Who dares not speak his free thoughts is a slave.

Euripides The Phoenician Women

This is my twenty-third 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 Fund – $691 943
• Vanguard Lifestrategy Growth Fund  – $40 358
• Vanguard Lifestrategy Balanced Fund – $73 033
• Vanguard Diversified Bonds Fund – $100 197
• Vanguard Australia Shares ETF (VAS) – $72 441
• Betashares Australia 200 ETF (A200) – $118 299
• Telstra shares – $4 072
• Insurance Australia Group shares – $17 535
• NIB Holdings shares – $6 636
• Gold ETF (GOLD.ASX)  – $79 033
• Secured physical gold – $12 691
• Ratesetter (P2P lending) – $33 553
• Bitcoin – $98 423
• Raiz app (Aggressive portfolio) – $ 12 318
• Spaceship Voyager app (Index portfolio) – $1 397
• BrickX (P2P rental real estate) – $4 837

Total value: $1 366 766  (-$57 077)

Asset allocation

• Australian shares –  39%
• International shares – 18%
• Emerging markets shares – 2%
• International small companies – 2%
• Total shares – 61.6% (3.4% under)**
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.0% (1.0% over)
• Australian bonds – 8%
• International bonds – 9%
• Total bonds – 17.2% (2.2% over)**
• Cash – 1.3%
• Gold – 6.7%
• Bitcoin – 7.2%
• Gold and alternatives – 13.9% (1.1% under)

Comments

This month has delivered the largest monthly fall in the overall portfolio level since commencement of the journey. This has resulted from the sharp falls in Australian and international share values from mid-October. The falls have made it unlikely that Objective #1 will be reached by the end of this year as was the target, which is a slight disappointment given how close to the target I was just last month.

The most significant effect this has had is to make me more restless to continue to dollar-cost average into the market, and take advantage of these better valuations. Academic research and history reinforces that key drivers of valuations, such as the equity risk premium (pdf), are variable over time.

The falls also made me curious to examine the record of volatility in the portfolio, to place the events of this month in context. The below graph provides a raw ‘change in value’ measure of the portfolio since the start of this journey. For simplicity, it includes contributions, on the basis that outside of July and December distributions, market movements tend to dominate contributions.

The data is instructive on the issue of volatility in a diversified portfolio. It shows that:

• the portfolio has experienced five down months and 17 monthly gains over nearly two years;
• the median monthly change in value is around $24 000, or 2.2 per cent of the total portfolio – however, gains around this size have only occurred five times;
• the larger falls and gains have each been associated with movement of the Bitcoin component in late 2017 and early 2018, rising and falling respectively;
• last months fall is the largest ever fall, however, it’s worth recording that this has occurred in a generally low volatility environment for shares.

Investment through this period has been almost exclusively in the Betashares A200 ETF, with much smaller ongoing contributions to Raiz and Spaceship. Third quarter dividends of around $2300 from VAS and A200 were reinvested. Receiving significant dividend payments on a quarterly basis is a pleasant and novel experience arising from my entry into ETFs, as most of my significant Vanguard managed fund investments only pay distributions twice a year.

This month I’ve also been following – and occasionally participating in – the ongoing debate on the advantages and disadvantages of Listed Investment Companies compared to index funds or ETFs. The ever thoughtful Pat the Shuffler is convinced there is a ‘cultural shift’ occurring towards LICs, and is adopting that approach for new investments. For my part, I am not as sure that the additional manager and concentration risks are worth taking for any of the claimed benefits.

As one example of the concentration risk mentioned, LICs make active choices to pick equities to be in their funds, including some, excluding others. Such an approach, however, is fraught with the risk of including under-performing equities, and excluding potential out-performers. Such decisions can have very significant impacts on portfolio performance. To illustrate, one study found that for the US market, if an investor had missed investing in the top 20 per cent of equities, total portfolio return between 1989-2015 would have been zero per cent. Nonetheless, the debate has made me curious about the record and conceptual basis of Listed Investment Companies, even if unconvinced at the moment of the added value.

Progress

Progress to:

• Objective #1: 92.6% or $109 234 further to reach goal.
• Objective #2: 67.0% or $674 234 further to reach goal.

Summary

The market movements this month may have either set achieving my targets back a few months, or could herald the beginning of a more substantial weakness which defer their achievement for much longer periods. At the moment, I am relatively unconcerned about missing my target by a few months. I have reached this period of volatility, however, still underweight on my equity allocation, so decisions from here will focus on the path to the right balance of international and domestic shares.

In the period of weakness my allocation to gold – with its long and storied history – has provided some stability and cushioning of overall portfolio volatility, as have bonds. Storms may be ahead, but with each passing investment, the freedom to speak thoughts and weather the consequences grows.

** These variances have been recalculated from this month onwards to be in reference to my longer term allocation targets for equities and bonds (65/15), rather than a previous lower transitional target of 61-62 over the past two years.