The roaring seas and many a dark range of mountains lie between us.

Homer, Iliad, Bk.1.155

This record of exploration towards financial independence started five years ago, with an initial objective of building a passive income of $58,000 per annum by July 2021. Since that time, goals have evolved and changed, with the most recent target achieved through last year.

Each year in early January I spend time reviewing my investment goals and how I plan to reach them.

This post discusses the findings from my annual review, details my updated portfolio goal and assumptions, and discusses how I will approach my financial independence journey through 2022 and beyond.

The aim is to have a clear written record of the objectives, approaches and reasoning underlying the plan, to serve as a reference point through the year to come. The process also enables the updating of plans and assumptions for changes in circumstances, thinking, as well as available data and evidence.

A journey’s end for the financial independence portfolio?

Since June 2021 the portfolio value has consistently exceeded the revised overall portfolio objective I set myself in early 2021, reaching the goal over a year earlier than originally targeted.

This past target of $2,585,000 was based around a benchmark of the portfolio producing a real annual income of $90,500 in 2021 dollars. The level was chosen because it reflected an amount equal to Australian adult full-time ordinary earnings, and was close to my (then) estimated spending of around $85,000 per annum.

Passing this target has led to a sustained reflection about the meaning and significance of the target.

For the journey up to that point, the target was a way to measure tangible progress towards the goal of financial independence. It has never, however, served as a countdown clock or trigger to immediate early retirement once that dollar value was exceeded.

Another valuable part of the process of setting a specific target has been as a forcing mechanism to help clarify what type of post-financial independence is envisaged and sought.

This is an important decision. In some circumstances, it represents a unique once in time decision about the approximate standard of living to be locked in and experienced across multiple decades – including those in which flexibility to adjust income or expenses may be circumscribed in unforeseen ways.

In this respect, the target goal of adult ordinary full-time earnings represents an objective external measure of a continuing capacity to fully access and participate in the broad range of goods, services and daily experiences of those in the community.

That it sits close to my actual spending also provides an assurance that post-early retirement life would not see a material diminishment in, or undue limitation of, lifestyle.

Homeward bound: updating the target portfolio goal

The target portfolio goal was significantly revised early last year, in association with a switch towards a ‘safe withdrawal’ rate approach.

This moved the portfolio goal to a level sufficient to generate the target income in real 2021 dollars at a safe withdrawal rate of 3.5 per cent, which shifted the final target upwards by $400,000.

To maintain this approach, I have updated my existing goal and formed an updated Portfolio Objective.

The new objective is to maintain a portfolio of at least $2,620,000 through 2022. This should be capable of producing an annual income from total returns of about $91,600 (in May 2022 dollars).

This updated target is an increase of just over $35,000 on my previous portfolio objective. The key reasons for this change are to account for estimated movements in benchmark earnings, bringing the target income into 2022 dollars. Simply moving the target to nominal 2022 dollars and updating average ordinary earnings increases the target by this amount.

The passive income target for the objective is updated with May 2021 Australian Bureau of Statistics data and expected wage growth to mid-2022. That is, it seeks to reflect the approximate equivalent of average Australian full-time ordinary earnings in mid-2022. It is also close to my current estimated average annual spending between 2013-2021 of around $84,000.

This income goal is designed to reflect a ‘business as usual’ lifestyle, rather than a ‘leanFIRE’ approach. This is personal choice.

As described above, as I considered my goals for financial independence, this level is closer to the level of expenditure at which I think I will be truly indifferent to working or not in terms of lifestyle.

The last debate: movement to a safe withdrawal rate approach

Last year I changed my approach to setting the portfolio goal by explicitly incorporating a safe withdrawal rate into its calculation.

In previous years I estimated the portfolio goal by dividing the passive income target by a projected average real portfolio return (for example, 3.99 per cent in the case of 2020).

The real return assumption used in this past calculation was based on the total return arising from the portfolio allocation. These return assumptions are discussed further below in the second half of this entry which reviews allocation plans and portfolio design.

Such an approach was a useful rough approximation of a safe withdrawal rate, and past annual reviews recognised it as an imperfect but serviceable proxy measure for use on the journey of accumulation.

The weakness of this approach, however, was that it failed to properly account for sequence of returns risk. This is the potential for early negative returns affecting the portfolio in the first years of income drawdown to lead to unsustainably high portfolio withdrawals, depleting the portfolio irreversibly.

This change was made to move beyond approximations and to target explicitly a portfolio goal that better took into account a reasonable estimate of a sustainable safe withdrawal rate.

A target safe withdrawal rate of 3.5 per cent will continue to be used. This figure underpins the updated portfolio goal (i.e. $91,600/0.035 = $2,620,000, with some rounding).

Reasoning for the selected safe withdrawal rate

Any safe withdrawal rate is at heart a personal decision.

The choice is informed by risk tolerances, personal factors and views about the value of historical data in forward-looking decisions of high and enduring personal consequence.

The basis for previous annual reviews has been the finding that based on historical Australian equity returns data over the period 1900-2011, a safe withdrawal rate of 4.0 per cent has had an 88 per cent success rate over a 40 year time horizon. This success rate lifts to 97 per cent at a withdrawal rate of 3.0 per cent.

A further study by Professor Wade Pfau, an eminent academic commentator in this area, has indicated that the maximum safe withdrawal rate for Australia using 1900-1979 equity market data was 3.68 per cent.

These findings might suggest a safe withdrawal rate around 3.7-4.0 per cent, however, several factors have led to a more cautious rate being adopted.

These factors are:

• Survivorship bias – Due to strong equity market performance Australia has had one of the highest safe withdrawal rates in the world. Effectively projecting continued higher than globally average equity market returns indefinitely into the future is not likely to reflect a realistic central estimate of probable outcomes. Many other highly developed countries with comparable advantages have experienced lower safe withdrawal rates. There are no particular reasons to suppose that the outperformance of Australia’s equity markets over the past century will reliably persist (see Pfau An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule? 2010).

• High equity market valuations – Safe withdrawal rates should account for relatively high equity market valuations at present, which can justify a lowering, for example, of US safe withdrawal rates to 3.25 per cent. As recently highlighted by Early Retirement Now’s series, safe withdrawal rates, current equity valuations and failure rates are intimately linked. Where equity valuations are high, as they are at present, failure rates at a given safe withdrawal rate are also typically much higher.

• Impact of historically low bond yields – There is some academic evidence that a safe withdrawal rate of 4.0 per cent is simply too high considering the extremely low bond yields currently available. By some estimates, a 40 year drawdown horizon in these conditions implies a safe withdrawal rate of between 1.6-2.2 per cent, assuming a tolerance of failure of between 5-20 per cent (see Finke, Pfau and Blanchet The 4 Percent Rule is Not Safe in a Low-Yield World 2013).

• Portfolio management fees not taken into account – Academic and other estimates of safe withdrawal rates routinely assume away real world investment management fees. For the investment portfolio at present, these average around 0.21 per cent per annum. Paying 1 per cent in fund expenses has been estimated to lower a safe withdrawal rate by 0.5 per cent (see Pye, G. 2001. “Adjusting Withdrawal Rates for Taxes and Expenses.” Journal of Financial Planning, Vol. 14, No. 4, p. 126).

• Statistical portfolio ‘success’ can look and feel a lot like failure – Many statistical ‘successes’ with a higher safe withdrawal rate would actually be close run exercises. This is because success is frequently defined in such studies as having at least $1 in the retirement portfolio at the end of the drawdown. Suffice to say, this does not match many people’s intuitive desire for a margin of safety and security late in life’s journey. In short, as this analysis shows, ‘terminal values’ and the experienced path of the drawdown matters.

A further 2021 study by Morningstar (h/t Aussie HIFIRE) examining some of the above factors, and projecting lower future returns has estimated that a safe withdrawal rate for a 40 year period with an equity allocation of 80 per cent could be as low as 2.6 per cent (modelled based on a 90 per cent ‘success’ rate).

These factors all argue for a safe withdrawal figure lower than 4 per cent.

In reviewing the final proposed rate, I have re-read key parts of Early Retirement Now’s brilliant US-focused safe withdrawal series as well as this post from AussieHIFIRE who has also produced excellent shorter and simpler analysis of Australian returns and withdrawal rates.

A final consideration in the other direction has been evidence on the potential value of flexibility in withdrawal rates and approaches.

The flexibility to not draw on one year of distributions can make a significant difference in the performance and success rate of a reasonable safe withdrawal rate. Similarly, this (pdf) Canadian Vanguard study shows that a dynamic flexibility in spending can lift a safe withdrawal rate for a high equity allocation portfolio across 40 years from 3.5 per cent to 4.3 per cent.

The Morningstar research paper outlines the potential impacts of a range of flexibilities in actual withdrawals, initial acceptance of slightly lower levels of ‘success’ probabilities, and temporary foregoings of inflation adjustments in certain circumstances over time.

I have yet to finalise my precise preferred drawdown approach and strategy, but anticipate it will have elements of flexibility as well as a 12-month cash ‘bucket’ to avoid some unnecessary withdrawals of capital in any shorter duration adverse market events.

In addition, the presence of a superannuation portfolio currently provides an additional 25 per cent ‘buffer’ in dollar terms, potentially reducing the risk of poor ‘tail end’ outcomes that would arise from strict reliance only on the financial independence portfolio.

On balance, taking all these considerations into account, a target value of 3.5 per cent appears to remain appropriate as a reasonable estimate, and to match the personal degree of assurance I am comfortable with in my personal circumstances.

An indication of the impact of superannuation on the ‘margin of safety’ actually in place is that using January 2022 figures, the target income of $91,600 would represent a 3.0 per cent drawdown of the sum of all financial assets (portfolio assets excluding Bitcoin) and current superannuation holdings.

Journey to the cross-roads: the meeting of the portfolio goal and implications

The most important change in the portfolio goal this year flows from the fact that the current portfolio sits above the target of $2,620,00 – at least as of early January.

This makes the new focus of the journey around maintenance, and reinforcement of the pre-conditions to early retirement, rather than simply on progress towards a final target portfolio value as has been the rule since the journey began.

Yet the portfolio goal continues to play an important function, once it is recognised that meeting a dollar value goal is not the same as maintaining that goal over time, in the face of inevitable market fluctuations.

An incomplete sense of the potential magnitude of these fluctuations is illustrated by the historical record of closing monthly portfolio values since this record began in the chart below.

For example, the largest consecutive falls in monthly portolio together delivered over $300,000 in losses, across February and March 2020.

Repeated, equivalent losses of this kind of magnitude today could easily push the portfolio below its updated portfolio goal, by removing around $500,000 from the portfolio within a short period. This in turn could delay the re-attaining of the target by a year or more.

Therefore, as a beacon, an overall portfolio goal remains valuable to recognise those possible circumstances.

The review last year introduced this point that the key of this later phase of the journey could turn out to be less about whether a particular portfolio value is reached than previous phases. Rather, it focuses more on whether a number of broader conditions informing a decision to change the nature of my work in the future are met.

These conditions are:

1. Portfolio target being met – in particular, is the portfolio target met or exceeded, such that applying a 3.5 per cent safe withdrawal rate can be expected to be sustainable over a forty year period? The logic for this target and withdrawal rate is detailed above.
2. Achieving the minimum equity target – has the minimum equity holding targeted been achieved (i.e. whether the equity component of the portfolio is at its target level) to ensure that the long-term core of the portfolio which is assumed to generate income and capital growth is able to serve its function? If the equity holdings are below this level, any decision to retire would be at appreciably higher risk.
3. Cash reserve in place – is a capital reserve in place that is equivalent to at least one year of normal expenditure, to minimise or avoid required portfolio withdrawals in future equity market drawdowns?

Currently, only the first of these three conditions is clearly met. All three being met will be important considerations in any future decision to change my existing full-time work status.

So for this year my approach will be to focus on meeting conditions #2 and #3.

By current estimates, meeting each of these conditions should be possible by the end of this year. In the case of the equity portfolio target, this estimate is based on average monthly equity portfolio increases since 2017.

Putting the cash reserve in place is partially complete, and should be achievable taking into account expected future distributions through the year.

Therefore a key secondary focus through 2022 will be achieving the minimum equity target, which is $2,100,000, prior to any changes in work status.

Windows on the remaining path to financial independence

I will continue to measure the value of the portfolio in simple percentage terms against the updated total portfolio goal needed to deliver the passive income target, for the reasons described above.

Similarly, after expanding the reporting of progress in recent years to recognise that I have some significant superannuation assets that sit outside of the financial independence portfolio, I will continue to assess progress using two key benchmarks:

• a ‘Portfolio’ benchmark – this is the primary measure based on the total value of assets in the financial independence focused investment portfolio alone; and

• an ‘All Assets’ benchmark – a secondary ‘All Assets’ measure which takes into account portfolio assets, but also the additional value of superannuation assets.

This latter ‘All Assets’ metric recognises the incompleteness of a too narrow portfolio-only view.

Such a partial view unrealistically ignores a substantial set of financial assets that are in my case large enough to have significant implications for the achievement of financial independence. This remains the case, even if superannuation holdings ultimately have some potential accessibility restrictions and some legislative risk.

Due to these risk and restriction factors, my first preference is to continue to target financial independence through my private investment portfolio alone, with superannuation providing an additional ‘margin of safety’ and buffer.

Recognising this, I will continue to just report a total ‘All Assets’ measure, rather than closely detail or write about my superannuation arrangements (a brief summary of which is here).

I will also report against a revised set of benchmarks, beyond just the formal investment portfolio objectives.

Previously, I have reported against a metric of Total average expenses.

This measure is defined as percentage progress toward a portfolio value capable of sustaining a moving average of nominal estimated expenditure since 2013. The benefit of this is that it means if my average expenses rise over time, the actual impact on progress is highlighted dynamically.

Currently this figure sits at $84,400 following re-estimation of some fixed expenses over this month.

I will also add to reporting a second metric, being Target equity holding. This measure, which I have reported occassionally through 2021, will be equal to the current equity holdings in the portfolio, divided by the final targeted equity allocation, which will be further discussed below.

I will report these progress percentages in future monthly updates. An illustrative example of this reporting, using the portfolio position on 1 January of this year as inputs, is set out below.

Revised FI measures – Example

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	114%	146%
Total average expenses (2013-present) – $84,400 pa	123%	157%
Target equity holding in portfolio – $2,100,000	88%	N/A

A journey in the dark?

The updating of the portfolio goal to a higher value, to account for changes in inflation and earnings over the past year was an expected event, and known terrain.

From this point of the journey, however, an interesting contradiction increasingly comes to the fore.

With the portfolio currently at the target, the achievement of the desired end of financial independence becomes mathematically more certain than at any time of since setting out on the path in 2001.

Yet market forces, at this point, also make the maintenance of the primary portfolio goal and the reaching of the secondary minimum equity portfolio objective appear more contingent and uncertain.

This is partially a matter of the mathematics of portfolio size, but some of it is also deliberately and consciously assumed risk relating to portfolio allocation, which will be further discussed in the investment plan below.

As with 2020, the progress of the past year, and its volatility, has also highlighted the low probability that any finely adjusted projections and plans at this stage of the journey will play out. One set of new specific circumstances and risks – now unknown and unknowable – will prevail over the next crucial 5-10 year period, not simply an ‘average’ of historical outcomes.

Taking into account the best available evidence on safe withdrawal rates, however, allows greater confidence that the portfolio will find itself more resilient and capable of the task assigned to it than past approaches.

The updating of the income estimate will ensure the maintenance of a real standard of living over time, which is based on an external measure. The continuation of the actual total expenditure measure ensures longer-term changes in expenditure patterns are reflected in measures of progress over time.

The introduction of a new minimum equity portfolio measure will guarantee that the targeted allocation of the central wealth-generating component of the portfolio is in place prior to any movement to primary reliance on the portfolio’s returns

These changes allow the confidence to know when the FI objective has been reached, in a manner consistent with both my personal risk tolerances, and the best available quantitative evidence. This evidence, is, however, always incomplete and backward-looking.

The prospect of even this caveated confidence is more attractive than a false sense of security while taking short-cuts or unconsciously assuming unexamined risks. Likewise, ignoring available evidence now where adverse and irreversible risks and consequences may arise in future decades would be short-sighted.

There are undoubtedly roaring seas and dark ranges to cross. Yet the progress made so far over over the past five years of the journey reinforces my confidence that the journey can be safely completed.

Reviewing the investment plan and assumptions

Wait for that wisest of all counselors, time

Pericles, Plutarch Lives, Vol.III

Each year I review my investment policy to ensure it stays relevant to available data and evidence, and will serve my ultimate investment goal of financial independence.

The summary is based on my past reviews and decisions. It is designed to serve as a reference for the chain of reasoning underpinning portfolio design and allocation decisions through the year – so it remains unchanged where my conclusions have not changed.

In 2019 I increased the equity allocation in the portfolio to 75 per cent. In 2021 the policy was adjusted to move towards a long-term target of an equal allocation of global and Australian equities over the next several years.

The most significant change following the review this year is to slightly increase the overall equity allocation, to 80 per cent, by reducing the target bond allocation.

The goal of reaching an equal allocation of global and Australian equities remains. These changes are reflected and discussed further below.

Specific asset allocation targets

Based on the review and considerations below the portfolio allocation targets are as follows:

• 80 per cent equity-based investments, comprising:
  • 40 per cent international shares
  • 40 per cent Australian shares
• 5 per cent bonds and fixed interest holdings, comprising:
  • 2 per cent Australian bonds and fixed interest
  • 3 per cent international bonds and fixed interest
• 7.5 per cent physical gold holdings and securities; and
• 7.5 per cent Bitcoin.

Reasons for allocation targets and assumed asset returns

Assumed equity returns

The equity component of the portfolio provides the fundamental engine of returns in the portfolio, with the most sustained historical record of outperforming other traditonal asset classes, and maximising after inflation returns.

Calculation of the overall portfolio target previously involved setting an assumed return for each asset class, however, this has been replaced since 2021 with the use of the safe withdrawal rate.

To anchor forward expectations, however, I still find the estimation of assumed returns a question of interest.

In terms of long-term real equity returns, last year I adopted a more conservative estimate of 4.9 per cent, based on the geometric mean of Australian equity returns over risk-free assets from 1883 to 2018. This value has been updated to 5.0 per cent this year based on the same historical data from the period 1883 to 2020.

For my specific purposes, the geometric mean appears to continue to be more appropriate than the previously used average of the arithmetic and geometric mean, and its lower value also reflects lower expectations going forward.

For global equities the equivalent real return estimate is 5.2 per cent, a long-term historical figure sourced from the 2020 Global Investment Returns Study.

Allocation between Australian and global equities

The split between Australian and international equities is designed to maximise total returns and minimise portfolio volatility, while taking advantage of the tax-advantaged nature of Australian franked dividends.

The specific equities sub-targets changed in the investment policy review last year.

Previously, I sought to achieve a target 60/40 split between Australian and foreign equities, which this academic survey published in 2013 estimates to be optimal for most Australian investors (see Klement, Greenrod and O’Neill Optimal Domestic Equity Allocations for Australian Investors and the Role of Franking Credits published in the Journal of Wealth Management and also discussed previously here).

A key finding of that study is that Australian equity exposures at higher rates significantly increase portfolio volatility, and maximum potential losses.

The specific optimal 60/40 split suggested by the study is, importantly, a product of the historical data and the characteristics of volatility in past markets.

As such, it retains value in application only to the extent that fundamental relationships between Australian and global equities may not have changed since 2013. I have previously noted that as time continues, that assumption becomes more questionable, meaning that a 60/40 split provides no certainty of continuing to be optimal going forward.

Last year I changed the target allocation to a 50/50 split of Australian and foreign equities. This approach is adopted to:

• Assume a ‘neutral’ position on relative equity market performance – Over the long-term in conceptual terms, an equal allocation reduces the portfolio risks of any future Australian equities underperformance compared to global equity indices.

• Recognise the after-tax benefits of franking credits – The remaining 50 per cent weighting to Australian equities still sits close to the optimal balance for reduced portfolio variance and maximisation of franking credit benefits suggested in the Klement et al paper discussed above

• Reduce portfolio variance – A 50/50 per cent weighting is supported as a minimum variance (i.e. lowest volatility) portfolio allocation by this 2012 Vanguard study (pdf).

• Recognise that pure ‘market capitalisation’ weighting is not required – Due to correlations between Australian and global markets, and the specific benefits provided by the current franking credit regime, it is not optimal to hold the Australian market at the low weighting (2-3 per cent) which would arise from a pure market capitalisation weighting approach.

The Vanguard study (pdf) mentioned above provides an excellent structured framework for individual investors thinking about these issues (see in particular Figures 4 and 11).

Having set this target, I have not realised capital gains in Australian equities to seek to immediately meet it. Nor has it meant targeting meeting it by exclusively redirecting new investments and distributions to global shares. Rather, it sits as a longer-term goal to guide, but not fully determine, the pattern of future investments.

The reason for this is that exclusively switching to purchases of global shares across these particular relative market valuation and currency regimes would effectively embed a set of risks into the portfolio which are better diversified by regular investments over time. In this way, time itself can be employed as a diversifying factor, in a similar way as dollar cost-averaging.

This means that while the movement to a more equal allocation has commenced, the target for the achievement of this 50/50 allocation is longer-term, at around 5-7 years.

Bonds and fixed interest

Bonds and fixed interest play a role in diversification, reducing overall portfolio volatility.

The assumed return of 2.0 per cent for these assets is in line with long term global averages measured since 1900, sourced from the 2020 Global Investment Returns Study and based on data from the Dimson, Marsh and Staunton book Triumph of the Optimists – 101 Years of Global Investment Returns.

A separate review of bond holdings in the portfolio and the relevant investment literature has reinforced the value of a small bond holding, but caused a slight adjustment in the target allocation from a simple equal weighting of Australian and foreign bonds, to a position that reflects the greater diversification benefits of international bonds.

This year the target bond allocation has been reduced from 15 per cent to 5 per cent.

This is due to my personal assessment that the expected real return and diversification benefits of bonds going forward are significantly reduced in market conditions likely to persist over the next 5 to 10 years.

For example, it is difficult to see bonds producing returns close to their long-term historical results in the near-term, following a multi-decade fall in interest rates that has acted as a sustained tail-wind for returns.

At the point of investment, many bonds would currently be expected to produce near zero or negative real returns in income terms, and with interest rates still near decade lows the prospect of significant capital loss is much more likely than any continuation of capital gains that investors have enjoyed since the early 1980s.

While in a broad range of market conditions a reduction in portfolio volatility could potentially offset this bleak outlook for expected returns, my assessment is that current and potential future government policies and monetary policy authority decisions are likely to dampen or eliminate the potential for bonds to profitably serve their traditional role in portfolio design.

This is a set of circumstances – with such policies sometimes termed ‘financial repression’ – that has been experienced at other times of relatively high public sector debts at a global level.

Gold

Gold is as described previously in the role of gold and Bitcoin in the portfolio primarily included in the portfolio as a non-correlated financial instrument for diversification, and to act as an insurance against extreme capital market events or conditions. I have invested in gold, principally through an exchange traded fund, since mid-2009.

No real return is assumed for gold assets held.

Bitcoin

Bitcoin has been included as an asset in the portfolio following the unexpected growth in value of a small exploratory investment (representing around 0.5 per cent of 2015 portfolio value) to a sizeable component of current overall portfolio value.

For a significant period it has been uncertain exactly what role Bitcoin may or may not play in investment markets, or as an emerging store of value. As such it remains a high risk and volatile component of the portfolio. No real return is assumed for Bitcoin held, despite its strong performance across the past decade.

At different times Bitcoin has exhibited different correlations to equities, but its overall and enduring investment characteristics going forward cannot yet be clearly disentangled from price impacts from its wider adoption to date.

Generally, over the medium-term it has had an extremely low correlation to the price of gold, potentially making it a valuable additional source of diversification at times where gold fails to serve its intended objectives within the portfolio. Bitcoin also represents, in some senses, an ‘option’ on some forms of monetary policy breakdown and market disorder.

In this way, I view it as broadly part of the ‘alternatives to equity’ portfolio (including gold and bonds) which has constituted between 20-25 per cent of the target portfolio over recent years.

The purpose of this component of the portfolio is diversification and protecting real wealth and purchasing power in circumstances where the primary ‘engine’ of the portfolio – equities – may temporarily be adversely impacted by market events.

Recognising this, and in line with its sharp volatility, and the potential risks and costs of seeking to actively trade Bitcoin, I have not and do not propose to trade to target the specific Bitcoin target allocation.

Rather, the allocation level of 7.5 per cent represents an aspirational average level that I would be comfortable with holding over an extremely long-time frame.

The achievement of this target allocation in any particular year or even five year period is a matter of less importance to me in my personal circumstances. Of more significance is seeking to target over time around 20 per cent of the portfolio being non-correlated to the performance of equities.

Property

I have no formal property allocation for investment purposes, excepting my tiny exploratory investments in fractional residential real estate through BrickX.

In the current market environment my assessment is Australian property is likely to enjoy low yields and returns for a considerable forward period, and not offer sufficient diversification benefits over Australian and global equities or other available asset classes.

Overall long-term portfolio return estimate

Taking into account the above asset allocation and return assumptions, the overall portfolio return is estimated on a weighted average basis at 4.18 per cent, up from 4.09 per cent last year.

This is equal to a nominal return of 6.68 per cent based on an assumption of inflation being in the middle of the Reserve Bank’s target band over the long-term.

Though providing some guidance around expectations, as highlighted above this estimate no longer plays a determining role in setting the level of the portfolio goal. Rather, this goal is now calculated by reference to the 3.5 per cent safe withdrawal rate assumption.

With this annual review and assessment now completed, there is nothing to do but await the judgement of that wisest of counselors, time, on the portfolio and remaining journey.

_{* This specific portfolio allocation and approach has been determined based on my personal circumstances, objectives, assessments and risk tolerances. It is not a recommendation to invest in any particular investment product, security or asset, and investors considering these issues should undertake their own detailed research or seek professional advice.}