Prudently the god covers the outcome of the future in dark night

Horace, Odes, III.xxix

This is my sixtieth 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	$828,192
Vanguard Lifestrategy Growth Fund	$44,284
Vanguard Lifestrategy Balanced Fund	$79,775
Vanguard Diversified Bonds Fund	$99,241
Vanguard Australian Shares ETF (VAS)	$375,442
Vanguard International Shares ETF (VGS)	$273,120
Betashares Australia 200 ETF (A200)	$287,049
Telstra shares (TLS)	$2,169
Insurance Australia Group shares (IAG)	$5,612
NIB Holdings shares (NHF)	$8,400
Gold ETF (GOLD.ASX)	$113,675
Secured physical gold	$18,243
Plenti (P2P lending)	$531
Bitcoin	$875,660
Raiz app (Aggressive portfolio)	$20,909
Spaceship Voyager app (Index portfolio)	$3,598
BrickX (P2P rental real estate)	$4,988
Total portfolio value	$3,040,888 (+$20,033)

Asset allocation

Australian shares	33.7%
Global shares	21.8%
Emerging market shares	1.5%
International small companies	1.9%
Total international shares	25.2%
Total shares	58.9% (-16.1%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.4%
International bonds	5.4%
Total bonds	7.8% (-7.2%)
Gold	4.3%
Bitcoin	28.8%
Gold and alternatives	33.1% (+23.1%)

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

Comments

This month the financial independence portfolio gained around $20,000, maintaining its positive momentum over the past two months.

Though this represented modest portfolio growth in percentage terms – of 0.7 per cent – it pushed forward progress further above the recently reached threshold of $3.0 million.

The monthly movement across November means that the portfolio has advanced in 10 out of the last 12 months.

Through the month there was generally muted and offsetting movements beneath the ‘headline’ portfolio value.

Australian shares and bonds remained relatively stable through the month. The value of gold holdings increased by around 5.6 per cent to reach the highest value in around a year. Coincidentally, international equities also advanced by 5.6 per cent.

Bitcoin declined by around 3.3 per cent through the month, having briefly reached new highs early in the month.

As a result of these varying cross-currents, the portfolio generally ended up fairly close to where it began.

This reflects the fact that through this month global markets have been assessing and weighing the evolving path of interest rates, inflation, and the impact of current supply chain bottlenecks.

In turn, this seems to point to two potentially quite different futures.

One is a higher interest rate environment, as central banks actively seek to curb inflationary expectations and pressures. Another would be marked by a shorter-term passivity from monetary authorities derived from a confidence that some inflationary forces are transitory.

A strengthening US dollar – itself at times a signal of financial market instability – has also added to the uncertainty of the environment. Currently, only around 46 per cent of the total portfolio is directly priced in Australian dollars, likely delivering a small benefit in these conditions due to US equity holdings.

Heading into this uncertain environment the portfolio is positioned such that around a third is in Bitcoin and gold, one-third is in Australian equities, and another quarter is placed in global equities.

While being not the target allocation in the plan set in January, it does appear to be a position that is tolerably well suited to meet a range of possible outcomes.

Possibly the exception to this remains the low amounts in bonds, but the question of future bond exposures is planned to be re-examined as part of my annual investment planning review cycle. In the current environment, potentially at the termination point of a 40-year period of remarkable capital growth in bonds, I am unconvinced of the case for rebalancing to the original target allocation.

Mindful of these issues, through new investments I have continued to target the longer-term asset allocation goal of an equal balance between global and Australian shares.

This month this led to an equal allocation of new investments between the Vanguard global shares (VGS) exchange fund and its Australian equivalent (VAS).

Establishing projected fourth quarter distributions – a journey back in time?

As January comes slowly into view, a set of fourth quarter distributions also approach. The final shape these will take is unknown.

The timing and size of dividends in Australia and internationally were significantly affected by firms holding larger cash balances and deferring shareholder payouts from the early stages of the pandemic across 2020. These forces generally reversed over the past year, as some extreme market fears eased.

Precautionary impulses could easily re-emerge over the next month, though many distribution decisions will have already effectively have been made for this quarter.

An additional source of known volatility in the portfolio is some currency hedging and rebalancing effects in the Vanguard retail funds. These can create uneven payout patterns on a year-to-year basis.

Overall this effect should be diminishing over time, as for example since July of this year, the value of equity holdings outside of these Vanguard funds has exceeded those within them.

The chart below sets out past actual distributions for the fourth quarter over the past four years, as well as projected distributions for this year.

This shows an expected set of distributions of $27,000 – almost the same as the equivalent quarter distributions back in 2017.

The estimate is based on simple averages of fourth quarter distributions for the Vanguard funds or ETFs over available periods. These available periods differ by fund and security, but are typically around a decade, though shorter in cases of recent more investment products such as the Betashares A200 ETF.

The single exception to this approach is in the estimate of the retail Vanguard Lifestrategy High Growth Fund. Distributions in this fund show a consistent strong upward trajectory over time, making estimates based on simple averages potentially downwardly-biased.

Instead, for this fund, I have assumed a distribution per unit consistent with the linear average of the past 12 December quarters. This produces an estimate approximately double that of applying a simple average approach.

The following observations stand out from the chart:

• Lower overall distributions compared to last year – this is attributable to abnormally high payouts a year ago from both equities and bond funds.

• Payouts from the Vanguard High Growth retail fund dominate – making up more than two-thirds of projected distributions.

• The expanding role of exchange-traded funds in overall distributions continues – despite the continued important of the Vanguard funds, the value of ETF distributions continues to rise, with projected distributions of almost $6,000, compared to $3,000 last year.

Each of these observations are tentative, however, as projections can easily prove inaccurate.

As an example, based on past years experience, the Vanguard High Growth fund distributions could easily be $10,000 higher or lower than the projections made.

Based on the set of projections above and the known third quarter distributions, some initial estimates can be made of the total half yearly distributions to December 31, 2021.

Currently it appears these may total around $37,000, slightly less than in for the same period last year ($43,000), but almost double the result in 2019.

Trends in average distributions and expenses

Overall, past trends in both average distributions and credit card expenses remain in place.

Credit card expenses continue to trend down, as more months of restricted or lockdown conditions are picked up in the three-year data window. At the same time average distributions through the period have been growing.

The result of this is the rough ‘scissors’ pattern in the chart below.

The blue line of distributions continues to track above $7,200. The credit card expenses (red) line, by contrast, continues to fall to around $4,700.

The substantial gap between distributions and credit card expenses continues to grow, but will likely stabilise over time where conditions continue to ease. The last six months, in particular, have not felt like a solid or representative set of months upon which to base future expectations.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,585,000 (or $90,500 pa)	117.6%	149.1%
Total average expenses (2013-present) – $83,800 pa	127.0%	161.0%

Summary

As the year comes to an end, a mix of new and familiar rituals start to fill the days. Some travel, work meetings, and preparations for the Christmas period.

These start to account for each previously empty day on the calendar, providing a sense of an inescapable and programmed rushing towards the close of 2021.

Much of the years journey is done, just as much of my financial journey is completed.

But not all, if assessing against the reference point of whether the equity portfolio sits at its target of $1.93 million. Today the equity portfolio sits at 92 per cent of this final target – or around 1.79 million.

Events, uncontrollable and unknown will shape whether the completion of this part of the journey can occur through next year, as progress to date would suggest.

And so I am in a kind of perpetual December, in a way, with a desired prize and period of rest ahead, but still with a defined, and not insubstantial, period to continue onwards.

This month I have consumed The Fiat Standard, by Saifedean Ammous, which is a fascinating and acute evaluation of our current monetary framework, taken from the observational standpoint of Bitcoin. A key focus of the book is the comparative performance of ordinary currencies and Bitcoin as a store of time, a point also nicely illustrated by this interesting little webapp.

I have also followed my interest in the history of macro-economic developments, and their impact on today’s investment context, enjoying this video discussion featuring ex-Goldman Sachs hedge fund manager Raoul Paul.

On more day-to-day FI planning questions this article (h/t Aussie HIFIRE) gave pause for thought on the impact of current valuations, tolerance for the risk of failure, and asset allocation on historical measures of the ‘safe withdrawal rate’.

As with previous Vanguard work, it comes down squarely in favour of ‘flexible’ approaches to withdrawal as the most reliable risk-reduction strategy.

During the coming summer, I will be spending more time considering what possible shapes post-financial independence life could take. That could involve scaled down work, after a large project finishes in early 2023. It is likely to involve much more time reading and potentially creation of different types of written content.

Right now feels, however, a challenging time to be engaged in any kind of definitive lifestyle design.

The tremors of uncertainty around the Omicron variant have just started as this update is being written. Ahead, perhaps, is a familiar path of renewed lockdowns, heightened uncertainty, and financial market volatility. Indeed, the last has already commenced.

Yet as noted, increasingly the portfolio has been balanced at approximately one-third Australian shares, one-third international shares, and one-third ‘exotic’ or non-financial assets (Bitcoin and gold).

As uncertainty advances, and in prospect at least, this appears a reasonably robust portfolio allocation with which to meet this unknown future – over which darkness has prudently been placed.