Sometimes, I feel the past and the future pressing so hard on either side that there’s no room for the present at all.

Evelyn Waugh, Brideshead Revisited

This is my forty-seventh monthly portfolio update. I complete this regular update to check 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	$728,112
Vanguard Lifestrategy Growth Fund	$41,606
Vanguard Lifestrategy Balanced Fund	$78,564
Vanguard Diversified Bonds Fund	$109,495
Vanguard Australian Shares ETF (VAS)	$231,548
Vanguard International Shares ETF (VGS)	$75,298
Betashares Australia 200 ETF (A200)	$231,199
Telstra shares (TLS)	$1,428
Insurance Australia Group shares (IAG)	$6,043
NIB Holdings shares (NHF)	$4,992
Gold ETF (GOLD.ASX)	$121,009
Secured physical gold	$19,482
Ratesetter (P2P lending)	$7,363
Bitcoin	$218,040
Raiz app (Aggressive portfolio)	$17,488
Spaceship Voyager app (Index portfolio)	$2,841
BrickX (P2P rental real estate)	$4,447
Total portfolio value	$1,898,955 (+$73,218)

Asset allocation

Australian shares	40.8%
Global shares	22.4%
Emerging market shares	2.1%
International small companies	2.7%
Total international shares	27.3%
Total shares	68.1% (-6.9%)
Total property securities	0.2% (+0.2%)
Australian bonds	4.1%
International bonds	8.6%
Total bonds	12.8% (-2.2%)
Gold	7.4%
Bitcoin	11.5%
Gold and alternatives	18.9% (+8.9%)

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

Comments

This month the portfolio expanded by around $73,000, continuing the strong overall pattern of recovery since March. This has resulted in portfolio growth of 4 per cent, which has taken the value of the portfolio to a new monthly high.

The portfolio was affected by small price falls across global shares, a modest increase in Australian share values, with limited movement in gold and bond holdings.

This means that the majority of gains in the portfolio have been from an appreciation in the price of Bitcoin, which in fact made up more than 90 per cent of the total monthly gains. This appears to be based on some early steps by Paypal to increase use of Bitcoin, and some recent corporate decisions by a US technology firm to seek to employ it as a corporate treasury store of value.

This element of the portfolio, more a product of curiosity than deliberate investment intent, now represents a surprising 11 per cent of total assets held. Combined, Bitcoin and the gold components of the portfolio have expanded in value over the past few years to currently sit at their highest dollar value ever. This is despite no significant investments in either for nearly five years.

What this means in practice is that while these values increase, to hold other elements of the portfolio close to their targets, equity purchasing continues. In essence, as these defensive (or at least uncorrelated) assets appreciate, there is a strong automatic signal through my asset allocation plan to increase equity holdings to maintain balance.

This month this translated to continued purchases of Vanguard exchange traded funds, with units bought in both the Australian shares (VAS) and international shares (VGS) funds.

Third quarter dividends start to grow

Third quarter dividends from the three equity ETFs held (VAS $1,702, Betashares A200 $1,583 and VGS $275) were received this month. These totalled close to the $3,600 expected, but were around 40 per cent lower than past historical distributions for the same period.

In addition, a distribution from the Vanguard diversified bond fund of $2,483 was received, a far higher payout than average. These distributions were all reinvested through the month.

Estimating future distributions – some further explorations

As I start to think ahead to the December half-year distributions, I will primarily rely on the approach of estimating approximately the average level of distributions per ETF or fund unit, drawing on historical records. Then I will likely apply a broad downward adjust to reflect expected cancelled or deferred dividend payouts during the pandemic.

Doing some early work on this has turned up a potential issue of under-estimation of future distributions from applying this approach. Put simply, while payouts per unit for ETFs show no particular trends, the ‘cents per units’ distributions paid out of the Vanguard retail funds (in particular the High Growth, Growth and Balanced funds) have generally grown over time.

The trend is evident at least for June distributions measured over the last decade, as can be seen in the chart below. Interestingly, however, the issue does not seem to be as clearly present for December distributions.

At an annual aggregate level, this can mean that simple averages or median figures may not necessarily be representative of trends in recent, and potential future, payouts.

Presumably part of the reason for this is that some elements of the capital growth experienced by the retail funds are being ’embedded’ in the price of the retail fund units over time. This can be thought of as akin to a share price increasing over time, but the precise drivers for this happening are not entirely clear.

Early work suggests that giving weight to more recent fund distributions would substantially raise the estimated future portfolio income – by almost $20 000. Yet in these COVID-affected market conditions, this effect may not be discernible compared to broader dividend reductions.

Centre of the load – changing balance of holdings

Since the commencement of the journey in 2017 there have been some substantial changes in the shape of the financial independence portfolio.

Many of these changes have been documented elsewhere, including the growth in the overall size of equity holdings, and a strong rebalancing towards Australian equities based on the portfolio plan.

The focus of much of the portfolio analysis contained in this record focuses on asset allocation. That is, the specifics of what is owned, rather than the how – or the precise investment structures through which these assets are owned.

This is entirely the right way to think about the issues for most purposes – as generally it makes little difference if a share in global firms is owned through an ETF, a passive low-cost managed fund, or even a Fintech mobile app such as Spaceship or Raiz.

Yet day to day, it is these investment structures I deal with, and choose to expand my investments in, or receive distributions from. Over time these choices are shaping the overall characteristics of the portfolio in ways that are only slowly becoming apparent.

Comparing past and present investment structures

The portfolio at the commencement of this record was a legacy of two competing characteristics – consistency and a taste for experimentation.

The chart below shows the composition of the portfolio by investment structure in January 2017.

Starting the journey, this meant a solid basis of larger investments in Vanguard retail funds. The largest of these – the Vanguard High Growth Fund – comprised around 6 in every 10 dollars invested. Collectively, all Vanguard retail funds constituted 82 per cent of the portfolio.

By contrast, a range of small experimental investments made up a tiny proportion of the portfolio, with Raiz, Spaceship, and Bitcoin only representing around 1-2 per cent of the entire portfolio.

The portfolio, viewed by structure, looks quite different today.

Investments structures which have not received new contributions have naturally shrunk as the overall portfolio has approximately doubled across the past four years. The chart below shows the portfolio by investment structure today.

Overall, the portfolio has a greater number of individual structures. This is mostly the result of a shift in the focus of new investments towards exchange traded funds.

The shifting balance and portfolio implications

The major changes in terms of portfolio and investment structures have been:

• A declining importance of Vanguard passive index funds – The Vanguard retail funds are only around half of the portfolio by value, with the High Growth fund alone declining from 59 to 38 per cent of the portfolio.
• With ETFs growing in portfolio significance – Exchange traded funds (VAS, A200 and VGS) have grown to just under a third of the total portfolio.
• And from nowhere, Bitcoin arrives as a portfolio component – Bitcoin has come from being an inconsequential part of the portfolio, to constituting more than 11 per cent of its value.
• Smaller investment structures have even more negligible impact – with the five smallest investment collectively making up only 2 per cent of the overall portfolio in 2017, and half that today.

These significant changes have a few different implications.

First, the portfolio performance is increasingly a function of how the Vanguard High Growth fund, Australian equity ETFs (A200 and VAS), and Bitcoin perform through time. These four investment structures represent nearly 80 per cent of the portfolio. This has some benefits in terms of simplicity, as it is easier to get a broad sense of performance from just a few data points.

Second, and conversely, a significant number of investments simply have negligible effect on overall portfolio outcomes, representing less than one per cent of holdings.

Third, with a number of these investment structures being lower cost, this increasing concentration in these vehicles has the overall effect of lowering average fees across the portfolio. These currently sit at around 0.24 per cent.

Trends in average credit card expenses

Similar to recent months, average monthly expenditure on credit cards has continued to fall. The rolling average level of distributions is also gradually falling, reflecting some larger distributions in the older data being excluded over time.

Reviewing monthly figures, total expenditure continues to track at levels above estimated distributions, while credit card expenses remain fully met.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2 180 000 (or $87 000 pa)	87.1%	117.3%
Credit card purchases – $71 000 pa	106.3%	143.2%
Total expenses – $89 000 pa	85.1%	114.7%

Summary

There was a small pleasant surprise in the past week, in the form of recognition in this Business Insider piece on the topic of choosing a FIRE lifestyle. With the portfolio moving beyond previous monthly highs it has been tempting to consider the journey smoothly back on track, and that the timeline for the portfolio goal of July 2021 may yet be attainable.

Yet the sense of changing regimes – monetary, fiscal, and inflationary – is unmistakeable, with the International Monetary Fund, for example, openly calling for a new ‘Bretton Woods‘ moment. Nobel prize winning economists are increasingly questioning a series of pervasive puzzles across markets, and the foundational concept of risk-free rates that sit behind all market asset prices.

These same forces have found their expression in the portfolio this month, with unanticipated increases in non-traditional and alternative asset types. These seem caught in a struggle between the past and future, and the portfolio itself seems poised at the same potential inflection point.

The shape of some of these inflection points is well described in this piece on the historical premium for investors assuming equity and bond risks over the past 300 years. Critically, it reinforces the extraordinary and atypical performance of bonds over the past 40 years, and their poor outlook going forwards.

Likewise, this recent work by Professor Robert Shiller points to increasing fears in the US of poor future equity returns. For another perspective, this academic piece highlights a potentially more stable underlying connection between price fluctuations and value in key international equity markets.

This month I have also sought out perspectives from a slightly shorter time period, beginning Felix Somary’s memoirs The Raven of Zurich. It is a story of an extraordinary financier’s life, a life intersecting with almost every major world event in the first half of the twentieth century. The contents are a stark reminder that predictions and warnings can go unheeded, and that identification of risks is only one half of their resolution.

Reflecting on the memoir, one is reminded that nobody has ever had a choice of what history they live through. The only choice lies in how to respond, what actions to take.

With looming US elections likely to be highly contested, increased uncertainty and fear driving markets, there is a sense of there being hardly room for the present. Yet this narrow present is the one we must act in, to seek to progress the chosen journey.