It is idle, having planted an acorn in the morning, to expect that afternoon to sit in the shade of the oak.

 Antoine de Saint-Exupéry, Wind, Sand and Stars

This is my thirty-third 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 passive 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 – $750 246
• Vanguard Lifestrategy Growth Fund  – $43 194
• Vanguard Lifestrategy Balanced Fund – $79 500
• Vanguard Diversified Bonds Fund – $110 418
• Vanguard Australian Shares ETF (VAS) – $102 977
• Vanguard International Shares ETF (VGS) – $20 184
• Betashares Australia 200 ETF (A200) – $258 984
• Telstra shares (TLS) – $1 982
• Insurance Australia Group shares (IAG) – $14 056
• NIB Holdings shares (NHF) – $8 868
• Gold ETF (GOLD.ASX)  – $104 149
• Secured physical gold – $16 759
• Ratesetter (P2P lending) – $19 968
• Bitcoin – $158 330
• Raiz app (Aggressive portfolio) – $16 223
• Spaceship Voyager app (Index portfolio) – $2 104
• BrickX (P2P rental real estate) – $4 395

Total value: $1 712 337 (-$2 653)

Asset allocation

• Australian shares – 40.5% (4.5% under)
• Global shares – 22.2%
• Emerging markets shares – 2.4%
• International small companies – 3.1%
• Total international shares – 27.7% (2.3% under)
• Total shares – 68.3% (6.7% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 5.1%
• International bonds – 10.1%
• Total bonds – 15.1% (0.1% over)
• Gold – 7.1%
• Bitcoin – 9.2%
• Gold and alternatives – 16.3% (6.3% 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 an overall decrease of $2 600. This movement comes after a strong period of expansion through the first half of the year in the value of the portfolio.

As with last month, the fall occurs despite some significant new investments being made, meaning the absolute size of the decline is somewhat obscured. Renewed concerns about global trade and a relative weakening in the outlook for future earnings played a significant role in the overall movement of the portfolio.Once again movements this month within the portfolio have been relatively limited in terms of the size of the portfolio.

Equity holdings have declined by around $28 000 when contributions are accounted for, whilst appreciation in the price of gold has offset just over a third of that loss. In fact, despite no recent purchases, the gold component of the portfolio is currently at the highest nominal value it has ever held. On the topic of gold, this 2013 paper (pdf) provides a comprehensive and skeptical empirical analysis of the range of claims made to support holding gold, including tracing the real gold value of average soldiers pay across 2000 years.

This month has seen a continuing ‘averaging in’ of the capital from July distributions. These have been directed to purchases of Vanguard’s Australian shares ETF (VAS). This is to bring the allocation closer to my original targets – with my Australian shares allocation currently further underweight than the international shares allocation. Psychologically, a weakening Australian dollar has also made purchasing unhedged international shares more problematic.

Risk, volatility, markets and economies 

There has been significant market volatility this month, and discussion around the future of Australian and global growth in the midst of trade tensions between US and China.

In such times, something to remember as this St Louis Federal Reserve piece points out, is that the economy and sharemarket are not the same thing. This means that bad (or good) news for one, does not necessarily imply anything about the other. Missing this has the potential to lead to overconfident investment actions predicated on assumptions of future national economic trends (which will themselves most likely be priced into equity markets well before any retail investor reading the news arrives).

The volatility in equity markets has brought out many well-intentioned injunctions to remain calm and fixed on the objective of contributing capital with a long-term view in mind.

At times, however, this wise advice can shade into a form of near complacency – for example, for people to invest confident in the knowledge that long-term returns are (almost) guaranteed. No doubt this is generally good advice, directed at easing particularly new investors’ concerns about investing at the “wrong” time, and reducing the potential damage from selling into falling markets due to panic.

Even as I continue to invest amidst volatility, it is important to reflect on Elroy Dimson’s definition that ‘risk means more things can happen than will happen’, and to consider that the history of equity markets available to us provides only a basis for sound conclusions around what has happened, not what could happen. This is the definition of the risk assumed in markets by investors.

None of this is to suggest that starting, saving and regular investing with a view to one’s individual risk tolerances are not the most important steps in the path to FI. There is a need to pause, however, and acknowledge that at times common financial independence investment precepts bear a disconcerting passing resemblance to the declaration and mathematical proof offered by famous stock promoter Jacob J Raskob in the well-known Ladies Home Journal (pdf) article exactly 90 years ago. This declaration was that with a steady investment in equities, based on the past patterns of returns,  ‘everybody ought to be rich’.

Nearly 90 years happened to be just before the Great Depression devastated equity markets and employment prospects alike, and US equity investors were behind in nominal terms for around 25 years. Interestingly, however, this New York Times article argues that deflation, higher dividend yields and impacts from changes in the Dow index composition could theoretically have shortened the real losses of any investor to just 4.5 years, provided they possessed the resources and fortitude to hold on to average stocks.

Progress

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

Summary

Progress against my goals and benchmarks has been static this month, with the exception of the ‘total expenditure’ benchmark. My detailed review of expenditure last month identified that I could lower this to recognise some double-counting of fixed expenses, and this has meant a leap forward in progress in that aim of 5.8 per cent. This moves the clock forward appreciably for achieving that benchmark.

As a general rule, it is always later than we think. For example, on a recent lunch time walk it occurred to me that if my progress to my current FI target of $1.98 million is considered in terms of the length of an ordinary working day, it is currently approximately 3.50pm in the afternoon. Quite late, and just over an hour until heading home.

This perspective, of being further towards the tail end than expected, is explored fully and powerfully in the blog Wait but Why here. It helps frame the remaining journey. Viewed in this way, wishing time away seems less useful and fitting than seeking to fill the remaining time with as much meaning, learning, knowledge transmission and patience as feasible. Yet it also explains why in a FI context at this stage sharp changes in investing approach, or commencing new ‘side hustles’ have limited appeal.

Despite it being late afternoon from this one perspective, there are a couple of other considerations or viewpoints. One is the potentially deceptive role of compounding later in the journey, which means that – at least in a stylised world of ‘smooth returns’ – the end goal is actually likely closer than any purely linear measure would suggest.

The other counterpoint to this is that while in my case the absolute journey to FI has involved serious investments over around 18 years, this is not the whole story. Viewed in terms of the average ‘age’ of dollars actually contributed or invested, the journey of the average dollar in the portfolio has been shorter.

In fact, in terms of dollars contributed, around 50 per cent have been contributed since January 2016. So, in some ways, it is more akin to mid-morning for the portfolio as a whole, meaning perhaps that I should not reasonably expect to shade myself under the oak tree just yet.

Finally, this month also saw Pat the Shuffler emerge from a short hiatus and provide a honest and well-argued insight into his rethink on investment options between LICs and ETFs. I also enjoyed reading the start of another Australian FI voice at Fire for One.

The past few months has also had many interesting podcasts related to FI – from The Escape Artists’ Chris Reining on Equity Mates, to a really fascinating practical ChooseFI episode on David Sawyer’s on the UK Path to FI. On the slightly more technical and future focused side of finance, the outgoing address  of the Bank of England’s Governor to the Jackson Hole central bankers gathering provides much food for thought on current and longer term monetary and currency issues, particularly as global bond rates continue to cross the ‘zero-bound’ into uncharted territory.