The shouting, wounds, and blood were in plain view, the cause was hidden: fortune ruled the rest

Tacitus, Annals, Bk.I

This is my sixty-fifth monthly portfolio update. I complete this regular update to check progress against my goal.

Portfolio goal

My 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 portfolio returns of about $91,600 (in 2022 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.

A secondary focus through 2022 will be achieving the minimum equity target of $2,100,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$780,458
Vanguard Lifestrategy Growth Fund	$41,461
Vanguard Lifestrategy Balanced Fund	$74,230
Vanguard Diversified Bonds Fund	$90,708
Vanguard Australian Shares ETF (VAS)	$389,075
Vanguard International Shares ETF (VGS)	$315,367
Betashares Australia 200 ETF (A200)	$295,734
Telstra shares (TLS)	$2,153
Insurance Australia Group shares (IAG)	$5,752
NIB Holdings shares (NHF)	$8,496
Gold ETF (GOLD.ASX)	$120,610
Secured physical gold	$19,357
Plenti (P2P lending)	$23
Bitcoin	$609,240
Raiz app (Aggressive portfolio)	$20,349
Spaceship Voyager app (Index portfolio)	$3,252
BrickX (P2P rental real estate)	$4,711
Total portfolio value	$2,780,976 (-$115,727)

Asset allocation

Australian shares	37.0%
Global shares	24.5%
Emerging market shares	1.5%
International small companies	1.9%
Total international shares	28.0%
Total shares	65.0% (-15.0%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.4%
International bonds	5.5%
Total bonds	7.9% (+2.9%)
Gold	5.0%
Bitcoin	21.9%
Gold and alternatives	26.9% (+11.9%)

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

Comments

This month twin winds hit the portfolio, leading to an overall loss of $115,000, or 4 per cent.

As a result, over half of the gains of the previous month were erased.

The portfolio is currently within sight, though a bit above, its total value twelve months ago. The past year has been a relatively volatile period in absolute terms, reinforced by the growth in the overall size of the portfolio, and its exposure to Bitcoin.

The value of the portfolio continues to be above the revised portfolio goal of $2.62 million, as it has since late July last year.

This month Bitcoin declined significantly, falling around 13 per cent, representing the largest part of the overall decline. By contrast, gold enjoyed a positive capital return of around 4 per cent over the month.

International share holdings also fell by 2.8 per cent amidst strong signs of monetary tightenings to come in developed economies. Australian shares produced a negative return of around 0.5 per cent, once distributions were accounted for.

Continuing the negative picture, bond holdings fell by 2.6 per cent. This means in dollar terms the bond portfolio holdings are at their lowest value since late 2015, and are also close to their lowest level ever as a proportion of the portfolio.

A significant theme of this month was a continuing focus on higher inflation outcomes, and, consequently, global debt markets resetting to higher required yields, driving down prices.

The rise in bond yields represents one of the sharpest and sustained shifts in monetary conditions since the global financial crisis. It may signal the end of a relatively persistent 40 year trend towards ever lower interest rates.

The phenomenon of negative yielding debt, once standing at $19 trillion, appears to be on the retreat. At the same time, there are significant parallels between attempts to ‘normalise’ bond markets across 2018, which ultimately led to a reversal of policy and continuation of the overarching lower trend.

Through such periods, history and macroeconomic analysis can merge, and it is more critical than ever to recognise the spectrum of past monetary responses to inflation challenges – such as talked about in the conversation here on inflation between Carmen Hofman and Thomas Mayer.

Another linked emerging theme during this period has been sustained global shortages, lockdowns in the port of Shanghai, and impacts of supply chain shocks and energy prices on food prices.

Amidst this instability, almost unnoticed, a second country – the Central African Republic – has taken the decision to adopt Bitcoin as legal tender. Meanwhile, global monetary authorities themselves appear to be investigating the prospects of central bank digital currencies to enable a ‘zero inflation’ target world.

The ongoing losses in the value of global shares compared to Australia equities, means that investments this month were directed toward Vanguard’s international shares ETF (VGS). This is done with the medium-term objective of reaching an equal allocation of Australian and international equities.

Making headway: trends in first quarter distributions

The passage of this month has allowed finalisation of the first quarter portfolio distribution results.

These came in at a level that closely matched prior projections, at $12,500, as can be seen from the chart below.

These have been the highest on record, due to relatively high distributions from the Australian shares ETFs held (VAS and A200).

Around 35 per cent of these payouts have been quarantined for future taxation liabilities, and the remainder was re-invested through the month.

Moving to second quarter projections of distributions

Finalising these payments, attention now turns to the projected second quarter distributions from the portfolio.

A record of median distributions across the ETFs and retail Vanguard funds that comprise around 98 per cent of the income producing financial portfolio allows an estimate of these to be made also.

The actual distributions for the second quarter since 2017 – and the projected figure for this year- are set out in the chart below.

This highlights that there are significant compositional differences between quarters.

The Vanguard High Growth fund, for example, plays a dominating role in June quarter distributions. It is forecast to be responsible for over 75 per cent of the value of total June quarter distributions.

The forecast for both the Vanguard Growth and High Growth fund differ in an important way from the forecasts for the ETFs. This is because the fund distribution estimates are not based on the median payout values over the full available history of the security, but rather the simple average of the past five years.

This estimate approach is taken to recognise that as the unit price appreciates (reflecting in part capital growth in the funds assets), taking a median value of payouts across at times a dozen or more years will artificially bias downwards future likely distributions.

To provide a simple illustrative example, a forecast of a payout of 5 cent, on a unit price of $1, 12 years ago, may represent a serious underestimate of likely income potential of that same unit, priced now at $2.

For these Vanguard funds, this adjusted 5-year based estimate is substantially higher. A median estimate for the High Growth fund, for example, is less than half of this 5-year based estimate.

The finalising of first quarter distributions also allows a forecast of the shape of distributions for the half-year to June for this year. A projection of this, and past actual distributions over the same period, is set out below.

From this it can be seen that if these projections are accurate, the half-year to June distributions – at around $65,000 – will be substantially lower than those experienced in the same period last year, but still above all other previous years.

Trends in average distributions and expenses

There was no significant changes in average portfolio distributions or expenses. Distributions essentially continue to track around $1,200 per month above average total expenses.

For the present, the three-year average of total distributions is slowly falling.

The blue line of distributions continues to track towards $7,300 per month. The total expenses (red) line continues to sit at around $6,100.

As mentioned in previous months, total expenses have generally been in a downward trend from a maximum level of around $7,700 in 2017, but are now showing some signs of levelling out.

Distributions payments, on the other hand, have recently reached their maximum, and have started to drift lower, as some particularly high distributions over some previous months drop from set of those averaged.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	106%	136%
Total average expenses (2013-present) – $84,400 pa	115%	148%
Target equity holding in portfolio – $2,100,000	86%	N/A

Summary

This month I enjoyed Nick Maguilli’s book Just Keep Buying, which provided good insights into the subtly changing roles of savings and investment over the financial journey, and the function of investment being to progressively replace human capital over time.

Cool autumn mornings also provided an opportunity for long walks in local nature reserves and hills, while listening to a history of the management of the Nazi war economy from 1933 – The Wages of Destruction. It has been a grim reminder of the risks of the intersection of dysfunctional economic forces and ideologies with the accidents of history.

The portfolio continues to be suspended above the final objective, even as distributions allow further investments to aimed at reaching the secondary target of $2.1 million in equity. Both bonds and US share markets are suffering through their worst combined starts to the year in decades.

Through this time, therefore, progress is probably not best measured by the ever changing raw numbers of the portfolio.

In markets, the shouting and wounds are indeed all in plain view, as the world readjusts to the presence of an inflation shock, and climbing interest rates. Bitcoin has encountered volatility, though this piece provides an interesting counterpoint to the proposition that this is excessive in comparative terms.

There is no immediate end in sight to this phase. The remainder of 2022 could indeed be a story of stumbling monetary authorities seeking to restore a sense of normalcy, or forced into additional unexpected interventions.

Furthermore, history also tells us that major armed conflict and international crises typically severely impact returns from market and add to volatility.

What this period most calls for is a patient long-term view of markets, and a reflection on the limits of control at this point of the journey. Daily we hear the shouting, and see the wounds and the blood of current times – causes are hidden and fortune does appear to rule at least the immediate future.

Disclaimer

The specific portfolio allocation and approach described has been determined solely based on my personal circumstances, objectives, assessments and risk tolerances. It is not personal financial advice, or 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.