With Profit Bond

cheerfulcat

Hi, Chrismaths,

At the risk of perpetuating yet another long and boring thread let me say that I do not think that the HYP is suitable for most people, which is why I normally wouldn't recommend it, but for those who take an interest in holding shares directly it is a comparatively safe way to do so, ( by which I mean, compared to the collection of odds and sods people without a strategy tend to end up with ) and I think that it gets an undeserved kicking here.

I don't know the "tinkering" HYP, but if it rebalances I have less problems with it.

It does.

Well on this board it is often recommended as an investment strategy without such caveats. If it's real money, it's no longer an experiment.

All strategies are theoretical, surely. I'm just being honest about this one...TMF tried out many strategies in the early days; the HYP has been one of the more successful. BTW I haven't seen anyone except Ed ( and on the odd occasion, me ) recommending it, so not really " often ", it just seems that way...

You may be happy to have your entire portfolio in one, but the effect of that is to provide a higher level of risk for a given return. Diversification lowers the risk of a portfolio. 20 equally weighted stocks will only provide sufficient diversification if they are are all independent.

I didn't say that I was happy to have my whole porty in HYP, I said that I would be if all that I wanted was an income and a certain amount of inflation-proofing. As I also want real growth, I also hold growth-type shares ( and yes, I know the difference between growth and contrarian/value strategies; I was up very early this morning...)

Chrismaths

CC, I don't think I was giving HYP a kicking - I actually said it can have a part to play in an investment portfolio (so long as it is your "tinkering" version!), but whenever you analyse an investment, you have to look at the risk factors. I was simply explaining a few ofthose, and explaining who it wasn't suitable for.

Chrismaths wrote:

I've never been against the HYP per se (apart from the rebalancing issue), more against the HYP as a magic bullet/panacea.

That's my central point. As this is a boring thread, I'll sign off.

cheerfulcat

Chrismaths wrote:

CC, I don't think I was giving HYP a kicking - I actually said it can have a part to play in an investment portfolio (so long as it is your "tinkering" version!), but whenever you analyse an investment, you have to look at the risk factors. I was simply explaining a few ofthose, and explaining who it wasn't suitable for.

That's my central point.

Fair enough.

As this is a boring thread, I'll sign off.

I'm sorry, CM, I did not mean to imply that you ( or any of the others, I hasten to add ) were boring! Clumsy phrasing at fault. I blame myself

ATB

Cheerfulcat

EdInvestor

At the risk of perpetuating yet another long and boring thread let me say that I do not think that the HYP is suitable for most people, which is why I normally wouldn't recommend it, but for those who take an interest in holding shares directly it is a comparatively safe way to do so

A large HYP is just a DIY Equity Income fund with very low charges and some additional risk filters. Equity income funds are regarded as one of the safer ways to invest in equities.

Of course it is a requirement to be happy to take equity risk - but then anyone who was ivested in With profits funds ( ie most of the investing population) in the recent past had 75% of the capital invested in equities and considerably less risk protection than an HYP offers.

At the moment the most popular fund in the UK is the Invesco Perpetual High income fund, which is an Equity Income fund.I have a smallish chunk of this fund, but not nearly as much as I have in my HYP, partly because I regard the fund as quite risky: it is overweight in utilities and fags, both of which are exposed to regulatory risk.HYP investors are advised to have only one utility and one fag company in a 15 share HYP.

I'll just add that the HYP can IMHO make up the equity component of a portfolio for an income investor but that most people (including me )will have other investments as well, which may lower the overall risk of the portfolio.

I'll also note on the rebalancing front that some people have a rule that no individual share should make up more than 10% of the capital or the income of their HYP. There is no actual evidence that following such a rule (or not following it) is any more or less risky.

But suffice it to say that if this was a rule you adopted, in the demo HYP mentioned above it would involve three trades in 7 years and would probably be usefully done if you needed a little extra income that year. I estimate around half an hour at the keyboard and slightly over 5 pounds a year in costs.

BTW missile might like to have a look at the 2nd HYP, started in April 2003, just as the market bottomed out.

HYP2

I guess an HYP started at the time he bought his bond would have performed somewhere between HYPs1 and 2.

Here is the latest update on all 3 HYPs

Chrismaths

HYP investors are advised to have only one utility and one fag company in a 15 share HYP.

But 2 miners at the top of a commodity bubble?

There is no actual evidence that following such a rule (or not following it) is any more or less risky.

Apart from basic mathematics and investment principles. And the 10% rule doesn't go far enough. 15 stocks is stretching the bounds of reasonable diversification, you need to be hot on the weightings, and the correlations between stocks.
In portfolio theory (which is a gross simplification, but works for this purpose), risk is comprised of 2 parts - market risk (how much the market goes up and down) and specific risk (the chance that a specific company is hit by specific issues - think Marconi/Enron/Worldcom/Partygaming etc etc). Diversification can protect against the second part by not exposing your portfolio to too much in one stock.
It can also help to protect against the market risk if you pick stocks that depend on different factors. You could pick 10 stocks, such as HBOS, RBS, HSBC, Lloyds, Alliance & leicester, Northern Rock, B&B etc, and you would not be diversifying your portfolio - they are all banks, dependent on similar factors. I'm not saying the HYP does this, I'm explaining some basics about investment. Not rebalancing a HYP like HYP1 changes the very character of the investment, and it is no longer "lower risk" (ie than the market, which is high risk - putting HYP medium-high risk on an absolute scale).

You don't have additional risk filters on a HYP. You have different risk filters.

But anyone who wants to know why I get peeved at Ed just needs to read this:

anyone who was ivested in With profits funds ( ie most of the investing population) in the recent past had 75% of the capital invested in equities and considerably less risk protection than an HYP offers.

With profits bonds had risk protection built into the contract. It is a unit linked life insurance policy usually. If you finish the contract, you have capital protection built in.

Now with profits bonds were and are a dreadful investment, don't get me wrong. But how you can say it has less "risk protection" than a HYP is ridiculous. A HYP has NO risk protection, it simply follows a less risky strategy than a tracker.

You constantly understate the risks of a HYP, which leaves people like me and dh to balance it up and correct the more glaring errors, because suprisingly enough, I actually give a !!!! that people aren't mislead. You waste my time.

EdInvestor

Chrismaths wrote:

With profits bonds had risk protection built into the contract. It is a unit linked life insurance policy usually.

I'll let Chrismaths have the last word on this thread.He deserves it, having made this schoolboy howler.

Readers are advised to make their own judgments about his investment knowledge, and whether he might ever have derived any benefit from the lessons of history.

dunstonh

With Profits does have risk protection built into the contract. Also, behind the scenes many of them did operate as a unit linked plan and that is how they worked out who got x amount of terminal bonus. Early conventional with profits plans didnt but in the 90s, many moved over to that method and gradually more became upfront with that at and actually showed units in their contract. By the end of the 90s many were either operating as balanced managed funds (or cautious managed) with smoothing or where the unit price could only go up but not down.

There is nothing wrong with the HYP as a strategy but it is promoted far too often on this site as being the only solution and one that is lower risk when it isnt. CM has shown how the TMF HYP has changed from having 6.7% per holding to over 34% in just three. If one of those top 3 was to do a Polly Peck or Marconi in you, then you face a significant loss.

The idea of the HYP is to produce a stable and rising income.Long term capital growth is a bonus.Benchmarks are the FTSE100 and cash.

Its only stable and rising if you pick the right shares. Go to high with shares with a very high yield and there is only one direction they are likely to go in. clue.. it isnt rising.

That's so. 15 diversified shares will cover the vast majority of the risk.If you invest quite a large amount you may like to purchase a few more - but there's virtually no improvement in risk protection beyond 25 shares.(There are other risk related filters built into the HYP as well as diversification, see the article on how to choose shares).

Risk isnt just on quantity of holdings. Its the amount into each holding and the type of holding.

A sector allocated portfolio in funds would typically have the maximum of 2% in any one share. If that goes under, then 2% of your capital is at stake. Rebalancing keeps the risk in line with what you want it to be. With funds, rebalancing can be at nil or minimal cost. Even with shares, the cost is not significant when you compare it to how much you could lose if the share price took a turn for the worse.

The other side of risk is where its invested. Well, it would be 100% in the UK stockmarket. Even a medium risk sector allocated portfolio wouldnt be 100% in stockmarket (i pick medium as that is where the WP investment is). A 15 share holding in UK stockmarket would be medium/high (7 rising to 8, out of 10 in the case of HYP1).

There are different ways of doing these things and at different times they will perform in different ways. The important thing is to understand the risks of the options you are taking, any limitations and consequences if you dont rebalance.