The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.

Marcel Proust, Remembrance of Things Past

This is my forty-first 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 – $697 582
• Vanguard Lifestrategy Growth Fund  – $40 709
• Vanguard Lifestrategy Balanced Fund – $76 583
• Vanguard Diversified Bonds Fund – $110 563
• Vanguard Australian Shares ETF (VAS) – $174 864
• Vanguard International Shares ETF (VGS) – $31 505
• Betashares Australia 200 ETF (A200) – $215 805
• Telstra shares (TLS) – $1 625
• Insurance Australia Group shares (IAG) – $7 323
• NIB Holdings shares (NHF) – $5 904
• Gold ETF (GOLD.ASX)  – $119 458
• Secured physical gold – $19 269
• Ratesetter (P2P lending) – $12 234
• Bitcoin – $158 360
• Raiz app (Aggressive portfolio) – $16 144
• Spaceship Voyager app (Index portfolio) – $2 435
• BrickX (P2P rental real estate) – $4 471

Total portfolio value: $1 694 834 (+$127 888 or 8.2%)

Asset allocation

• Australian shares – 40.9% (4.1% under)
• Global shares – 21.7%
• Emerging markets shares – 2.2%
• International small companies – 3.0%
• Total international shares – 26.9% (3.1% under)
• Total shares – 67.8% (7.2% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 4.5%
• International bonds – 9.9%
• Total bonds – 14.4% (0.6% under)
• Gold – 8.2%
• Bitcoin – 9.3%
• Gold and alternatives – 17.5% (7.5% over)

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

Comments

This month featured a sharp recovery in the overall portfolio, reducing the size of the large losses experienced over the previous month.

The portfolio increased by over $127 000, representing a growth of 8.2 per cent, which is the largest month-on-month growth on record. This now puts the portfolio value significantly above the levels of a year ago.

The expansion in the value of the portfolio has occurred due to an increase in Australian and global equities markets, as well as substantial increases the price of Bitcoin. This is effectively the mirror image of the simultaneous negative movements last month.

From a nadir of initial pessimism in late March, markets have generally moved upwards as debate continues about the path of a likely economic recession and recovery from Coronavirus impacts over the coming year.

First quarter distributions from the Australian and Global Shares ETFs (A200, VAS and VGS) were received this month. These were too early to fully reflect the sharp economic activity impacts of the Coronavirus and lockdown period on company earnings.

Despite this, they were significantly down on a cents per unit basis on the equivalent distributions last year. Totalling around $2700, these distributions formed part of new contributions to Vanguard’s Australian shares ETF (VAS).

The rapid falls in equity have many participants looking forward to a return to normalcy, or at least more open to the pleasing ideas that nerves have been held in a market fall comparable to 2000 or 2008-09, and that markets now represent clear value. As discussed last month, there should be caution and some humility about these questions, if some historical perspective is taken. As an example, the largest global equity market in the world – the United States – remains at valuation levels well above those experienced in previous market lows.

Portfolio alternatives – tracking changes under the surface

A striking feature of the past year or so has been the expansion of the non-traditional or ‘alternatives’ components of gold and Bitcoin as a proportion of the overall portfolio. Currently, when combined these alternative assets form a greater part of the portfolio than at any point over the past two years.

The chart below shows that since January 2019 the gold and Bitcoin component of the portfolio has lifted from around its long term target level of 10 per cent, to now make up over 17 per cent of the portfolio. In the space of the last four months alone, it has lifted from 13 per cent.

With no purchases of either gold or Bitcoin over the period, the growth in the chart is the result of two reinforcing factors:

• A substantial fall in the value of the equity portfolio – reaching nearly $200 000 since the recent February market peak has naturally and mathematically led to a commensurate increase the proportion of other assets.
• Increases in the value of gold and Bitcoin – have also played a role with a total appreciation of around $150 000 across the two assets over the past 16 months.

In fact, the value gold holdings alone have increased by over 40 per cent since January last year. Further appreciation of either gold or Bitcoin prices, particularly if any further falls in equity markets occur, could easily place the portfolio in the same position as experienced in January 2018.

At that time these alternative assets made up 1 in every 5 dollars of the portfolio, an unusual, and in that case temporary phenomenon. This represents a different portfolio and risk exposure than that envisaged in my portfolio investment plan.

Yet, equally it is critical to recall what the circumstances would likely be for this to arise. Simultaneously high gold and Bitcoin prices are more likely to occur in a situation of severe capital market dislocation, or falling confidence. On the other hand, should confidence and equity market growth be restored, both of these portfolio components could fall back to lower levels.

It is difficult to tell which state of the world will eventuate, a key reason for diversification across asset types. United States government debt is already at record levels – equivalent in real terms to levels last seen when it emerged out of the Second World War – despite no similar national effort having being undertaken.

Future inflation can potentially partly manage this burden, however, the last sustained episode of persistently high inflation rates during the decade of the 1970s spelt negative real returns. Where investors expect future inflation or financially ‘repressive’ policies of inflation exceeding interest rates, the economic growth required to ‘grow out’ of debt can be affected.

At this point, my inclination is to address this circumstance gradually through time by re-balancing of distributions and new contributions, rather than to realise capital gains by selling assets at one, or several, points in time.

Chasing down the lines – falling average spending in lockdown

Since the implementation of lockdown restrictions, average credit card expenditure has fallen by nearly 30 per cent. This has taken credit card expenditure to lower than any similar period in the past six years.

Partly as a result of this – as the chart below shows – a new development is occurring. The previously fairly steady card expenses line (red) is now starting to bend down towards, or ‘chase’, the rolling average distributions line (in blue).

The declining distributions line is a result of some previous high distributions gradually falling outside of the data ‘window’ for the rolling three-year comparison of distributions and expenditure.

This intriguing picture will probably change before a cross-over occurs, as lockdown restrictions ease, and as the data feeding into the three year average slowly changes over time.

Progress

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

Summary

Last month market volatility theoretically took progress down to below most of my financial independence benchmarks on an ‘All Assets’ (i.e. portfolio and superannuation assets) basis. This position has reversed this month. As markets have recovered and with additional spare time in the lockdown period, I have continued to seek out and think about different perspectives on the history and future of markets.

Yet it must be recognised that there is a natural limit to the utility of these ponderings. The shape of the future is always uncertain, and in this world, confident comparisons and analogies with past events can be perilous. Comparisons with past periods of financial market crises miss the centrality of government action as a causal influence on the path of virus affected economies and markets.

A virus and recovery is not the same as a global financial crisis originating in housing finance markets addressed through monetary and fiscal stimulus. Most developed country governments have quickly applied the same, if not larger versions of responses as applied in the global financial crisis, a distinguishing step that also makes analogies with the great depression era problematic.

Similarly, a pandemic is not hitting and interacting with the shattered economic and health systems of the 1918-19 Spanish flu. Overlaying all of this is the imperfect and partially disconnected relationship between the economy today, and equity markets that discount and focus on the future.

This makes all history’s lessons more than usually caveated and conditional. One avenue for managing through these times is to focus on what does not change – the psychological difficulty of accepting alterations in financial circumstances and the capacity of markets movements to cruelly surprise us in both timing and direction.

One of the best texts to read to get a sense of both of these in such times is Benjamin Roth’s A Great Depression Diary. This tells of the day-by-day changes observed in everyday urban life and investment markets, from the point of view of an American small retail investor living through the times.

This month also saw the exciting news that Pat the Shuffler and Strong Money Australia are combining efforts to produce a new podcast. Speaking of which, Big ERN’s reflections on the current implications of sharemarket market movements for seekers of financial independence have been filled with insight and wisdom.

This interesting piece (video) – the latest in a ‘virus’ market series – from New York University’s Professor of Finance Aswath Damodaran on asset performances through the past few months – is a more technical and detailed discussion of how markets have re-priced businesses and profits. Finally, the recently released Hmmminar interview series provides a more heterodox set of speakers and ideas on current markets, presented by Grant Williams.

Unlike predicting the future, seeking out different perspectives on it is perhaps the easiest it has ever been in history. While it is not always possible to change the course taken, it is possible to look at the same horizon with new eyes.