The most difficult thing is the decision to act, the rest is merely tenacity.
Amelia Earhart
This is my fiftieth monthly portfolio update. I complete this regular update to check progress against my goal.
Portfolio goal
My objective is to reach a portfolio of $2,585,000 by 31 July 2022. This would produce a real annual income of about $90,500 (in 2021 dollars).
This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.
Portfolio summary
| Vanguard Lifestrategy High Growth Fund | $775,158 |
| Vanguard Lifestrategy Growth Fund | $43,025 |
| Vanguard Lifestrategy Balanced Fund | $79,641 |
| Vanguard Diversified Bonds Fund | $107,429 |
| Vanguard Australian Shares ETF (VAS) | $269,445 |
| Vanguard International Shares ETF (VGS) | $117,712 |
| Betashares Australia 200 ETF (A200) | $257,703 |
| Telstra shares (TLS) | $1,662 |
| Insurance Australia Group shares (IAG) | $6,144 |
| NIB Holdings shares (NHF) | $6,624 |
| Gold ETF (GOLD.ASX) | $109,475 |
| Secured physical gold | $17,648 |
| Plenti (P2P lending) | $5,480 |
| Bitcoin | $494,160 |
| Raiz app (Aggressive portfolio) | $19,508 |
| Spaceship Voyager app (Index portfolio) | $3,106 |
| BrickX (P2P rental real estate) | $4,447 |
| Total portfolio value | $2,318,367 (+$52,337) |
Asset allocation
| Australian shares | 37.4% |
| Global shares | 20.9% |
| Emerging market shares | 1.8% |
| International small companies | 2.3% |
| Total international shares | 25.0% |
| Total shares | 62.4% (-12.6%) |
| Total property securities | 0.2% (+0.2%) |
| Australian bonds | 3.4% |
| International bonds | 7.2% |
| Total bonds | 10.5% (-4.5%) |
| Gold | 5.5% |
| Bitcoin | 21.3% |
| Gold and alternatives | 26.8% (+16.8%) |
Presented visually, the chart below is a high-level view of the current asset allocation of the portfolio.
Comments
This month the portfolio has increased by over $52,000, extending the strongest period of growth since this record started.
This has contributed to an expansion in the overall portfolio of over 25 per cent since the beginning of October last year. In this month alone the portfolio grew around 2.3 per cent.
Increases in the price of Bitcoin have provided the key motive force for the portfolio both this month and since October. Equities have made a smaller contribution since October, but the value of equity holdings actually fell slightly this month.
Part of this is related to the reduction in value arising from the payout of substantial distributions earlier this month, which will be averaged back into the portfolio over the next six months. The value of gold and fixed interest holdings have also marginally declined.
Stepping back, the result of this is the strongest consecutive four month performance of the portfolio on record, based quite narrowly on the fortunes of just two of its components, equities and Bitcoin.
A month ago I reset my financial independence objective and also signalled a gradual adjustment of the equities portfolio towards a medium-term goal of equal allocation of Australian and international equities.
Developments in both Australian and global equity markets make it a challenging psychological time to be increasing equity purchases. Many markets are expensive on traditional metrics, with the critical question being the extent to which these valuations are justified by future stimulus, broader economic recovery flowing from the rollout of COVID-19 vaccinations, increased earnings, and historically low interest rates.
In these extraordinary times it is also still an open question whether many investors are seeing equities acting as an imperfect store of value and hedge against rising inflation expectations over coming years.
Applying the revised investment policy this month led to continued purchases of Vanguard exchange traded funds, with units bought in each of the international shares (VGS) and Australian shares (VAS) funds.
Force majeure – portfolio impact of Bitcoin
The past month has seen the price of Bitcoin reach all time highs. A plethora of reasons have been provided for this, including increased institutional interest in the technology, irrationally exuberant market behaviour, and impacts of fiscal and monetary policy expansion.
This has created a position never anticipated in the design of the portfolio, or at the inception of the small experimental purchases driven by curiosity across 2015-16. At the final purchase in early 2016 the total funds I had used to make these Bitcoin purchases represented just 0.5 per cent the portfolio, and an amount I was comfortable entirely losing.
With no further investments since that time, Bitcoin holdings have unexpectedly grown to make up 21 per cent of the portfolio.
This is a rare occurrence. In the five years I have owned Bitcoin, it has only exceeded 10 per cent of the portfolio across only a handful of months. Yet the fact remains, it currently sits as the second largest portfolio component, if measured as an asset class.
The ‘if’ in that last sentence is there for a reason.
The inclusion of Bitcoin in these updates and portfolio estimates is designed to recognise that it currently represents a large monetary value. It is not to suggest that Bitcoin is an ordinary investible asset alongside equities, property, or fixed interest, which should form part anyone else’s portfolio.
Rather, it is there as a significant financial asset for the moment, which may, or may not successfully transition over time to a store of value. Further, it may emerge over time to have some value as a non-correlated ‘option’ on certain (low probability) future states of the world.
Response to the (re)rise of Bitcoin
Given time, markets teach humility to all. When this record started, I naively expected it to be a story of relatively steady progress of equity focused purchases and market growth over time bringing about the reaching of portfolio goals.
As it turns out, markets had other ideas.
So the choice is this: to write about the journey I expected to have and omit the inconveniently inconsistent parts, or write about the one I am actually experiencing. That is no real choice, if the purpose is to act as a genuine record.
Despite the significant price increase, my views on Bitcoin remain fundamentally the same as when I wrote about my approach to its portfolio role in mid-2019.
I would not recommend it as part of a financial independence portfolio.
Rather, I personally view it as an intriguing innovation and a possible emerging store of value with some option-like characteristics. It also may possess some uncertain but potentially useful diversifying features as part of my specific existing portfolio, taking into account my risk bearing capacities and appetite.
Most of all, the price increase has led me to seek to follow the discussions about these potential emergent properties more closely, and to work to further increase my knowledge.
This useful debate between a skeptic and Bitcoin adherent brings out some of the issues nicely. Significant traditional investment managers are similarly publicly discussing the characteristics and prospects of Bitcoin, in contrast to a number of previous dismissals of its future. Bitcoin is also drawing out fascinating debates and discussions amongst adherents around the nature of money as a technology (video).
According to this exchange commissioned report last year (pdf), curiosity and adoption is also growing here. Around 1 in 5 Australians owned some cryptocurrency in 2020, up from the previous year, with growth in the 25-44 years old demographic driving this increase.
Trends in average distributions and expenses
The holidays and Christmas period resulted in a substantial increase in total expenses.
Even so, average monthly expenditure on credit cards has continued to track below previous years, by nearly $1,000 per month. The rolling average level of distributions in the chart below has been revised due to the much higher than expected levels of December distributions.
This clearly indicates that distributions have moved significantly ahead of average credit card expenses, the actual crossover having occurred in the middle of the last year.
The record of distributions compared to total expenses provides a broader picture of progress against total monthly spending.
The chart below shows that the capacity of the portfolio to support average spending over the past three years is approaching 90 per cent, having started at around 30 per cent at the beginning of this record.
Progress
| Measure | Portfolio | All Assets |
| Portfolio objective – $2,585,000 (or $90,500 pa) | 89.7% | 117.0% |
| Total average expenses (2013-) – $85,600 pa | 94.8% | 123.7% |
Summary
January usually provides more time to think about the portfolio and progress on the financial independence journey than any other point in the year.
Having reset my portfolio goal and adjusted the course, there now seems to stretch out ahead a year that I know will bring events I have not contemplated, and which in some cases cannot be guessed at. A prolonged flat period, or reversals, are well within the range of possibilities.
While I am comfortable with the plan, and the current risk exposures of the portfolio, this does not mean an end to thinking and learning. New information and perspectives continuously present themselves.
An example is this paper Stocks for the long run? Evidence from a broad sample of developed markets which examines a fuller sample of equity market history. It finds that the risk of underperforming inflation over a 30 year period with diversified equity holdings is 12 per cent if broad multi-country equity market data is assessed, versus just 1.2 per cent if ones’ view is restricted to an inevitably narrower US data set.
Another example, from one of original academic advocates of stocks for the long run, is Professor of Finance Jeremy Siegel pointing to the likelihood of higher inflation and bondholder losses as a consequence of current fiscal and monetary policies.
With the extra time this month it was enjoyable to catch up on this annual review from Pat the Shuffler, Strong Money Australia’s plans for 2021, as well as this in-depth Mad FIentist podcast with the founder of Early Retirement Extreme – one of the pioneers of the US FI movement.
This month it was also pleasing to see the blog recognised in an excellent Sharesight listing of ‘Top 50 Finance and Investing Blogs’, and also to somehow come in at the top of the global Dividend Driven leaderboard for financial independence portfolio income for 2020.
Amidst volatility and transition, it is often difficult to distinguish the signal from noise. The recent trading events around GameStop illustrate this, with interpretations ranging from it being an unmistakeable sign of a market top to representing the French revolution of finance. History and intuition both suggest revolutions are usually bad times for investors.
Whether revolution or a long period of quietude lays ahead, decisions have been made and a goal set. From here, the rest truly may be tenacity.
It’s amazing how your portfolio doubled in value in just 4 years; Dec 2016 – Dec 2020… $1M – $2M…Those graphs are beautiful!
Thanks for the read and comment Jeff!
Yes, absolutely, it’s just not a path I ever would have contemplated as I sat down to start the record in December 2016. It’s been a fortunate time.
Hey, just wanted to know how often do you invest in etf’s, shares etc. Considering that the stockbrokers charge about $5 to $20 (depending on the broker) for each trade, what strategy do you follow to allow for continuous investments while also keeping the brokerage costs low.
Hi Gautam, thanks for reading and the question!
I tend to invest lump sums 1-2 times per month, using Self Wealth, which is $9.50, and generally try to keep the cost down to 0.2-0.3% of the purchase amount if possible.
Hey.. I have recently started reading your blog posts and stuff. I love detailed evidence based pieces on your blog. Just curious, what ETFs do you buy via self wealth (I kn people use it for VTS, Betashares 200). What about Vanguard Australian share ASX300 ETF, Vanguard Lifestrategy High Growth Fund and VGS? You can buy them directly off Vanguard website at low MER. Do you buy Vanguard ETFs via self wealth too?
Hi Ash, thanks for the comment, and for reading!
I buy all the ETFs I regularly invest in via Selfwealth, so VAS, VGS, and A200.
The Vanguard Lifestrategy funds I own I took out as retail funds back in the early 2000s, so they are now legacy products, closed to new investors.
Having said that, equivalent funds with the same name and around the same MER are now available as ETFs, and through Vanguard’s new personal product.
Hope this helps!
Thanks, I always appreciate your thoughtful updates.
I may have missed it in a previous post, but based on your revised strategy, (how) do you plan to unwind your bitcoin weighting? If I understand right you have a much lower allocation target for it than the 20%+ of portfolio it is today. Would you be looking to do some progressive profit taking (with CGT implications) or hold it for now and balance it down through contributions elsewhere?
Thanks very much for reading and commenting! It’s great to hear from you. 🙂
This is a really good question, and one I have only had very early thoughts about. One approach I have thought about is a kind of ‘time-averaged’ approach of selling a set unit or % amount of it every 2-5 years at the prevailing dollar price, down to a minimum holding.
That way I would be minimising regret should price increases continue, while capturing some of today’s upside if it falls into the future.
But I have no formal plans/decisions here. Partly that’s based on the real potential if could fall 80% at any time, and completely resolve the issue quickly (if unhappily!).
At the moment, in a sense I am balancing it out progressively, as each new investment is going to equity to reach that 70% target. As you say, CGT and timing is something to think about too!
No desire to re-balance and take some of those Bitcoin gains?
Hi Baz, thanks for the comment!
Good question! No, not at this stage.
The reason is because at the moment I view the Bitcoin portfolio component as more in the nature of an ‘option’ on a particular possible future, than normal element of the portfolio with likely, fixed, or known correlations to other components.
Almost any rebalancing rule I would have established at the outset of the small experimental investment would have seen me selling a large majority of the holdings well before anything like current prices and values – incurring regret.
For example, if I had sold it when it doubled in value, I would have missed all of the appreciation since late 2016.
To impose a rebalancing constraint now would potentially avoid downside regret should prices fall from here, but also take out further appreciation opportunities on a fairly arbitrary basis.
So currently, I am happy keeping this option open, and entertaining other potential strategies, such as a time-based regular withdrawal over coming decades. I’m also fairly philosophical about the fact that if this does not play out, and I fail to capture short-lived ‘gains’ I will still likely be well ahead both the initial investment, and any alternative investment I might have chosen at the time. Does that make sense?
I’ve often wondered about strategies for your holding. I have a holding in a smaller Australian company that has performed very well and wonder what I should do if it continues to grow.
Have you considered selling 20% every time it doubles or something like that? I’m considering a similar strategy in that it will ensure I take some solid gains, but mostly retain stock so that I don’t suffer too much regret.
Hi Lachlan, thanks for the comment! 🙂
Coincidentally, just as you wrote this I was finishing off a post on exactly this kind of topic – see my February update just released today for how my thinking is developing! 🙂
The 20% each time it has doubled rule is interesting, I’ll have a think! Most rules I’ve thought about would have seen me exit very, very early – locking in some small gains, but potentially leaving significant upsides uncaptured.
I am always blown away by reading your updates, and peeking through your portfolio. But gee whizz, half a million in bitcoin! Do you have any plans to sell your bitcoin and convert it into the relatively safer avenue of index fund ETFs?
Thanks for the kind words CaptainFI!
No, no plans at present. My answer to Baz’s comment above really summarises my current thoughts.
There is still a distinct possibility that Bitcoin will ‘rebalance’ for me by declining relative to shares, but at the moment I’m comfortable with new investments going into shares, and just letting Bitcoin run – having made no investments in it since early 2016.