A hero perish, or a sparrow fall,Atoms or systems into ruin hurl’d,And now a bubble burst, and now a world.Alexander Pope, An Essay on Man
This is my seventeenth portfolio update. I complete this update monthly to check my progress against my goals.
Portfolio goals
My current objectives are to reach a portfolio of:
- $1 476 000 by 31 December 2018. This should produce a real income of about $58 000 (Objective #1).
- $2 041 000 by 31 July 2023, to produce a passive income equivalent to $80 000 in 2017 dollars (Objective #2)
Both of these are based on a real return of 3.92%, or a nominal return of 7.17%
Portfolio summary
- Vanguard Lifestrategy High Growth – $724 062
- Vanguard Lifestrategy Growth – $42 356
- Vanguard Lifestrategy Balanced – $75 123
- Vanguard Diversified Bonds – $102 559
- Vanguard ETF Australia Shares (VAS) – $75 389
- Telstra shares – $4 238
- Insurance Australia Group shares – $19 734
- NIB Holdings – $6 684
- Gold ETF (GOLD.ASX) – $80 190
- Secured physical gold – $12 333
- Ratesetter (P2P lending) – $43 336
- Bitcoin – $135 720
- Raiz app (Aggressive portfolio) – $10 557
- BrickX (P2P rental real estate) – $4 751
Total value: $ 1 337 032 (+$52 169)
Asset allocation
- Australian shares – 32 %
- International shares – 19%
- Emerging markets shares – 3%
- International small companies – 3%
- Total shares – 56.4% (4.6% under)
- Australian property securities – 3%
- International property securities 3%
- Total property – 6.4% (1.4% over)
- Australian bonds – 9%
- International bonds – 9%
- Total bonds – 18.8% (0.2% under)
- Cash – 1.3%
- Gold – 6.9%
- Bitcoin – 10.2%
- Gold and alternatives – 17.1% (2.1% over)
Comments
A few weeks ago, on a sunny morning trip at Sydney airport and ahead of an all day meeting in the city, I stopped by a newsagent, and bought a copy of the April Money Magazine. I had the unusual experience of seeing the following…
Money had profiled this blog, and a number of others such as Pat the Shuffler, following call out on twitter and some follow up discussions with several Australian FI bloggers. A special welcome to new readers!
Compared to that unique experience of picking up a magazine, and reading my own plans, the execution of them has been low key this month. The portfolio has continued to recover to previous levels, led by higher equity prices, a lower dollar, and movements in Bitcoin. Some first quarter dividends have been reinvested into the Vanguard high growth fund. In addition a gradual draw down of Ratesetter funds is occurring, as each loan matures. The BrickX platform has added an extra residential property for investment, and as part diversifying as widely as possible within this platform, I made a small additional investment.
The retreat and then recovery of the overall portfolio over the the past four months has not directly disturbed my plans, but it has increased my focus on the next substantive piece of new information in the journey. Looking ahead, this still lies some way off – in the form of July distributions. A major equity price fall continues to be within my expectation, even in spite of listening to a compelling Meb Faber podcast interview with UK academic Elroy Dimson, on the relationship between valuations and future returns.
Progress
Progress to:
- objective #1: 90.6% or $138 968 further to reach goal.
- objective #2: 65.5% or $730 968 further to reach goal.
Summary
As I near my target I am finding myself increasingly restless, thinking more and more actively around issues of safe withdrawal rates, sequence of return risks, and wanting to hear perspectives from other FI adherents who have stopped work. With potentially large future declines in Bitcoin and equities quite feasible, it feels a risky time to be taking on sequence of return risks. To some extent, I feel involuntarily ‘paused’, waiting to see the next part of the story, without yet being able to clearly read the chapter heading.
Thanks for the shout out, that was a nice little piece in Money Mag and I took the opportunity to actually buy a copy.
That must have been surreal! I cant imagine….I would have bought 5!
Now I’m wishing I had! Two seemed the right balance between permanence and vanity! 🙂
Congrats on the feature mate! That’s awesome!
The point you raise is the reason why I don’t want to rely on market valuations to meet retirement cashflow needs.
It might have it’s flaws, but investing for a stream of steadily increasing dividends helps meet this need without undue stress or market issues. Rather than maximum diversification, I’d aim to focus all available equity on generating a decent income with a backup being made of cash or in your case bonds to smooth out any drops.
Everyone needs to find their own strategy and what works for them, but I can’t help but think that the current approach leaves you a little stuck/worried in regards to market valuations.
Don’t worry too much though, you’re still in an incredible position.
Thanks SMA for the comments, and it was! I do see the attraction of dividend based investing, due to the greater stability of dividend streams, and the tangibility of building a passive stream that doesn’t result in regular portfolio sales. It is very intuitively appealing.
My concern with sole reliance on dividends though is that it ignores a major element of market return (capital growth), and therefore pushes the final required portfolio up to a level many might find daunting to embark upon.
A second concern I have is that selection of dividend focused equities is likely to result in a tilted portfolio, which in a way is somewhat like an ‘active bet’ that certain sets of firms (i.e. dividend paying firms) will perform in line in, or not underperform, a broader portfolio of firms that includes both dividend focused, and growth focused firms. At times, it’s likely that bet will pay off, at others it will underperform, for years or even a decade.
A third concern I have is that it’s not quite right to say dividend investing avoids issues of or worries about market valuation. This is because at high market valuations, by definition dividends will be ‘expensive’ (i.e $1 of dividends will cost more to purchase). Dollar cost averaging could help, but there’s nothing inherent in targeting dividends that allows an investor to escape this reality.
Finally, while more stable than market valuations, dividends can and do go down – 10, 25, even 50 per cent in extremes. A lot of dividend investor discussion doesn’t seem to cover this risk very fully.
Great reply, thanks.
However, dividend focused investing does not exclude capital growth, that’s a misnomer. I’ve written about this recently, we still need growth, but rather than look at growth in prices, we look at growth in earnings/dividends. We both need the same thing and that’s growth in earnings to survive. One of us harvests the growing dividends and the other harvests from the growing prices. I obviously choose the dividends because I feel it’s more reliable. We’re on the same team, just watching different players.
You’re right that it’s somewhat of an active bet and it can underperform. The point is not maximum performance, but an increasing income stream. How other investments perform becomes much less important, as it’s not a competition, it’s about cashflow to retire.
One can still be completely invested in index funds, yet think of themselves as a dividend investor. It’s simply a change of mindset. An Oz/International portfolio of index funds would throw off a decent stream of dividends which would grow steadily over the decades.
Of course yields can be lower in times of high market valuation. What I actually meant was that living on dividends is not reliant on market fluctuations, meaning it avoids those particular issues. As you know they’re paid from company profits, not dependant on market prices. In retirement market valuations to a dividend investor don’t really matter, what matters is whether earnings can grow or be sustained.
And absolutely dividends can go down, hence why I said about a cash buffer or bonds.
It’s likely a topic that we may never agree on 🙂 But it’s an interesting discussion!
No worries.
It’s a truism of course that no style of investing in equities will exclude capital growth, but if we are defining dividend focused investing as also consistent with investing in a market cap index and just liking the fact we get dividends, I’m not sure quite what the term practically means.
Focusing on the growth in earnings as a screen is just another active or factor tilt that will result in a portfolio that departs a market cap index. There’s nothing particularly magical about it, it will under perform and outperform at different times just like any other tilt. It will also mean the portfolio is less diversified, and therefore have different risk characteristics than the benchmark.
My fundamental point is that cashflow from capital sales is just as real as cashflow from dividends, and maximum portfolio performance (capturing the full market return of the index) is likely to be important for many, especially those for whom building a passive income cashflow from an actively tilted portfolio would seem a potentially risky and very distant goal at dividend yields of 2-3%
Agree on your other points.