If it not be now, yet it will come.The readiness is all.Shakespeare, Hamlet, Act V, Scene ii
This is my thirty-second 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) – Achieved
- $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 – $769 050
- Vanguard Lifestrategy Growth Fund – $43 826
- Vanguard Lifestrategy Balanced Fund – $79 826
- Vanguard Diversified Bonds Fund – $108 036
- Vanguard Australian Shares ETF (VAS) – $90 076
- Vanguard International Shares ETF (VGS) – $20 250
- Betashares Australia 200 ETF (A200) – $265 413
- Telstra shares (TLS) – $2 116
- Insurance Australia Group shares (IAG) – $15 051
- NIB Holdings shares (NHF) – $9 588
- Gold ETF (GOLD.ASX) – $95 251
- Secured physical gold – $15 309
- Ratesetter (P2P lending) – $21 070
- Bitcoin – $157 290
- Raiz app (Aggressive portfolio) – $16 358
- Spaceship Voyager app (Index portfolio) – $2 092
- BrickX (P2P rental real estate) – $4 388
Total value: $1 714 990 (-$1 713)
Asset allocation
- Australian shares – 40.6% (4.4% under)
- Global shares – 22.6%
- Emerging markets shares – 2.5%
- International small companies – 3.2%
- Total international shares – 28.2% (1.8% under)
- Total shares – 68.9% (6.1% under)
- Total property securities – 0.3% (0.3% over)
- Australian bonds – 5.1%
- International bonds – 10.1%
- Total bonds – 15.2% (0.2% over)
- Gold – 6.4%
- Bitcoin – 9.2%
- Gold and alternatives – 15.6% (5.6% over)
Presented visually, below is a high-level view of the current asset allocation of the portfolio.
Comments
The portfolio experienced a small decline this month, with a decrease of $1 700. This slight downward movement comes after six months of continuous increases in the value of the portfolio.
The fall also comes at a time in which some significant new investments were made, masking the size of the fall somewhat. A substantial likely contributor to the decline, however, is the natural impact of distributions being paid from shares, as well as ETFs and retail index funds.
In short, around $30 000 of distributions were paid out across July, decreasing the value of portfolio securities by around the same amount. Not all of these distributions have been re-invested, creating a temporary illusion that this value has been removed. A comparable effect led to a similar reduction in July 2017.
Generally movements this month within the portfolio have been relatively limited. One of the larger movements has been an increase in Australian and international shares, with Australian share markets just reaching post Global Financial Crisis highs.
A fall in the price of Bitcoin, and a smaller countervailing increase in the value of gold holdings has provided a live example of some of the issues in my last post on the potential value of non-correlated alternatives. Having said this, the fall in the price of Bitcoin is the major factor in this months downward movement. Evidently following some real estate revaluations, my BrickX holdings have also decreased in value by nearly 6 per cent since the last month. This most recent research into the actual realised returns from real estate investing suggests I should not be surprised, and usefully highlight the specific risks facing individual property investments.
This month has also seen my first investment of July distributions. These were placed in Vanguard international shares ETF (VGS). The remainder of the distributions will be placed into either into VGS, or Australian shares (A200 or VAS) over the next four months, on a dollar cost averaging approach alongside new contributions.
Reviewing of insurance needs and adjustments
Following distributions last month I have also re-examined my insurance requirements, taking into account updated portfolio values, existing savings, insurance through superannuation, and future financial obligations. This has led me to continue to reduce both my life insurance sum insured (from $315 000 to $100 000) and my income protection insurance (from $3000 to $1000 per month).
I have taken a conservative approach, and based the adjusted coverage on the goals of providing of sufficient income, at an assumed safe withdrawal rate of 3.75 per cent, to still meet my Objective #2.
In other words the target has been offering full income replacement from all assets and insurance of at least $83 000 in perpetuity. Still, this adjustment has led to a substantial savings – nearly $1 000 per annum. An alternative way to think about this is that I have lowered my ongoing expenses by just under $20 per week, reducing the final portfolio sum required to support this cost by around $28 000.
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) | 107.3% | 145.3% |
| Objective #2 – $1 980 000 (or $83 000 pa) | 86.6% | 117.3% |
| Credit card purchases – $73 000 pa | 98.5% | 133.3% |
| Total expenses – $96 000 pa | 74.9% | 101.4% |
Summary
The steady reinvestment of July distributions should give a small upward push to monthly results through to December. This is tempered by an effect of the growth in the overall size of the portfolio, and its exposure to equities.
As a simple example – a daily movement in equities of 0.5 per cent at the beginning of the journey meant a loss or gain of just over $3 000 in a day. The same movement now with the current portfolio would mean a gain or loss of nearly $6 000.
This makes the path less clear – as new contributions can more easily be swallowed into a daily market movement. The portfolio value effect has generally been – to borrow a phrase – a little akin to watching the movement of a yo-yo being used by someone walking up or down some stairs. Psychologically, it detaches effort from reward in a way that still feels relatively new in this journey.
An interesting post to think about in this context, is this from Collaborative Fund, which shows the sharp, volatile multi-year paths equities can take to reach a single destination. Usefully, it also points out the futility of many ‘fine adjustments’ to sectoral exposure, and unnecessary complexity in portfolio construction.
A further truth illustrated by the data in the piece is that general consumer sentiment, and economic growth, do not align with stock returns in any systematic way. In short, buying or selling shares because of a view that the economy or consumer confidence is strengthening, or weakening, is a futile guesswork, which has no historical basis in the past behaviour of returns.
These findings and new realities are reminders that taking the actions that support forward progress and continued regular investments are the immediate focus. This matters more than whether the portfolio sits above or below an arbitrary number on any given day. Planning and readiness for that day is the priority.
Absolutely love seeing your updates each month. Keep up the great work!
Thanks very much for that, that’s really kind of you to say Easypeasyfire! 🙂
A very interesting point on the movements of your portfolio now being far more important than the extra savings you are adding. Up and down changes of the equivalent of a months wages for the average Australian any time the market moves by 0.5% would also make watching it too closely a bit of an emotional roller coaster ride.
It must be nice to be able to reduce the insurance and thus the premiums, depending on what safe withdrawal rate you are using that would mean about $25,000 to $35,000 less that you need in retirement. Or to think of it another way, a 2% move in equities on your current portfolio!
Thanks for the link on the actual returns on real estate, it never ceases to amaze me how many people think buying an investment property is a guaranteed road to riches. Very few seem to take into account factors like inflation, fixed costs like rates and insurance, maintenance, property agent fees etc. And then on top of the financial costs there are the hassles of dealing with tenants and repairs etc.
Thanks Aussie HIFIRE for the comment. Yes, that’s a good point. I tend to think acclimating myself to it is one possible approach. I lot of the advice is to ignore and not check, but but think that’s better advice if you feel at risk of changing approach in response to what you see.
Yes, I think I used 3.5-3.75% for that insurance type assessment. 🙂
I enjoy your thoughtful commentary. I’m in a similar position regarding walking up the stairs with a yo-yo. One solution is to focus on the number of shares/units held (in my case mostly VAS & VAP but also some international exposure). I regard each of those shares/units in my core holdings as employees, so my progress can be measured by how many new employees I’ve bought. Since I plan to never sell, it’s the distributions that are important to me, not the day-to-day valuation. Sooner or later a bear market will arrive. It will smash the valuation of my employees, but they will still be there, working away as hard as they can to earn the next distribution.
I like this analogy, JD.
Well done again, FI Explorer.
Thanks Dingo! I agree. I think another US blogger refers to his shares as his ‘minions’! 🙂
Thanks very much! I have thought about that approach as well, and it’s an attractive way to think about it, isn’t it. I even planned to try and track ‘no of units’ measures and see what that looked like, for exactly the reasons you give.
Have not done that as yet, but in just the way that say, this is why I have kept track of distributions on a half yearly basis and written those other posts on trends in distributions vs expenses. Noting that distributions aren’t total returns, its still a really tangible way of seeing the progress in concrete terms.
AussieFirebug mentions a similar concept and thought in passing in one of his recent podcasts.
Hi, you certainly have a decent and varied share portfolio. can i ask your opinion regarding any pro’s and cons around borrowing at 4% approx to invest in shares, such as etf’s lic’s, paying dividends around 4 to 5% ?
Thanks… Brad
Hi Brad – thanks for reading and the comments.
It’s a question really that involve very individual circumstances and risk appetites.
My own view is that while in theory it can be advantageous when modelled in theory, the benefits are contingent on a lot of factors, none of which are certain, such as:
– interest rates remaining lower
– remaining in a tax bracket that make it worthwhile
– no changes to negative gearing
– correctly assessing your own risk appetite
– personal circumstances not changing in a way to make the arrangement unsustainable
Generally, I consider borrowing to invest in equities as being too high risk for me.
I’m with you 100% on this FI Explorer. It’s a very tempting strategy when you look at the numbers, and I’ve toyed with this idea on and off myself over the years, but the potential downside and psychological challenges watching your equity disappear and go negative in a hurry is nowhere near offset by the potential upside when things are good, in my view. The extra 1% margin you might make on the spread between interest and dividends won’t mean much when your portfolio falls 20% and your equity falls at a multiple of that.
I’ve since committed to NEVER borrowing to buy shares – just not worth it.
Cheers, Frankie
Thanks for the follow up Explorer, and also Frankie! I have been reading both your blogs for sometime.
It sounds like it could become over complicated, depending on the various outcomes, and some of the possible outcomes are unknown and out of my control.
My main driver for this is to also reduce the tax i pay. around 30 K annually i have a decent amount of savings, and it pays 2 to 3 percent annually, I am no financial guru, but considering i have a substantial amount in this account it’s also probably not making me enough return overall.
Does having cash in my savings account act as a safety buffer ? Is it common or viable in the Fi community to have alot of money tied up in savings ?
I am in my 50’s so does age come into play also ?,
Thanks again
Brad
Hi Brad, I think it does. Actually Aussie HiFIRE published an excellent piece on emergency funds today. As part of an investment portfolio cash does add stability, but in the current interest rate and inflation context, you’re right, it does just sit there. The answer to your question is practice varies, but taking risk out close to hitting FI is quite a standard approach.
Thankyou , Brad
I’m really impressed by your ability to push out your well written and deeply insightful portfolio update, without fail, on the first day of every month. Amazing stuff!
Just wondering, since you’re almost FI (having met Objective 1), and from the looks of it, you don’t have any debt – do you still see the need to have life insurance? Just wondering what future financial obligations you were considering when you reduced your insurance?
Apologies for the rather sensitive question – it’s a hot topic in our household as we’re currently in the middle of reviewing our insurances.
Thanks FI Mum! That’s really great feedback! Yes, I can definitely see a time when there may be no need at all, and enjoyed our followup discussion on Twitter! 🙂
Hi, RE: Insurances etc!
I cancelled my and my Partners Life insurances a few yrs ago, Own my home! i deemed it not necessary,
Am i on the outer ?
Thanks Brad
Fair enough! I don’t know, insurance is a very personal and individual decision. It all depends on the shape and likelihood of future obligations. If those are limited, then I can see the attraction in reducing or leaving. 🙂
Thanks Explorer, i will take a read of Aussie hi fire’s news, i have also been following his blog for sometime,
Thankyou. Brad
Wow this portfolio is getting quite large indeed!
Interesting to read your thoughts. It’s quite amazing how the daily moves get larger and larger over time as the portfolio grows. From hundreds of dollars, to thousands of dollars, and eventually to tens of thousands.
I read something about this recently; even though the percentages are the same, because we’re all emotional humans, it’ll probably never feel the same!
Thanks for the comment Dave!
It is, I have somewhat habituated myself to it through long exposure (and Bitcoin is another innoculation!). Indeed, changes of $10 000 per week used to be extremely rare, but is now becoming more and more routine. So far, I can view it with detachment. Counterintuitively, I’m not as sure that if I checked every 3 or 6 months, I’d feel as relaxed about seeing an (admittedly less frequent) negative sign.
Yes, people typically feel losses viscerally, sharper than gains – a consistent finding of behavioural economics! 🙂