Part 3 of our HYP Series (read Introduction here and Article #1 here).  Last week in the series I outlined briefly the selection method for choosing HYP shares and this week I’ll look closer at some of the nuances that influence those choices. A number of my rules governing selection will in practice often need to be bent to a certain extent in order to satisfy the one rule that is never compromised, diversification and its soul mate, equal investment per sector. This trumps everything else.


 

 I’ve said that a minimum of fifteen sectors is required to construct a sufficiently diversified portfolio. I usually have a few more but the maximum is at the discretion of individual HYPers, I don’t set any limit on this factor. The more sectors you have, the less the risk but the effect of this reduces a lot once you have more than my minimum of fifteen. Each additional sector thereafter does not ameliorate risk to anything like the same extent as the earlier choices.

Which Sectors?

The question then arises as to which sectors should be included, or indeed excluded. Are there any fundamental sectors that should always be present in every HYP? Or does it depend merely on the chance presence of the shares thrown up at the time, by my method of choosing from the FTSE100 ranked by descending yield I described earlier?

My view is that there are certain sectors which are more important than others to the general economy of the world and I like to include these in every HYP I build. But do be aware that just because a company is in an essential type of industry, this is no guarantee that for this reason it will do better long term than other shares in less basic sectors. That is not why I have common sectors.

The reason I include certain sectors in all portfolios is more to do with modelling the world economy in a very crude way. Recall my concept of Strategic Ignorance which says I know nothing about the long term future, but, I will use that attitude to my advantage in the way I design portfolios. 

It’s a popular fallacy of naïve small investors, something I’ve heard repeatedly over the years, to think that if a business is supplying essentials, then it must…

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