Time discovers truth.

Seneca On Anger

This is my twenty-fourth 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 – $692 662
• Vanguard Lifestrategy Growth Fund  – $ 40 404
• Vanguard Lifestrategy Balanced Fund – $73 134
• Vanguard Diversified Bonds Fund – $100 347
• Vanguard Australia Shares ETF (VAS) – $71 485
• Betashares Australia 200 ETF (A200) – $127 999
• Telstra shares – $3 905
• Insurance Australia Group shares – $12 818
• NIB Holdings shares – $5 928
• Gold ETF (GOLD.ASX)  – $76 634
• Secured physical gold – $12 343
• Ratesetter (P2P lending) – $31 360
• Bitcoin – $64 851
• Raiz app (Aggressive portfolio) – $ 12 489
• Spaceship Voyager app (Index portfolio) – $1 431
• BrickX (P2P rental real estate) – $4 844

Total value: $1 332 632 (-$34 134)

Asset allocation

• Australian shares –  40%
• International shares – 18%
• Emerging markets shares – 2%
• International small companies – 3%
• Total shares – 63.5% (1.5% under)**
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.1% (1.1% over)
• Australian bonds – 8%
• International bonds – 9%
• Total bonds – 17.5% (2.5% over)**
• Cash – 1.3%
• Gold – 6.7%
• Bitcoin – 7.2%
• Gold and alternatives – 11.5% (3.5% under)

Comments

Time has revealed truth – it is now quite clear that the portfolio will not reach Objective #1 by the target time of the end of the year. Indeed, the portfolio in absolute value terms has ended the last twelve-month period fairly close to where it began. This is not the first time this type of prolonged portfolio ‘levelling off’ has happened. A similar period of continued investment but little or no growth in the portfolio occurred in 2011. During and beyond this earlier period of stagnant portfolio value, however, regular new investments increased the underlying asset base, and resulted in continued growth in the level of distributions.

This month has seen a fall of over $34 000 in the value of the portfolio. This is one of five significant portfolio falls over the journey so far, and it is the only unbroken month on month fall in this period.

These results and market conditions, however, are not enough to tempt me away from passive index investing.

The record of individual investors pursuing active investments is a sobering one to review, with the average retail equity investors routinely underperforming market indexes by a substantial margin. This margin was measured at nearly 2% on average over the past 20 years by the most recent Dalbar survey covering the performance of US retail investors. Over 10 years, the gap was even wider, at nearly 4%. Remarkably, those investors with average asset allocations only captured around a third of potentially available equity returns over the past 20 years.

Through this period I have continued to invest new savings and maturing Ratesetter funds into Australian equities through the Betashares A200 ETF. Compared to heavily US weighted global investment ETF options, this appears reasonably valued in price earnings ratio terms. The recent falls in Australian and US equities have supported and strengthened this view.

A substantial contributor to the reduced portfolio has been a sharp fall in the price of Bitcoin. In a triumph of mental accounting over economic reality, this has actually not concerned me as much as I might have expected. At more than ten times the purchase price, the current price still feels like an upward push to my overall journey, even as its absolute level has declined from previous highs.

In part, my desire to not sell the holding is driven by continuing belief that it may be an uncorrelated assets with all other parts of the portfolio over the medium term, and that it provides a kind of ‘insurance’ or ‘option’ against unlikely extreme events in mainstream financial markets. So I remain willing to allow it to vary, fall and move dynamically.

Progress

Progress to:

• Objective #1: 90.3% or $143 368 further to reach goal.
• Objective #2: 65.3% or $708 368 further to reach goal.

Summary

In the longer term, as I begin to start thinking about my directions for 2019, I plan to more fully evaluate my targets for foreign and domestic equity market exposure. For the moment, it was interesting this month to listen to Meb Faber’s recent podcast in which he discussed evidence on the overriding importance of keeping costs low.

In particular, he discussed the potential for higher portfolio expenses to completely outweigh the benefits of one of the most fundamental investment settings – initial asset allocation. That is, paying too much for an investment vehicle can overwhelm any potential asset allocation decision made by the investor.

From past trends I appear to be around six months away from reaching my first objective, and am content with this. My focus over the next month will be revising and updating my investment plans and goals, and keenly anticipating the major set of portfolio distributions that are due in early January. These distributions will reveal the most critical measure of progress – actual passive income created over the past half and full year.

** 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.