Day by day, what you choose, what you think and what you do is who you become.

Heraclitus

When I started this record of my journey to financial independence, the voyage had already commenced. In fact, based on the measures used, it was already around two-thirds complete. This article seeks to fill in the blank pages in the log and answer the questions: what happened before this? How did the portfolio progress and grow since it started? How was it built and how did it evolve over time?

Looking back, much of the journey and portfolio progress seemed to take place at a slow but steady pace, likely because of a reliance on automated regular investments in  various funds. This piece will seek to chart the progress and describe the main investment vehicles used, to help answer what the early years of voyage looked like.

Outward bound and initial bearings

While in some senses the portfolio commenced as far back as 1999, with a first purchase of Telstra shares and some expensive actively managed share funds, this article focuses on the period from 2007 onwards.

Prior to 2007 I was regularly investing, however I was also saving for, and subsequently reducing, a home mortgage. Probably the single most significant starting investment I made in this period before 2007 was commencing in March 2001 sizeable regular monthly investments in Vanguard’s Diversified High Growth retail fund, which has continued to form part of the portfolio ever since.

It was only from early 2007 that a single focus was on building the portfolio for the purpose of any kind of financial independence. This goal itself was a slowly evolving journey, with revisions and adaptations.

For example, in July 2007 I set a target of $750 000, with the over ambitious view that that might produce around $50 000 in annual portfolio income. The goal of providing for a stream of passive income of $58 000 I can trace back to at least July 2009. Back then, my return assumptions were optimistic, and I envisaged the goal being achievable around 2020. By 2010 I had estimated that a portfolio of around $1.1 million would be required, a target which I updated to reflect more realistic information and evidence on likely sustainable returns in 2016, first setting my previous target of $1.47 million.

Progress of the voyage – movement in the portfolio

The overall pattern of growth in the portfolio since this time is shown below (with green denoting the period covered by the blog).

It contains three main phases.

Initial progress – 2007-2012

During the first phase, and first few years progress was slow, despite a growing savings rate. Part of this was the impact of the global financial crisis. This did not cause an absolute decline in the portfolio, but was a major contributor to the small increase over January 2008 to January 2009.

To give a sense of what happened in this period in total, the portfolio went from around $152 000 in July 2007, to $228 000 in July 2009, and probably the worst of it was reflected in the portfolio only increasing around $10 000 from January 2008 to January 2009. That means that without new contributions it would have gone backwards over that year. Regardless,  I did continue to invest. The portfolio was around 60 per cent equities during that period. On reflection, I’m glad that the global financial crisis happened while I still had a relatively low portfolio level compared to today.

During this first phase, there was little compounding of returns, and the slow rate of progress here is captured very effectively in recent infographics and discussions from Four Pillars. The first $100 000 of the portfolio was achieved in 2007, and portfolio passed $300 000 through 2010, three years into the journey.

Expanding horizons – 2013-2017

The second period was one of significant yearly growth between 2013 and 2017. During this phase distributions started making an appreciable and sustained contribution to portfolio growth around $20 000 per year.

During this period the portfolio approximately doubled in size, and started approaching the psychological point of $1 000 000.

The journey as logged – 2017 onwards

The third period, since the commencement of regular writing in early 2017, has been dominated by a a break in the otherwise smooth and slightly exponential portfolio growth pattern from early years.

The increased in the value of bitcoin in late 2017 and then subsequent fall through 2018 has been responsible for this one-off blip in the chart, but absent any further significant increases, its capacity to introduce volatility into the overall portfolio has been reduced

Contributions over the voyage

Over the journey so far, most investment has taken place in Vanguard retail funds (High Growth, Growth, Balanced, and Diversified Bonds), with these funds receiving just over 66 per cent by value of total contributions. Around 90 per cent of total contributions by value been made into passive index funds, or passive ETFs.

The graph below illustrates the investment vehicles that contributions were made to on an annual basis. It is designed to answer the question, where did new investment get directed each year?

From 2007 to 2015 contributions to Vanguard retail fund made up 90 per cent of yearly investments made, with the exception of a large single investment in a gold ETF in 2009.

The actual investment allocation between the various Vanguard funds differed from year to year, with a focus on building up each individual fund to a minimum size, assisted by inertia from many of these being automatic deductions left unchanged for a year or more. Achieving a notional target allocation set in investment plans also provided some guidance for which Vanguard fund was contributed to at any given time.

At one stage, as well, I sought risk management from an ‘bucket’ approach to splitting investments between different funds with different allocations, with the thought that over time this would achieve a greater margin of safety.

Over time, however, absorbing investment and finance theory led me to see that this was a wasteful, duplicative, and overly complex way of constructing an asset allocation, which had the potential to distract from critical whole of portfolio decisions about risk tolerance and capacity. This led to eventually to ceasing to contribute to some of the smaller and more conservative Vanguard retail fund holdings.

Before 2015, the only exceptions to this pattern of shifting Vanguard retail fund investments were some investments in gold ETFs, and a small exploratory investment in an early retail index fund associated with Bankwest, which had relatively high fees.

In 2015, this stability changed, with three significant non-Vanguard investments. This included  a continued investment in gold ETFs, a small exploration into Bitcoin, and a substantial investment in the peer to peer lender Ratesetter. This period coincided with an increased focus on investments, and some free time to explore this interest more closely.

This increased in 2016, with my first small contributions to BrickX, Goldmoney, and Raiz (then Acorns).  2017 saw the first investments made in Australian equity ETFs, with direction of major re-investment of distributions into Vanguard’s VAS ETF, rather than back into the Vanguard retail funds, which had been my practice previously.

Last year I halted any reinvestment in the Vanguard retail funds that had made up the bulk of my previous investment focus, moving from May onwards to regular investments in Betashares A200 Australian equities ETF. This has been driven by a two main reasons.

First, low cost purchases of ETFs now make it possible to buy small portions of A200 more economically. This means accessing a low MER of 0.07%, rather than 0.35% for the Vanguard fund I was contributing too.

Second, the Vanguard High Growth Fund still contains a 10 per cent bond allocation, meaning with each investment movement to my desired asset allocation was being slowed.

Shifting loads – tracking the movement in assets

Having seen how the level of the portfolio and the contributions shifted over time, this section discusses how the composition and asset allocation of the portfolio itself changed.

At the broadest level, the asset allocation of the portfolio has been relatively stable through time. The chart below sets out the allocation for major asset classes over the period 2007-2019.The major influences on asset allocation have been the original targets set, new contributions which have typically been directed to re-balancing towards a target allocation, and in places, major market movements (most notably the short-lived Bitcoin price appreciation in 2017-18).

The average actual share allocation across the period is around 67 per cent, which is relatively close to my previous target of 65 per cent. This target has recently been increased to 75 per cent.  Average exposure to fixed interests and bonds has been around 23 per cent. The only significant divergences from movement around these levels arose from:

• a gradual increase in share and bond holdings due to a deliberate reduction in conservative funds holding any cash from 2007-2010;
• an increase in bond holdings to 29 per cent of portfolio assets in 2015; and
• a one-off drop in share and bond allocations as Bitcoin briefly rose to make up 14 per cent of the portfolio in 2018

Recently, the share allocation has been rising towards and over 70 per cent, reflecting consistent contributions to Australian equities (mainly in ETFs) through the past two years.

Distributions over the voyage

One of the most satisfying elements of the journey so far has been the growth in distributions over time. These I have tracked in detail since the first half of 2000, with a good continuous record of dividends and fund distributions.

The record of portfolio distributions is set out below. In my earlier post Wind in the Sails – A History of Portfolio Distributions I set out some similar data on a financial year basis, however this figure below is on a calendar year basis in 2017 dollars, to enable the incorporation of the most recent half year data (with again green denoting the period covered by the blog).

Trends in portfolio distributions

Measured on a monthly basis these distributions started at less than $100 per month, and grew steadily until 2007, where they declined substantially due to some large cash funds receiving interest which were used in a house purchase. The global financial crisis in 2008 affected distributions across into 2009 , but some of that effect was also attributable to falling interest rates during that time, and it was a temporary reduction.

Portfolio distributions, aside from some variations flowing from irregular capital distributions, were largely fairly stable through 2011 to 2015, averaging a between $20 000 and $25 000. After this, in 2016, portfolio distributions began to become extremely significant in their own right.

The distributions in 2017, and part of 2018, have contained significant realised capital gains from Vanguard funds, and like the results in 2006 and 2011, may not be repeated for some time. At the time, these high distributions led me to ponder whether I had actually already achieved ‘Credit Card FI’.

Overall distributions have made a significant contribution to my journey to date. In real inflation adjusted terms these past returns constitute around 30 per cent of the current portfolio value. In nominal terms, they have added over $375 000 to the portfolio total.

Consistent with the growth in the size of the portfolio and impacts of compounding, this contribution has been highest in the last few years. Over half of the total distributions the portfolio has ever generated  over the past 19 years has occurred in just the past 4 years, and over 75 per cent within the past eight years.

Changing mix of distributions

The changing portfolio has also led to marked shifts in what makes up the distributions. Prior to 2007, high interest savings account (such as ING Direct, Bankwest) made up the most significant part of the level of distributions recorded, often over two-thirds. Over the period since 2007, falling interest rates, a shift towards more equity investments, and lower invested amounts in fixed interest and cash have led to a decline in this area. Even as recently as 2014, however, these sometimes made up as much as one third of total distributions.  With the slow withdrawal from Ratesetter to meet asset allocation goals, this can be expected to keep falling.

The current constituents of the most recent half yearly distributions are set out below.

From this it can be seen that Ratesetter interest make up only 10 per cent of total portfolio distributions, while passive Vanguard funds and ETFs, overwhelmingly weighted towards equity assets, now make up over 80 per cent of net distributions.

Reflections on the waypoints

The conscious journey to financial independence has stretched back at least a decade. Progress has mostly been achieved by increasing my spending by less than my income, and investing the difference.

Knowledge, and a willingness to try out different assets and vehicles and continue to learn were also markers in the journey. They pushed me beyond simple and unrealistic savings targets, to find the habits and open mind that allowed embarkation on this exploration. They also left me with a more complicated portfolio than I would recommend for others, but which nonetheless is quite diversified.

Much of the journey was quiet and not memorable, although a weekly habit of tracking my net worth since 1998 provided a regular focal point to account for progress and lay future plans to take the next step. Much of the time I allowed automatic deductions to slowly average into the market.

The waypoints continue to mark down a diminishing distance towards the destination of my first FI goal. More time has passed than lays ahead for the portfolio in growth terms, but of course history continues to happen. As the distance counts down, I strain forward to see the shape of this undiscovered country.