I have never thought, for my part, that man’s freedom consists in his being able to do whatever he wills, but that he should not, by any human power, be forced to do what is against his will.Rousseau, Reveries of the Solitary Walker
This is my twenty-seventh portfolio update. I complete this update monthly to check my progress against my goals.
Portfolio goals
My recently revised objectives are to reach a portfolio of:
- $1 598 000 by 31 December 2020. This should produce a real income of about $67 000 (Objective #1)
- $1 980 000 by 31 July 2023, to produce a passive income equivalent to $83 000 (Objective #2)
Both of these are based on an expected average real return of 4.19%, or a nominal return of 7.19%, and are expressed in 2018 dollars.
Portfolio summary
- Vanguard Lifestrategy High Growth Fund – $725 361
- Vanguard Lifestrategy Growth Fund – $41 957
- Vanguard Lifestrategy Balanced Fund – $75 692
- Vanguard Diversified Bonds Fund – $102 924
- Vanguard Australia Shares ETF (VAS) – $77 420
- Betashares Australia 200 ETF (A200) – $188 899
- Telstra shares (TLS) – $1 658
- Insurance Australia Group shares (IAG) – $12 818
- NIB Holdings shares (NHF) – $6 924
- Gold ETF (GOLD.ASX) – $84 534
- Secured physical gold – $13 659
- Ratesetter (P2P lending) – $27 576
- Bitcoin – $59 488
- Raiz app (Aggressive portfolio) – $14 277
- Spaceship Voyager app (Index portfolio) – $1 658
- BrickX (P2P rental real estate) – $4 653
Total value: $1 439 608 (+$65 077)
Asset allocation
- Australian shares – 40.6% (4.4% under)
- Global shares – 24.1%
- Emerging markets shares – 2.8%
- International small companies – 3.6%
- Total international shares – 30.5% (0.5% over)
- Total shares – 71.0% (4.0% under)
- Total property securities – 0.3% (0.3% over)
- Australian bonds – 6.3%
- International bonds – 11.4%
- Total bonds – 17.7% (2.7% over)
- Cash – 1.2%
- Gold – 6.8%
- Bitcoin – 4.1%
- Gold and alternatives – 11.0% (1.0% over)
Presented visually, below is a high-level view of the current asset allocation of the portfolio.
Comments
The past month has seen the largest single increase of the past year, and the third largest of the two year journey. This has been mostly caused by simultaneous increases in the value of equities, as well as gold and Bitcoin holdings. This synchronous performance is not what would be normally expected in a diversified portfolio, in which it is more usual to have portfolio components moving in different directions.
The result of this is that the portfolio is at the highest point in the journey so far, having regained levels not seen since September last year. This recovery from losses at the end of 2018 has occurred rapidly. As well as the largest single increase on a monthly basis in the past year, the past two month period has been the most significant period of growth experienced since the short-lived increase in Bitcoin in late 2017.
New contributions continue to be made through the Betashares A200 ETF, and there is still some way to go yet before the Australian shares component of the portfolio reaches its target. So contributions to the A200 ETF will likely continue, though this recent paper from Vanguard has raised the interesting possibility that the optimum level of international exposure to reduce portfolio volatility may actually be higher than my current target. This month the total share component of the portfolio reached just over $1 000 000. At about the same time last year, the total portfolio was just crossing this threshold.
The coming month will see two significant milestones, the investment of an additional $15 900 from the reduction of my emergency fund to recognise the role of the growing stream of distributions, and the release of first quarter dividends from A200 and some Vanguard funds. Receiving significant sums to reinvest outside of the half-yearly Vanguard distributions cycle will be a relatively new and welcome experience.
In coming months I may increasingly be facing a need to invest beyond A200 to maintain my target allocations – most likely in global shares. Continuously purchasing exclusively Australian shares over the past nine months to meet a higher equity allocation has felt challenging at times, however, Australian share market valuations have at least generally been close to long-term averages through this time.
Though this is not primarily a spending or an unsparing frugality blog, below is an updated version of my somewhat winding path towards ‘credit card’ FI over the past six years, including the most recent months and factoring in the lower distributions in the last six months.
It’s apparent that the half year portfolio income to July 2019 will need to rise substantially if I am to re-close the gap that has emerged since the high distributions across 2017-18. Over the past six months, distributions have on average totalled just under 50 per cent of credit card expenditure. In a small step towards addressing this gap, I recently re-contracted my mobile phone plan to achieve around a $500 annual savings.
Progress
Progress against the objectives, and the additional measures I have reached is set out below.
| Measure | Portfolio | All Assets |
| Objective #1 – $1 598 000 (or $67 000 pa) | 90.1% | 126.0% |
| Objective #2 – $1 980 000 (or $83 000 pa) | 72.7% | 101.7% |
| Credit card purchases – $73 000 pa | 82.7% | 115.6% |
| Total expenses – $96 000pa | 62.9% | 87.9% |
Summary
The strong portfolio growth over the past month means that on an ‘All Assets’ basis, I have theoretically just met my portfolio objective #2. In a few short months I may actually pass my old original portfolio objective (of $1 476 000). Looking just at the ‘Portfolio only’ measures, six months or so of further progress could potentially see the new objective #1 in sight, having just reached the 90 per cent of the way this month.
Currently my conscious focus remains on the ‘Portfolio’ measures, where there is some distance to go. Nonetheless, the progress made this month has caused frequent reflection on the subtle psychological impacts of being at this advanced stage of the journey.
Independence is not yet secured in quite in the way I want, yet feels within tangible grasp. Whether this is correct or not will only be known in time, but it is a source of daily thought. The feeling of an accumulating power over one’s circumstances – particularly the shift to a position of a type of ‘quiet power’ in relation to future work – represents a remarkable calming change from a decade ago. That was a time in which, even though I had a substantial emergency fund, any period without employment income led to a restless and anxious search for a replacement income.
Putting such philosophical thoughts aside this month, and spurred by a reader comment, I have been re-reading (or rather listening to) The Big Short. This feels timely given current Australian real estate markets. What is striking from absorbing the book again is how much conviction, research and character it takes to take a different view from the crowd, and how difficult this is in current investment markets. It is a healthy warning to be wary of easy consensus, and that even that most elusive of beasts in markets – ‘being right’ – can be less satisfying than imagined in crisis conditions.
In the something of the same theme as breaking consensus, Early Retirement Now has also recently released an excellent post on ‘yield illusion’. This is interesting to think about in terms of frequent Australian FI Reddit discussions about dividend investment approaches, as well as the potential for some Australian companies and listed investment companies to shift dividend policies in response to any changes in franking credit refund arrangements.
This recent paper also discusses an interesting finding that investors need to firmly guard against what it terms the ‘free dividends fallacy’. It shows empirical evidence from real investors that failure to dispassionately appreciate total returns and the real impact of dividend payments on an assets value and price can result in poor decision-making harmful to long-term returns.
Finally, an article on Kitces recently highlighted a sometimes under-appreciated aspect of sequence of returns risks: the fact that in many cases positive market returns mean that the 4% rule and similar approaches can lead to significant unanticipated growth in the portfolio, even through the withdrawal phase. Following the past two months, considering these ‘upside risks’ too closely feels perilously close to tempting fate, and so I choose to look ahead only cautiously.
Nice to see the portfolio heading upwards again! A we’ve discussed before at this point you’ve very much at the mercy of the market as opposed to whatever additional savings you are contributing.
I was reading Big ERNs article a couple of weeks ago, it’s interesting but i think it’s important to take into account the different dividend regime in the US vs over here. His dividend portfolio had a lot in bonds and REITs and still only got to a 3.69% dividend yield, here in Oz you can get roughly 4% in dividends and 1.7% in franking credits for a 5.7% return all while remaining entirely in shares. Which is not to say he doesn’t have a point to some extent, but there are large differences between our two countries which would allow it to work over here but not over there.
Exactly, ‘…on such full sea are we now afloat’. It’s a peculiar counterpoint to the feeling of some power described in the post.
I do agree on the Big ERN post. I was mostly appreciative of his diagram about total returns, the maths versus the ‘no trade offs’ story sometimes told about dividend investing. In my view a bond and REIT portfolio is something different to a dividend portfolio, but as you point out, they have lower dividends there.
My interest will really be on what over the long term Australian companies do with dividends. It’s plausible they won’t shift much, but you might expect over time if their tax effectiveness changes versus capital gains value increases there might be some response. But as your recent post indicates, there are changes proposed across the board so will be difficult to foretell.
I would be pretty surprised if most Aussie companies change their dividend policy much if at all. The proposed changes won’t affect too many of their shareholders, and given the nature of their businesses generally being mature ones without much need for the additional money they would have if they retained their dividends, there’s not much point in holding onto them. They may do more share buybacks perhaps, but again given that it doesn’t affect most of their shareholders why do it?
There are exceptions to this of course, in particular hybrids and LICs where I think the holders are disproportionately SMSFs and we’ve already seen some of the latter looking to offload some excess franking credits in advance of the election. What they will do post election, who knows but they strike me as being far more likely to make changes to their dividends to suit shareholders as much as possible.
Thanks HIFIRE, yes, that all makes a lot of sense. I guess part of what I am wondering is if dividend imputation itself is potentially a future target for a government well down the track, given how much of the discussion on the franking credit refund is based on the talking point that ‘not many countries have imputation systems, and those without seem to do fine’. My other thought is If equity markets are becoming more globally integrated, you might expect to gradually see dividend payout levels across countries face (within some limits based on market maturity as you say) some pressure to converge as well.
Brilliant stuff. Great that you held your nerve in a nasty last qtr of the year. I bought a few shares at cheap prices then sold once they went up significantly. My bad
Thank you for stopping by and commenting! What’s the saying about never going broke taking a profit? 🙂
Great update! The markets are playing nice again.
I personally have been reflecting on the amount of due diligence you need to put in to have confidence in your numbers and at which stage would you be able to throw caution to the wind as it were and jump in even though the numbers might not be aligning.
Thanks J.D for reading.
That sounds intriguing, curious to hear more. One of the interesting aspects of The Big Short narrative is that the numbers – the logic of shorting the US real estate market – looks almost too good to be true on the sheer numbers. It required a leap of faith not so much from the maths, as to wonder why others weren’t doing the same, and work to convince people to buy into the trade with them.
I think one of the issues highlighted in the book (and possibly in the movie, I haven’t seen it) was that investors tend to have fairly specific mandates. Even if you think that the mortgage market is about to blow up if you’re a long only bond or stock investor there isn’t much you can do except avoid the relevant sectors, and if you’re a salesperson covering these account you know this so you don’t talk to them about it, assuming you even know about it yourself. You’re mostly looking at hedge funds who can get into the short trade. And even then it’s mostly the long/short guys, short only and maybe relative value and special situations/event driven guys, plus macro of course. So investors just don’t know about it and assume that there is a reason why something is trading where it is.
One of the other misconceptions that the average person has is that the investment banks are all great at communicating a message across the entire firm, everyone is on the same page, there’s no breakdowns in communication etc. My personal experience is that this just doesn’t happen. Credit and rates guys don’t talk to each other. Credit and equities guys don’t talk to each other. Equity derivatives and cash equities guys don’t talk to each other. Quite often they’re on separate floors and even if they’re not you don’t tend to talk much to guys outside your desk.
Of the 500 or so people on my equities trading floor at the time of the GFC I knew maybe 50. There were entire product areas where I wouldn’t know a single person. And as for the 500 people upstairs in FICC, I knew two. Neither of whom worked in mortgages. We did admittedly get a teach in from the mortgage guys at one stage who explained correlation trades and all sorts of fun stuff, and then told us well the US housing market has never had a country wide drop so it all should be peachy. That worked out well…
Thank you, that’s very insightful and interesting. On your last point, I still remember many reading books on personal finance in the 1990s and 2000s talking about how ‘property doubles every 8 years’. The cautious ones said ‘or so’.
Great progress. The ups and downs are an emotional roller coaster when you are so close.
I watched Big Short recently for the first time. You are right about backing conviction – it was incredibly ballsy. Even more astounding is the house of cards it was all built on and how history is repeating itself.
Your thoughts regarding more international diversification is interesting. What products do you have in mind? – US/world/emerging and large/small caps – now so many choices that knowing how far to diversify becomes overwhelming!
Thanks for stopping by. Do read the book if you’re at all interested, it’s really well written, not a dull moment and has some amazing stories about their interactions with Wall St investment banks.
At the moment, I think my default would start with VGS, on the basis of low fee, tax administration, trust in the Vanguard brand, and simplicity. But I will have to investigate this, as I know there are some new players on the field, and some recently with reduced fees (like VEU). I’m interested to do a bit of a review as it’s been awhile since I looked.
Very nicely done. Thanks for sharing that info. I like the portfolio. Will have to look more into international exposure soon. Cheers
Great stuff – always love reading your progress and how close you are!
Thanks very much for saying so easypeasyfire!
Great to see more green seas :).
And thanks for the link to us too!
Cheers,
Alex
Thank you! No problem – wanted people to see exactly what could be done with more discipline and will than I possess! 🙂
Firstly great site and content – I have enjoyed reading your posts for the last year.
I note your targets are expressed in 2018 dollars, however your progress is based on current value. Have you considered how to reconcile these? I have been considering this on my own journey, quarterly targets set in 2017 set in 2017 then adjusted to include inflation to track progress.
Thanks for stopping by and the comment John!
That’s a good question, and one that bedevilled earlier targets I set (see the recent Waypoints post). At the moment the difference between 2018/19 dollars doesn’t concern me so much. Letting it go for a few years can result in a distorted target, and so that was a major factor in moving from my old $1.47 million target.
This year (see Portfolio goals page) – or really right at the end of 2018 as that was when the calculations were done – I set a nominal 2018 dollar target using two ABS series published last year, and my current intention would just be to update the target to a new nominal dollar amount each year – to ensure I’m not hitting an old nominal target with new inflated dollars.
Inflating your target each year by inflation would work to, depending on whether your lifestyle income target also moved with inflation. That is probably close enough for a target just few years away, but there could be a significant divergence over longer periods.
Love following along with someone at the end of the journey while I am still paying off my PPOR. I have a question – will your expenses reduce dramatically once retired?
Thank you for the comment!
I am not sure, to be honest. I read a lot of those that have achieved FI saying yes, but then, I also think that I would like to travel, and will have more free time, some of which might involve the expenditure of money. My best guess is perhaps a little, from having more time to do things myself, and perhaps less need for some of that ‘decompression’ expenditure.
You’ve hit upon part of the reason I also track my credit card and total expenditure measure, which is currently a little higher than my Objective #2. I do feel that by definition I ought to be able to manage on the median (#1) or average (#2) income, and if I can’t, that’s my issue to address rather than something wrong with the target, if that makes sense.
Hello. I have just discovered your blog and really enjoy your writing style! The way you have set out multiple objectives and track your progress as a percentage is something that I have now adopted myself. I was wondering how you go about recording your passive income, do you just do this by logging quarterly dividend statements + interest? Secondly, do you have any tools/suggestions to determine what percentage your overall portfolio produces in dividend returns each year?
Thanks-you again and im glad I found your blog.
Hi Mumlennial, thanks for reading and commenting! I’m really glad you’ve enjoyed it and found it useful. 🙂
For recording my passive income, yes, I tend to rely on ETF or fund statements, checked against what actually get distributed into my bank account. It’s a bit different for some of the new apps and Ratesetter, but usually if you log into them there’s a summary of some form. Some I need to add up manually, which is a pest. Then I just enter these into an excel spreadsheet I keep and total them.
If you are just investing in shares and ETFs, there is the online tool Sharesight you could use (it’s free up to 10 or so holdings) which is excellent, and will automatically calculate total dividends, portfolio performance across different time periods etc. I use that as well, but it doesn’t integrate managed funds and other bits and pieces I have, so I do that manually.
Thanks again for stopping by.
p.s. I tried to visit your website to check it out, but the link did not appear to be working?