rather than breaking them out. But it’s going to be close to my estimate, or perhaps 5-10 basis points less.

    Wish I was buying Tesco now, that’s for sure! And very much agree of course regarding sunk costs. I don’t intend to trade unless something dramatic dictates it. I will also be withdrawing all dividends, as the idea here is to compare three ‘income right now’ strategies.

    Here’s to year 2 indeed! 🙂

    @Niklas — Interesting comparing your young man’s view of the world (and advances in the life sciences) with wizened old ermine’s. 😉

    I definitely agree with the advantages your listed of the income strategy, and I think avoiding the cost/timing of ‘switching on’ income is a big benefit. Over shorter periods (say up to 20 years) I’d favour income focusing from the get-go, too, as I mentioned above.

    If it suits your temperament — and I think for most it does, compared to focusing on capital values — then why not for longer periods, too. I would point out though that volatility rewards alternative strategies, also, assuming you’ll be a regular saver throughout most of these decades and so able to benefit.

    I don’t profess to know a great deal about the Swedish stock market, but clearly it’s not going to a great replica of world growth over the next 50 years. Personally, I’d diversify widely out of Sweden for that reason, with the caveat that caveat risk would still see me overweight Sweden in some form or another, although possibly more with any fixed income component to my portfolio (since diversified equity returns have a better chance of outrunning currency volatility).

    It’s very hard to knock a TER of 0%, but understand how and why you’re really paying for it! Could still be a good deal, but is it fees elsewhere / risks with the fund (e.g. is it synthetic? are they lending out all your stocks? etc).

  • 23 Cliff1805 December 31, 2012, 3:51 pm

    I have just started my own HYP. I have invested £1000 in each of Vodafone, BAe Systems, Astra Zeneca, Resolution and National Grid. I have only selected five shares to keep fees manageable as my SIPP is with Hargreaves Lansdown. Even so I am 2% down taking account of fees and price movements in the last few days. My intention is to buy an additional share each time I accumulate £1000 in the SIPP. If this works for me I will invest my lump sum in the same way when I retire in just over 8 years and use the income to supplement my final salary pension. Does this sound a reasonable approach or should I be aiming for aggressive growth given that my final salary projection is circa £30,000 p.a. with lump sum of £90,000. I am putting £250 per month into the SIPP. Any feedback welcome. Happy New Year!

  • 24 The Investor December 31, 2012, 5:10 pm

    Hi Cliff. I can’t give personal advice, as in my opinion (and the law’s!) I’d need to know all your details (health, dependents, other assets, etc) even if I was a qualified financial adviser, which I am not.

    Generally though, I think building up a HYP in stages is fine. It’ll get you used to volatility, and figuring out how much you can take. 2% drawdown is *nothing* — imagine how it feels at 50% down, which can and has happened in just the past few years. In my opinion it’s best to concentrate on the income with these strategies, and to sort of ignore the capital sums (but not the underlying businesses — if one goes seriously off the rails, you may need to take action).

    If I was investing £250 a month, I’d wait until I’d built up at least £500 and preferably £1000 before buying, to reduce dealing costs.

    An alternative income strategy with smaller sums might be to investigate income investment trusts. As I write they are all at a premium to NAV though, which isn’t ideal (though it isn’t fatal either). They have reserves which help smooth out payouts etc, and you’re much less exposed to one company doing badly. They’re not as cheap to run as a HYP though.

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