Just so the Seabeast cleft the sea,
Running for the home stretch, and just so
She glided, borne by her own impetus.
Virgil, The Aeneid Book V.280-282
This is my fifty-first 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 | $780,296 |
| Vanguard Lifestrategy Growth Fund | $43,020 |
| Vanguard Lifestrategy Balanced Fund | $79,084 |
| Vanguard Diversified Bonds Fund | $104,841 |
| Vanguard Australian Shares ETF (VAS) | $279,959 |
| Vanguard International Shares ETF (VGS) | $124,196 |
| Betashares Australia 200 ETF (A200) | $261,896 |
| Telstra shares (TLS) | $1,641 |
| Insurance Australia Group shares (IAG) | $6,322 |
| NIB Holdings shares (NHF) | $6,648 |
| Gold ETF (GOLD.ASX) | $102,453 |
| Secured physical gold | $16,462 |
| Plenti (P2P lending) | $4,954 |
| Bitcoin | $650,610 |
| Raiz app (Aggressive portfolio) | $19,779 |
| Spaceship Voyager app (Index portfolio) | $3,077 |
| BrickX (P2P rental real estate) | $4,454 |
| Total portfolio value | $2,489,692 (+$171,325) |
Asset allocation
| Australian shares | 35.5% |
| Global shares | 19.8% |
| Emerging market shares | 1.7% |
| International small companies | 2.2% |
| Total international shares | 23.7% |
| Total shares | 59.2% (-15.8%) |
| Total property securities | 0.2% (+0.2%) |
| Australian bonds | 3.1% |
| International bonds | 6.6% |
| Total bonds | 9.7% (-5.3%) |
| Gold | 4.8% |
| Bitcoin | 26.1% |
| Gold and alternatives | 30.9% (+20.9%) |
Presented visually, the chart below is a high-level view of the current asset allocation of the portfolio.
Comments
There are no real precedents for the events affecting the portfolio over the last several months.
This month, a sharp appreciation of the price of Bitcoin – by over 30 per cent – has delivered the third single largest monthly gain of the record. As a result the portfolio has grown by over 7 per cent in a single month, increasing by around $171,000.
This significant growth has come following a series of positive months since October, leading to the overall portfolio increasing by nearly 40 per cent over the past five months.
As occurred in January, changes in the value of Bitcoin dominated any other changes over the course of the month. In fact, Bitcoin appreciation represents over 90 per cent of the gains. By contrast, Australian equities were up around 2 per cent, and international equities, bonds, gold holdings all lost value.
The end of the month brings into view a deeply peculiar and unlooked for landmark. Having reset to a higher portfolio goal just two months ago, with a target timeline of July 2022, this goal is already rather close to being achieved.
Against the background of such volatility, applying an asset allocation policy appears as a single unsteady breath against a forceful gale.
Even so, with the overall dollar exposure to Bitcoin growing this month, the only deliberate portfolio action was to counteract this with continued equity purchases. This meant purchasing units in each of the international shares (VGS) and Australian shares (VAS) funds.
Next month will see the finalisation of first quarter dividends and distributions from the major exchange traded fund holdings and the Vanguard diversified bond retail fund. Using an average of available past distributions, these might normally be expected to deliver a total of around $4,400. Whether that occurs in this environment of a partly recovering economy is an open question.
Blown to port – an unexpected journeys end?
I observed last month that chance had presented either the opportunity to write about the journey I expected to have, and omit any inconvenient parts, or write about the one I am actually experiencing. As is clear, it is no choice at all.
The continued rise of Bitcoin has created a position never anticipated in the original design of the portfolio, or when the small curiosity-fuelled purchases were originally made across 2015-16. At the final purchase date in early 2016 the total funds I had used to make these Bitcoin acquisitions represented just 0.5 per cent the portfolio. This was an amount I was comfortable losing in its entirety.
With no further investments since that time, Bitcoin holdings have unexpectedly grown to make up more than a quarter of the portfolio.
This magnitude of change means that necessarily my thoughts have continued to focused on what these developments actually mean for the FI journey, in the short and long-term.
The most common question posed by readers since October has been: having achieved previous portfolio goals, and with Bitcoin prices so high, is it time to take some gains, and sell part or all of the holdings?
The answer to this seems obvious, but this is deceptive. In reality, the answer comes surrounded by a host of imponderables, conditionalities and unknowables. It is small comfort that the passage of time alone will provide absolute and final certainty in its verdict.
Analysing some potential adjustment ‘rules’
One of the complexities that presents itself is: just what were or are the ‘right’ conditions for a re-balancing or sale?
A decision to fully or partially sell down the holdings could reasonably have been taken at many different points in the chart below.
Indeed, some other financial bloggers have made such a decision recently. Many of these different possible points for rebalancing or exit, however, would have left the portfolio dramatically undershooting its trajectory, and forgoing substantial gains.
This is a dilemma more commonly encountered in actively selected equity portfolios, where single small investments in emerging firms unexpectedly appreciate, than in portfolios made up of passive ETFs and funds.
Yet the issues remain the same.
To illustrate, using any fixed maximum percentage-based allocation to Bitcoin following the initial purchase would in general have resulted in early liquidation of a substantial proportion of the position.
The table below sets out the results of applying three different potential ‘exit’ triggers or rules, based on the Bitcoin holdings breaching set percentages of total portfolio holdings. The first column sets out three possible maximum asset allocation levels, following which exit from the position is assumed.
Table – Results of hypothetic maximum Bitcoin allocation (2016-2021)
| Threshold | Date triggered | Gains secured | Losses protected | Gains foregone |
| Sell > 1% | Oct 2016 | $4,000 | $9,000 | $642,000 |
| Sell > 5% | August 2017 | $52,000 | $57,000 | $594,000 |
| Sell > 10% | Nov 2017 | $146,000 | $150,000 | $500,000 |
Looking at this, it can be observed that:
- Hard triggers would have produced early exit – Given the initial Bitcoin purchase was around 0.5 per cent of the portfolio, even optimistic trigger points (a doubling of value, or the taking gains once the holding achieved a ten-fold increase) would have resulted in early sales, within 2 years of the original purchase.
- The opportunity cost of early exit is high – The losses hedged or ‘protected against’ under all scenarios are a fraction of the gains foregone by the trigger.
- And these costs are meaningful in portfolio progress terms – Selling as Bitcoin breached the maximum threshold would have resulted in foregone gains of fully 20 per cent of the total portfolio value today.
The clear rejoinder to this analysis is that any gains taken previously would be safe and certain, while the values in the ‘gains foregone’ column remain contingent on the current price.
This is true, but notice that attributing much decision-making weight to this point also implicitly suggests that the current price is incorrect, and will fall. On average, such a forecast has been wrong over the 12 years of Bitcoin’s existence.
An alternative less drastic rule to apply would be selling down the holding to a fixed maximum percentage. The results of this strategy are more complicated to model, and are less adverse, but essentially they share some broad similarities with the analysis above.
Under almost any reasonable cap, significant sales would have been triggered early, capturing some gains, but leading to relatively high opportunity costs as time progresses.
This arises because significant holdings are sold at prices which are rapidly exceeded. Once again, if it is assumed the future price falls on a sustained basis, such a strategy looks reasonable. Yet that assumption remains just that – an assumption.
Harnessing time – an alternate approach
Amidst the volatility, my views on Bitcoin remain fundamentally the same as when I wrote about my approach to its portfolio role in mid-2019. I do not recommend it as part of a financial independence portfolio.
I personally view it as an intriguing financial technology and a potential emerging store of value with some option-like characteristics. It also may have some uncertain but potentially useful diversifying characteristics as part of my specific existing portfolio, noting that extrapolating from past relationships is always subject to the caveat that these relationships can change.
This all means that the answer to the reasonable question of under what conditions would some gains be realised is still nascent.
One approach with some risk and regret minimising features is to gradually draw down on an even ‘unit’ basis over regular time periods. For example, selling 10 per cent of the total current holdings each 5 years.
This would have the benefit of a sort of ‘reverse dollar cost averaging’ effect, and harness time to potentially reduce both the opportunity cost of selling too early, or too late. But it would have other disadvantages. For the moment, I have not decided to move to that approach.
Trends in average distributions and expenses
Credit card expenses across the last two months have been significantly higher than average.
Despite this, examined as a longer-term average, monthly expenditure on credit cards has continued to track well below previous years.
There has been some reductions in the three-year average of distributions, from the average now including a month of (lower) estimated half year distributions than actually experienced in 2020. It remains to be seen whether this will continue and result in the two lines converging again.
The record of distributions compared to total expenses provides a broader picture of progress against total monthly spending.
The chart above shows that the capacity of the portfolio to support average spending over the past three years is still close to 90 per cent, with a small downward movement this month, but a longer term upward trend.
Progress
| Measure | Portfolio | All Assets |
| Portfolio objective – $2,585,000 (or $90,500 pa) | 96.3% | 123.7% |
| Total average expenses (2013-) – $85,700 pa | 101.7% | 130.6% |
Summary
Vladimir Ilyich Lenin is credited with the sentiment that there are decades where nothing happen, and weeks in which decades happen. In the sixteen weeks since the end of October, the portfolio has grown in nominal dollars by approximately the same amount as the decade from 2007 to 2016.
There is no doubt Lenin would not have been an adherent of decentralised cryptocurrencies (pdf). Nonetheless, Bitcoin’s impact on the portfolio progress has been revolutionary. The question remaining is – does it represent a ‘permanent revolution’, or will there come reversals and counter-revolution?
One of the features of the past month has been volatility and change – with at times the new portfolio target being achieved, and then lost again. The portfolio has traded in a range of $180,000 within some weeks. To my surprise, this volatility has not been overly disturbing.
Instead, it has seemed like an object lesson in a broader learning from the journey – stoical detachment and humility around the expectations for the future, including desires for certainties. Looking at the portfolio through the month what has felt most striking is the relative lack of volatility of equity assets by comparison.
This too may change. One of the most interesting developments of this month has been signs of emerging upward pressures around government bond yields and inflation expectations.
Like similar pressures in September 2019, these potentially represent a signal that market-driven bond buyers will demand higher yields than have been apparent since 2018. Any such sustained movement has the potential to challenge equity valuations, and as this paper (pdf) shows, broad equities are not always a reliable hedge against higher inflation.
Though the least of my expectations in early January was approaching the revised portfolio goal within two months, developments such as these could impact on further progress. This would be particularly significant, as the equity segment of the FIRE portfolio remains around $470,000 below its ultimate target.
This month I enjoyed Aussie Firebug’s interview with fellow blogger Aussie HiFIRE, and this honest and thoughtful reflection on the issue of income sustainability from Chasing FIRE Down Under.
By definition, the financial independence journey demands careful consideration about the permanence and limitations of any employment income. All the more so, as the journey – clefting the waves seemingly under its own impetus – appears at risk of completing itself.
Great job, love following along your journey – absolutely killing it btw.
Will you ever sell off your smaller holdings i.e. TLS, IAG and NHF. As they are such small holdings compared to your overall portfolio, what is the advantage of keeping them?
Thanks Sneak for the comment and for the kind words! 🙂
At the moment, I’m not minded to sell them, as that would just involve a transaction cost, tax, and eliminate a fee-less franked dividend. None of them are significant enough to impact on the risk of the portfolio, so there is just no real need.
At some point I might decide they are so little they aren’t worth reporting, but their acquisition 20 years or so ago was all part of the journey! 🙂
Fantastic result!
Your thoughts on rebalancing your bitcoin allocation are interesting. I faced a similar decision with long term (10 year) options that had grown to similar proportions in my portfolio. Apart from any theoretical rebalancing considerations, a personal consideration is the question “how much is enough?”. Of course, you’ve already answered that ($2.585M), and you’re almost there. The interesting aspect is that upon achieving that, most people transition from being a wealth builder to a wealth protector. When that happens your personal risk tolerance usually reduces, and that shifts your focus from speculative assets to more stable, income producing assets. Tax incurred by rebalancing is also a factor. There are several approaches available, and you’ve mentioned a few of them. In preparation for quitting work (I hit my personal “enough” at the end of 2018 and quit forever near the end of 2019), my personal choice was to sell down a large chunk (but not all) of the options and switching that money to VAS, even though selling the options incurred a tax hit.
Ultimately it is about optimising comfort so that you do not worry about your investments in your post-career phase of life. I wish you well in your deliberations and I’ll be watching with keen interest to see which path(s) you choose.
Thanks JD, that’s great to hear about your experience.
That’s right, you’ve hit on all the important considerations.
Perhaps my risk appetite has not declined as much as I expected. Part of if could be as well, that at the moment COVID travel and other restrictions may play more of a role in determining the ‘when’ decision, versus just the number – as travel was part of the post-FI plan.
The other factor underlying it may be some doubts about equities and bonds ‘store of value’ credentials in this unusual monetary environment. This makes the ‘option to wait’ potentially quite valuable in reducing uncertainty. I think your approach has a lot to recommend it. I can’t really see myself ever selling entirely out of Bitcoin altogether.
Very impressive month. Do the tax implications of selling some of your Bitcoin play a big part in your decision making process as to whether to hold or sell?
Hi AussieFI – thanks for the comment – good question, I should have mentioned that!
Not really, is the answer. In theory it would be good to realise any proceeds in a low tax bracket, but generally while I do from time to time remind myself of the ‘post-tax’ value of the holdings, it doesn’t figure that prominently right now! 🙂
Hi there – congratulations on the near-berthing of your vessel in the port of FIRE.
Re your BTC holding, if i were in your deckshoes, given you are perilously close to achieving your target portfolio value I would be very inclined to sell-down a significant portion of your BTC-holding despite the CGT hit. I would do this purely to address the (more) uncertain future for BTC value. No doubt you have considered this and are prepared to extend your FIRE-ing. Alternatively, if you hold fast and do not sell, what will you do if your portfolio value sinks dramatically as a result of a scuppering in BTC value?
Thanks for your posts – I always look forward to them.
Wadiman
Thank you Wadiman, for following the journey, and for the kind words! 🙂
I especially appreciate your placing yourself in my deckshoes! Haha!
It is quite true the point you make – BTC could potentially turn into flotsam and jetsam. I have thought about what it would feel like if say I faced a grinding 2-3 year reversal in the BTC gains, taking me further from the target.
This would unquestionably be hard, but at the same time, I feel that I have endured similar long dispiriting legs of the journey before, where asset accumulation was swamped by price changes for 12 months or so. But then, I’m mindful that one of the findings of psychology is that we are particularly poor at predicting our future emotional states. Currently, I am prepared to extend my FIRE-ing, at least to the original timeline of July 2022, and comfortable with the risk. Time will tell whether this is a good or bad call.
I’m going to have to subcontract you for some nautical metaphors when next docked! 🙂
Thank you for the shoutout! I was so confused about why I had so many hits today.
Amazing progress on your journey! The recent Bitcoin surge makes me nervous though, haha… I don’t own any myself as it seems too risky for me, and I’m feeling vicarious anxiety on your behalf as your percentage grows!
Hey, it was a great piece! So few talk about the issues you covered with that perspective.
Thank you. That’s fair enough on your ownership decision! Remember, stoicism teaches us to disconnect from our worldly possessions….so perhaps its just training! 🙂
looking good to reach your target early. congrats. I hope you stick with this rather than resetting again. My suggestion re bitcoin, given no one knows the future. Why would you not just dollar cost out over time rather than trying to pick the peak? Or if you reach your FI target then simply sell out of the most volatile (based on your chart) component of your investment
Thanks Eddie!
Those are some good thoughts, I will have a think about those options! 🙂
Hey, congratulations on the journey so far and really great to see you almost at the end of the road. I wanted to get your thoughts around GOLD, reasons for holding and is this something you have continued to accumulate over the journey.
Hey Ravi! Thanks for reading, and the question!
My thoughts on gold are summarised in the ‘Setting of the Sails’ post in July 2019, and also briefly in the ‘Plan’ section. They also links to some of the research I used to set up the size of the investment.
Essentially I hold gold as a non-correlated risk-reducing part of the portfolio. I use the GOLD.asx ETF simply because it was the lowest cost fund at the time that I was aware of. I believe PMGOLD.asx may be cheaper now.
I bought the majority of the GOLD.asx holding between 2009 and 2016, in increments, typically using some of the distributions at the time. Despite some losses in value recently, it still remains my second best performing listed investment, making around 10% pa.
For a short time, ending in around 2017, I also expanded my secured physical gold holdings (off shore via Goldmoney) on a regular fortnightly basis, but this has been a more minor part of the story.
Hope this answers your questions! 🙂
Hi, crazy to imagine your portfolio at this point one year ago! A question on your bitcoin holding, what if it’s value rises to be say 50% of your portfolio value. Will this change anything, currently bitcoin is larger then your international stock holdings. Thanks
Thanks for stopping by, and for the comment! 🙂
That’s a good question, I did map out, out of curiosity, some scenarios around ‘what would it take for Bitcoin to seriously disturb the asset allocation of the portfolio?’. The answers of those were all, essentially – quite a lot! So I think this is a low probability.
I think that my first inclination would be to wait, in case it was a short spike. If it persisted at a new level of 50%+, I think I’d need to re-evaluate and look to take some risk off the table.
But then, there are complicating factors – as a Bitcoin price that high would likely only come about in a significant wider disruption in the relationship of asset prices – so the question would then be, has something fundamentally changed that I should pay attention to in the rebalancing decision?
I hope that makes sense! 🙂
Thanks for the mention, much appreciated!
I’m pretty sure this is the first time I’ve seen Lenin quoted in a FIRE blog, but a very apt description of financial markets I think!
You’re very welcome! 🙂 No, you’re right. He doesn’t strike me as a FI kind of guy in general!
Another great article to accompany another great month of growth. Always enjoy the analytical and also the philophical/stoic nature of your thinking. Given the proximity to the potential RE part of FIRE, have you spent much time thinking about the plan for this?
Thanks Rajeev! Your feedback is great to receive, I really appreciate the kindness!
The short answer to your question is: no, not enough perhaps! 🙂
I think part of the reason is that progress has been so unexpectedly rapid since October, that in some sense my schedule of thinking, working to a date of July 2022, has not caught up. The other reason is a sense of unreality of it, and knowledge that quite easily $400 to $500 k of the gains could disappear quite easily, consistent with past pullbacks. That has made it feel premature, and hubristic to start thinking about the plan for this. This is doubly so because the equity part of the portfolio is still a significant distance away from where I would target.
So I have not indulged too much in thinking about the plan for this RE time, in case it again recedes well into the distance! 🙂
Ah makes sense – these last few bumper months would almost seem surreal for you. Looking to see how the next few months go and your thoughts as you get to the finishing line.
Would also love to see a summary of your journey once you do make the call…I enjoy the way you write and think, so would be great to hear about it and the challenges you went through. For example, one thing I’m going through now is the balance between being frugal…but trying to maintain an abundance mindset and not being too stingy :S I suppose a good problem to have 🙂
Hi FI Explorer
A newbie contributor here, and probably your oldest reader at 70! Congratulations on your amazing achievement so far. Always enjoy reading your posts, beautifully written and so informative. You are a fine example to my generation in how, with discipline, foresight and financial nous, you can be financially independent at such a young age. I also like the encouraging comments from your readers, they’re never narky or negative. I notice that you leave off the RE of FIRE in your blog name. Have often wondered whether FIRE devotees ever retire, or do they just leave a job that they don’t like and find something they enjoy/are passionate about (in your case ‘writing’ as you write so well?), ie will you ever retire in the full sense of the word, ie lie on a beach somewhere? Btw, there’s lots of anecdotal evidence that shows people who start businesses unencumbered/ideologically driven are far more successful than those who do it to make a buck. While I haven’t read all of your posts I notice you are a tad coy about what you will do when you eventually retire. You have invested some 10-20 years of your life achieving your financial goal of FI. How much time have you invested in what happens on 1 August 2022 when you retire? For me it was a pretty scary prospect, and one, in retrospect, I should have spent far more time thinking about and preparing for. The other thing about FIRE is that it is a relatively new idea, and so we still don’t know whether the ‘RE’ bit will ever work for some time to come. Having worked myself for some 45 years I could not comprehend a retirement of some 50-60 years, but then we’re all different. Best wishes.
Thanks very much for the thoughts and comments Martin!
I’m really honoured to have such a range of readers checking on the journey, and so pleased you’re enjoying it!
That is a good question on retiring early., you’re correct, I more often just talk about FI. I was asked to muse about the question of ‘after’ for a Money Magazine article a couple of years ago, and realised at that time that my thoughts on it were fairly open and undefined. I probably have not spent as much time as I should really mapping it out. What I have are more in the nature of directional ideas, some of which have been thrown pretty out of kilter by COVID-19 travel restrictions, for example!
Part of the undeveloped thinking is a healthy dose of humility about future plans and attendant uncertainties, and the unpredictable path of asset prices. So, I have not wanted to delve too much into specific plans, only to find out, for example, after a repeat of March 2020, that I could be another 1-5 years away from a FI date.
Obviously, the rapid progression of Bitcoin has just reinforced this hesitancy, I am always mindful that it could halve overnight, or decline 80% as it has at other times, which would leave a substantial part of the journey to go.
But you are correct, I ought to spend more time on these questions. Doing something that allowed continued writing does appeal, and I can’t quite ever imagine disconnecting entirely from following capital market developments, out of interest. I can imagine laying on a beach for a good while, however, I think I am restlessly curious by nature, so I would find something to do after – whether that looks anything like a traditional job, I am far less sure. It sounds like a good subject for a future post! 🙂 Thanks again! 🙂