Need money to make money?

[John Miles]

I was chatting to one of my neighbours the other day when I remarked that it was a sad fact that serous investment was not an option for anyone who didn’t have cosiderable money to start with.
She asked me precisely how much she would need.

A really good question, aned here’s my attempt to answer it.

My platform charges me just ninety quid a year to administer my ISA.
If I can get a yield of 4%, about two and a half grand will give me a hundred a year; reinvest the divideds and it should snowball into something pretty substantial over the years.

It was something of a surprise that the requirement was so small, and I’d welcome any comments or criticisms.

John (Fruitcake Leftie)

[Stephen Bland]

It’s one of those questions John to which the answer will vary between individuals. You don’t mention HYPs specifically but in order to be able to construct a suitably diversified portfolio in my strategy requires a minimum of 15 sectors, so with one share per sector that’s 15 times whatever the economically viable minimum investment per share is for any particular broker, having regard to costs.

I doubt that the £2,500 you mention would be anywhere near adequate and would suit more like 1-5 shares perhaps, thus increasing risk. Not that there’s necessarily anything wrong with taking on greater risk if the person understands what they are doing, it’s just it would not be an HYP as I define it and this is an HYP discussion forum, not a general investment forum.

Also I point out that if you are charged £90 per year, that 4% yield on £2,500 would be just about swallowed up by the annual charge and leaving next to nothing to reinvest.

An alternative for such a small sum might be a fund, of which there is an enormous choice, especially for a more risk averse investor.

[John Miles]

Hi Stephen,
Many thanks for your comment.
I agree with almosr everything you say, and plead guilty to strainng after inapprpriately theoretical accuracy.

But what if an ideologically committed HYPer were to invest three grand (instead of two and a half}, to look fof five or six percent (instead of four}, and/or to add a bob or two to his dividend payments when he buys each month in accordance, of course, with established TDL principles?

I can’t see them coming to serious grief, in fact this is probably the most sensible thing they can do with any spare cash they may happen to have.

[Stephen Bland]

Yes, that’s just a normal way to build up an HYP for those who don’t have a large initial sum, something I’ve mentioned repeatedly over the years and a lot of HYPers are doing just that. But the aim, even if they start with a small number of diversified holdings, should be to construct the full 15 sector minimum HYP over time by adding shares in new sectors with a mixture of new money and accumulated dividends.

An HYP with only about five different sectors may well not “come to serious grief” as you put it, but there is a sharply greater risk that it may do so over time compared with my 15 min view. Remember that the whole purpose of HYPing is income, whether that income is withdrawn or reinvested. Income investors in individual equities, more than most and especially if they are depending upon that income, need to lower risk as far as that is possible with shares, though it cannot be eliminated.

Diversification is the only way to achieve a lowering of specific industry risk in an HYP and I see a minimum of 15 sectors as necessary to achieve that. Note that there is not a direct relationship between greater diversification and lowering risk, instead the trade-off reduces with the number of existing diversified shares in it. For example a one share portfolio has its risk lowered very substantially by adding just one diversfied share to make a two share portfolio. But a 15 share portfolio achieves only a much smaller risk trade-off with one further diversified share to make a 16 share HYP, and so on.

[John Miles]

Thanks again.
I think we were at cross purposes at one point. but I don’t don’t disagree with anything you say.

What came out of it for me was that it’s quite feasible to start a HYP with rather less than I’ve always assumed. So, as I fear the next generation is going to find it even more difficult to get itself an adequate pension than we did, I’m inclined to suggest to my young friends snd relations that they consider starting up a HYP as a bit of a backup

And thank you for reminding us that diversification too is affected by the law of dimimishing returns.
Bad news for fund managers, who boast of billions of holdings on their books, but are, in practice, hardly more diversied thab you or me.
Actually it’s a double whammy for them, since after the first dozen or so it gets bmore and more difficult to find anything worth investing in

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