Consider anything that is humanly possible and appropriate to lie within your own reach too.

Marcus Aurelius, Meditations VI.19

This is my twenty-ninth portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My 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 – $756 860
• Vanguard Lifestrategy Growth Fund  – $43 529
• Vanguard Lifestrategy Balanced Fund – $78 182
• Vanguard Diversified Bonds Fund – $104 579
• Vanguard Australian Shares ETF (VAS) – $79 067
• Betashares Australia 200 ETF (A200) – $231 216
• Telstra shares (TLS) – $1 801
• Insurance Australia Group shares (IAG) – $13 742
• NIB Holdings shares (NHF) – $6 900
• Gold ETF (GOLD.ASX)  – $83 465
• Secured physical gold – $13 438
• Ratesetter (P2P lending) – $25 278
• Bitcoin – $81 867
• Raiz app (Aggressive portfolio) – $15 154
• Spaceship Voyager app (Index portfolio) – $1 880
• BrickX (P2P rental real estate) – $4 629

Total value: $1 541 587 (+$61 677)

Asset allocation

• Australian shares – 41.6% (3.4% under)
• Global shares – 23.4%
• Emerging markets shares – 2.7%
• International small companies – 3.5%
• Total international shares – 29.7% (0.3% under)
• Total shares – 71.3% (3.7% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 5.9%
• International bonds – 10.9%
• Total bonds – 16.8% (1.8% over)
• Cash – 1.2%
• Gold – 6.3%
• Bitcoin – 5.3%
• Gold and alternatives – 11.6% (1.6% over)

Presented visually, below is a high-level view of the current asset allocation of the portfolio.

Comments

The portfolio has experienced a positive month, with a total growth of $61 677. This places the portfolio well above its previous highs and potentially within two to three average months of reaching Objective #1.

The portfolio grew by the third highest absolute monthly amount since start of this record. Growth in the value of both Australian and international equities was a major part of this increase. This was assisted by the final dividends from Australian equities ETFs Vanguard VAS ($903) and Betashares A200  ($1894) that were received this month. These were reinvested in the A200 ETF with a small proportion being set aside to meet future associated tax liabilities.

Nearing the end of ‘the big rebalance’?

As the end of the financial year draws closer, choices around where to allocate future contributions and reinvestments may become slightly less clear cut than they have been for much of the journey.

This is because barring any major market movements, the portfolio is nearing the end of what could be called ‘the big rebalance’ that commenced at the start of this record. This has involved consistently targeting higher equity allocations (first 65 per cent, then 75 per cent) and lower bond holdings.

The movements involved in this rebalancing phase have been significant. Contributions and capital growth have lifted the portfolio’s overall equity allocation from around 60 per cent over 2017 to around 71 per cent currently.

The value of total equity holdings has increased from around $630 000 to close to $1.1 million since January 2017. Within this expanded equity portfolio, a significant change in composition has also occurred, as the chart above shows. Gradually, Australian shares have moved from representing a minority of total equity holdings – around 40 per cent of all shares – to now approaching 60 per cent. In pure value terms, Australian share holdings have increased from $277 000 to around $641 000 since the start of this record. The split between Australian and international shares is now close to my selected optimal position.

Over the same period portfolio bond holdings have fallen from around 25 per cent, to just 16.8 per cent. This has occurred by total bond and fixed interest holdings remaining at approximately $250 000.

This all means that future contributions, reinvestments or portfolio decisions may over time become less singularly focused on the purchase of Australian shares ETFs such as A200. The focus may shift to more a diverse and dynamic re-balancing approach, in which the objective is to gently and directionally ‘nudge’ the portfolio into alignment with its target allocations using a mix of new contributions and reinvested distributions. This will not happen all at once, as the equity portfolio is still just short of the target of 75 per cent, and market movements can have their own unpredictable impacts.

Role of Bitcoin: uncorrelated manoeuvres in the dark

An unusual source of around one-third of the portfolio growth this month has been an appreciation in the value of Bitcoin holdings. This increased by around $18 000 this month.

Over the past year or so Bitcoin has more frequently made a negative contribution, reducing the overall portfolio. I still regard it as a highly speculative element of the portfolio included not because I recommend its purchase by an investor, but simply by virtue of not wishing to ignore its current value and its contribution to net portfolio value.

It also remains in the portfolio as an asset under an assumption that it is uncorrelated to other similar defensive holdings, whilst sharing some of the characteristics of gold (for example, it does not represent another party’s liability). Over this month reflecting on these issues, I had time to undertake a brief analysis of whether it had actually delivered on this goal or promise of being a non-correlated asset, and whether it moved in a distinct way compared to the existing gold holdings in the portfolio.

The chart below sets out the measured correlation between the main portfolio gold holdings (GOLD.ASX) and Bitcoin, over the past three or so years.

From the chart it can be seen that the correlations are highly unstable, and do average close to zero over the period. This means that compared to the gold holdings, Bitcoin is likely to be delivering some diversification benefit – and adding to overall portfolio stability.

Progress

Progress against the objectives, and the additional measures I have reached is set out below.

Summary

The past month has brought the portfolio to within a short distance of Objective #1. Indeed, it could be only around 2 to 3 months away using the average monthly trend of the past three years.

This is causing further reflection on the exact psychological meaning of reaching that first target. It is most definitely not a trigger point to retire early. The existence of the second portfolio objective is clear recognition of that. Rather, it feels more like a minimum threshold, that once crossed, is some assurance of a minimum future living standard set around the Australian average, regardless of employment or common life events.

Each step beyond this point will, I think, feel like an additional protection, building towards Objective #2. Therefore the gap between Objective #1 and #2 feels like a large ‘safety zone’ in which life events can be viewed with a greater detachment and objectivity. That is, they can be viewed as simply opportunities and inevitable change, rather than as threats or obstacles to achieving the security of financial independence.

This need to be tempered always with the caveat that, viewed over the long term, no simple ‘rule’ of 4 per cent or otherwise will offer a complete guarantee. Simply put, over long periods nothing is safe from adverse events. This recent podcast of some of the most well-known US financial independence bloggers – including those with a quantitative and analytical bent such as Big ERN – provided some excellent insights into assessing the risks of FI in a balanced way.

A point emerging from the discussion is agreement that over period above 30 years, financial independence plans that rely on amortisation – consumption or a drawdown of capital – are not amenable to simple set and forget ‘4 per cent rule’ style approaches often promoted. Rather, they require a more nuanced approach, and an appreciation that even ‘successful’ outcomes can feel indistinguishable from failures, potentially for years or a decade or more. Flexibility is recommended, yet as BigERN’s analysis shows, this is no panacea.

The Australian FI community continues its pleasing growth, with Snowball Journey recently joining the community. Through the Easter holidays I also listened to an intriguing  ChooseFI podcast on dividend investing and read through an interesting report from the Grattan Institute on retirement incomes (pdf).

As Autumn begins to fade, I cannot help but wonder if a period of strong market gains will themselves fade and transform themselves in coming months. Even amidst such movements, however, I will be looking down the path towards the June distributions with curiosity and anticipation at what could lay within reach.