Monthly Portfolio Update – March 2020

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Only the sea, murmurous behind the dingy checkerboard of houses, told of the unrest, the precariousness, of all things in this world.
Albert Camus, The Plague

This is my fortieth portfolio update. I complete this update monthly to check my progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars).

This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent.

Portfolio summary

  • Vanguard Lifestrategy High Growth Fund – $662 776
  • Vanguard Lifestrategy Growth Fund  – $39 044
  • Vanguard Lifestrategy Balanced Fund – $74 099
  • Vanguard Diversified Bonds Fund – $109 500
  • Vanguard Australian Shares ETF (VAS) – $150 095
  • Vanguard International Shares ETF (VGS) – $29 852
  • Betashares Australia 200 ETF (A200) – $197 149
  • Telstra shares (TLS) – $1 630
  • Insurance Australia Group shares (IAG) – $7 855
  • NIB Holdings shares (NHF) – $6 156
  • Gold ETF (GOLD.ASX)  – $119 254
  • Secured physical gold – $19 211
  • Ratesetter (P2P lending) – $13 106
  • Bitcoin – $115 330
  • Raiz app (Aggressive portfolio) – $15 094
  • Spaceship Voyager app (Index portfolio) – $2 303
  • BrickX (P2P rental real estate) – $4 492

Total portfolio value: $1 566 946 (-$236 479 or -13.1%)

Asset allocation

  • Australian shares – 40.6% (4.4% under)
  • Global shares – 22.3%
  • Emerging markets shares – 2.3%
  • International small companies – 3.0%
  • Total international shares – 27.6% (2.4% under)
  • Total shares – 68.3% (6.7% under)
  • Total property securities – 0.2% (0.2% over)
  • Australian bonds – 4.8%
  • International bonds – 10.4%
  • Total bonds – 15.2% (0.2% over)
  • Gold – 8.8%
  • Bitcoin – 7.4%
  • Gold and alternatives – 16.2% (6.2% over)

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

Mar 20 MPU Pie.2png

Comments

This month saw an extremely rapid collapse in market prices for a broad range of assets across the world, driven by the acceleration of the Coronavirus pandemic.

Broad and simultaneous market falls have resulted in the single largest monthly fall in portfolio value to date of around $236 000.

This represents a fall of 13 per cent across the month, and an overall reduction of more the 16 per cent since the portfolio peak of January.

Mar 20 MPU All Jny 2

The monthly fall is over three times more severe than any other fall experienced to date on the journey. Sharpest losses have occurred in Australian equities, however, international shares and bonds have also fallen.

A substantial fall in the Australia dollar has provided some buffer to international equity losses – limiting these to around 8 per cent. Bitcoin has also fallen by 23 per cent. In short, in the period of acute market adjustment – as often occurs – the benefits of diversification have been temporarily muted.

Mar 20 MPU 12 mnth 2

The last monthly update reported results of some initial simplified modelling on the impact of a hypothetical large fall in equity markets on the portfolio.

Currently, the actual asset price falls look to register in between the normal ‘bear market’, and the more extreme ‘Global Financial Crisis Mark II’ scenarios modelled. Absent, at least for the immediate phase, is a significant diversification offset – outside of a small (4 per cent) increase in the value of gold.

The continued sharp equity market losses have left the portfolio below its target Australian equity weighting, so contributions this month have been made to Vanguard’s Australian shares ETF (VAS). This coming month will see quarterly distributions paid for the A200, VGS and VAS exchange traded funds – totalling around $2700 – meaning a further small opportunity to reinvest following sizeable market falls.

Reviewing the evidence on the history of stock market falls

Vladimir Lenin once remarked that there are decades where nothing happen, and then there are weeks in which decades happen. This month has been four such weeks in a row, from initial market responses to the coronavirus pandemic, to unprecedented fiscal and monetary policy responses aimed at lessening the impact.

Given this, it would be foolish to rule out the potential for other extreme steps that governments have undertaken on multiple occasions before. These could include underwriting of banks and other debt liabilities, effective nationalisation or rescues of critical industries or providers, or even temporary closure of some financial or equity markets.

There is a strong appeal for comforting narratives in this highly fluid investment environment, including concepts such as buying while distress selling appears to be occurring, or delaying investing until issues become ‘more clear’.

Nobody can guarantee that investments made now will not be made into cruel short-lived bear market rallies, and no formulas exist that will safely and certainly minimise either further losses, or opportunities forgone. Much financial independence focused advice in the early stages of recent market falls focused on investment commonplaces, with a strong flavour of enthusiasm at the potential for ‘buying the dip’.

Yet such commonly repeated truths turn out to be imperfect and conditional in practice. One of the most influential studies of a large sample of historical market falls turns out to provide mixed evidence that buying following a fall reliably pays off. This study (pdf) examines 101 stock market declines across four centuries of data, and finds that:

  • Large falls can lead to strong rebounds – After large falls of up to 50 per cent, the probability of a large rebound is higher.
  • Future returns after large market falls are generally positive – Returns following such a severe crash are systematically higher than otherwise.
  • Smaller market falls, however, may accurately signal poor future returns – Smaller declines (10-20 per cent) are more likely to be followed by further declines, although the strength of the relationship is weaker and less consistent.

Even these findings should be viewed as simply indicative. Each crisis and economic phase has its unique character, usually only discernible in retrospect. History, in these cases, should inform around the potential outlines of events that can be considered possible. As the saying goes, risk is what remains after you believe you have thought of everything.

Position fixing – alternative perspectives of progress

In challenging times it can help to keep a steady view of progress from a range of perspectives. Extreme market volatility and large falls can be disquieting for both recent investors and those closer to the end of the journey.

One perspective on what has occurred is that the portfolio has effectively been pushed backwards in time. That is, the portfolio now sits at levels it last occupied in April 2019. Even this perspective has some benefit, highlighting that by this metric all that has been lost is the strong forward progress made in a relatively short time.

Yet each perspective can hide and distort key underlying truths.

As an example, while the overall portfolio is currently valued at around the same dollar value as a year ago, it is not the same portfolio. Through new purchases and reinvestments in this period, many more actual securities (mostly units in ETFs) have been purchased.

The chart below sets out the growth in total units held from January 2019 to this month, across the three major exchange trade funds holdings in the portfolio.

Mar 20 Unit Gth 2

From this it can be seen that the number of securities held – effectively, individual claims on the future earnings of the firms in these indexes – has more than doubled over the past fifteen months. Through this perspective, the accumulation of valuable assets shows a far more constant path.

Though this can help illuminate progress, as a measure it also has limitations. The realities of falls in market values cannot be elided by such devices, and some proportion of those market falls represent initial reassessments of the likely course of future earnings, and therefore the fundamental value of each of those ETF units.

With significant uncertainty over the course of global lock-downs, trade and growth, the basis of these reassessments may provide accurate, or not. For anyone to discount all of these reassessments as wholly the temporary result of irrational panic is to show a remarkable confidence in one’s own analytical capacities.

Similarly, it would be equally wrong to extrapolate from market falls to a permanent constraining of the impulse of humanity to innovate, adjust to changed conditions, seek out opportunities and serve others for profit.

Lines of position – Trends in expenditure

A further longer-term perspective regularly reviewed is monthly expenses compared to average distributions.

Monthly expenditure continues to be below average, and is likely to fall further next month as a natural result of a virus-induced reduction of shopping trips, events and outings.

As occurred last month, as a function some previous high distributions gradually falling outside of the data ‘window’ for the rolling three-year comparison of distributions and expenditure, a downward slope in distributions continues.

March 20 MPU 3 yr credit

Progress

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

Measure Portfolio All Assets
Portfolio objective – $2 180 000 (or $87 000 pa) 71.9% 97.7%
Credit card purchases – $71 000 pa 87.7% 119.2%
Total expenses – $89 000 pa 70.2% 95.5%

Summary

This month has been one of the most surprising and volatile of the entire journey, with significant daily movements in portfolio value and historic market developments. There has been more to watch and observe than at any time in living memory.

The dominant sensation has been that of travelling backwards through time, and revisiting a stage of the journey already passed. The progress of the last few months has actually been so rapid, that this backwards travel has felt less like a set back, but rather more like a temporary revisitation of days past.

It is unclear how temporary a revisitation current conditions will enforce, or exactly how this will affect the rest of the journey. In early January I estimated that if equity market fell by 33 per cent through early 2020 with no offsetting gains in other portfolio elements, this could push out the achievement of the target to January 2023.

Even so, experiencing these markets and with more volatility likely, I don’t feel there is much value in seeking to rapidly recalculate the path from here, or immediately alter the targeted timeframe. Moving past the portfolio target from here in around a year looks almost impossibly challenging, but time exists to allow this fact to settle. Too many other, more important, human and historical events are still playing out.

In such times, taking diverse perspectives on the same facts is important. This Next Life recently produced this interesting meditation on the future of FIRE during this phase of economic hardship. In addition, the Animal Spirits podcast also provided a thoughtful perspective on current market falls compared to 2008, as does this article by Early Retirement Now. Such analysis, and each passing day, highlights that the murmurs of the sea are louder than ever before, reminding us of the precariousness of all things.

8 comments

  1. Great update. I was looking forward to this month’s post, hoping it would be a calm and reassuring voice of reason in these crazy times – and as always, you delivered! Thanks.

  2. I agree with Zac: it’s good to hear a calm voice of reason in chaotic times. For me, the reduction in my portfolio value highlights how important the other side of the early retirement coin is: decreasing expenditure, and learning to enjoy my life no matter the circumstances. When my life is happily sustained on a smaller and smaller fraction of my income, even the rockiest circumstances are easier to bear.

    Thanks for your posts!

  3. Good post, eagerly awaiting the April update after what has been a whooper of a March. Interesting link to the study you posted, very much contrarian and make a lot of sense you would think.

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