The wind sits within the shoulder of your sail

And you are stay’d for.

Shakespeare, Hamlet, Act I: Scene 3

This is my sixty-ninth 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	$714,600
Vanguard Lifestrategy Growth Fund	$38,340
Vanguard Lifestrategy Balanced Fund	$69,879
Vanguard Diversified Bonds Fund	$88,511
Vanguard Australian Shares ETF (VAS)	$359,644
Vanguard International Shares ETF (VGS)	$359,544
Betashares Australia 200 ETF (A200)	$271,514
Telstra shares (TLS)	$2,116
Insurance Australia Group shares (IAG)	$5,891
NIB Holdings shares (NHF)	$9,816
Gold ETF (GOLD.ASX)	$112,897
Secured physical gold	$17,951
Bitcoin	$327,060
Raiz app (Aggressive portfolio)	$19,478
Spaceship Voyager app (Index portfolio)	$3,121
BrickX (P2P rental real estate)	$4,632
Total portfolio value	$2,404,994 (-$36,598)

Asset allocation

Australian shares	39.5%
Global shares	28.9%
Emerging market shares	1.6%
International small companies	2.1%
Total international shares	32.6%
Total shares	72.1% (-7.9%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.6%
International bonds	6.0%
Total bonds	8.6% (+3.6%)
Gold	5.4%
Bitcoin	13.6%
Gold and alternatives	19.0% (+4.0%)

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

Comments

This month overall losses of around $36,000 were sustained in the value of the portfolio, reducing the portfolio by around 1.5 per cent in total.

With this outcome, over a third of the increases of July were essentially lost. Over the past 12 months, the majority of months have now registered as delivering portfolio losses.

The portfolio now sits below the overall revised portfolio goal of $2.62 million at the end of the month, as it has since the end of May.

Losses occurred broadly across much of the portfolio through the month.

Bitcoin holdings were reduced in value by around 14 per cent, as the prospect of higher interest rates were absorbed by financial markets. These losses were principally responsible for the total fall in portfolio value.

The value of international equities also fell from some initial gains within the month, to end lower, by around 0.8 per cent. Australian shares managed to end the month around 1.0 per cent higher. Bonds also fell in value sharply, by 2.4 per cent and gold holdings fell by 0.7 per cent also.

Capital market developments this month have been shaped by strong signals from the US Federal Reserve Chair at the annual Jackson Hole symposium on the potential future path of US interest rates, and their role in addressing inflation over the next few years.

At the end of this month, third quarter distributions can be expected to be paid out. From the record of past median dividends, it is estimated that these will represent around $8,000 of payments.

This month global equities face headwinds to the targetted medium-term objective of reaching an equal allocation of Australian and international equities. Positively, global shares sit at a higher level as a proportion of the portfolio than at any other time since the end of 2018.

Further progress remains to be achieved, however, and so once again investments this month have continued to be focused on the Vanguard international shares ETF (VGS).

Redrawing the map – the equity portfolio two years on

A critical foundation of the financial independence portfolio is the equity portfolio.

More than two years ago, the shape of this equity portfolio was described in this long-read post.

With equities planned to be the central driving force of the journey, and a longer-term rebalancing between Australian and international shares well underway, it seemed timely to provide a shorter snapshot of the equity portfolio as it is now.

This analysis looks through the individual investment vehicles, to the underlying allocation of assets – which is typically reflective of either the ASX200 or ASX300 index, or the MSCI Global Index.

The most important change between June 2020 and today is in the size of of the portfolio.

The equity portfolio is now 48 per cent larger, making up $1.7 million compared to about $1.2 million around two years ago.

Over the last several years, new investments and re-investments in the equity portfolio have been deliberately focused on the goal of an even split between global and Australian equities. Here, the shift is evidence.

Figure 1 below shows that at present 54 per cent of the equity portfolio is allocated to Australian equity index tracking products.

By contrast, 41 per cent of the equity portfolio is allocated to index funds tracking the MSCI Global index – with the remainder linked to smaller emerging markets or small global company indexes.

Counting these, 46 per cent of all equity owned is now invested internationally.

Just two years ago, the picture was significantly different, with 60 per cent of equities allocated to Australian indexes, and just 40 per cent to international indexes.

The changing shape of international equity portfolio through to 2022

The overall increase in international holdings has occurred with continued investment in the Vanguard international shares ETF (VGS.ASX).

This has ‘diluted down’ the overall size of holdings in emerging and small global companies indexes (which are part of the Vanguard retail funds allocation) from 8 to 5 per cent.

Growth in US markets over the past two years, and increases in its relative size compared to global peers has delivered another significant change.

As can be seen from the Figure 2 below around 66 per cent, or two in every three dollars invested internationally is invested in the US equity market. This is up from 60 per cent in 2020.

A fact worth bearing in mind about this change, however, is that it does not necessary result in as sizeable net reduction in international diversification as it might appear.

This is because the US market itself consists of many firms with global operations and revenues. That is, there is a hidden ‘international footprint’ with this 66 per cent allocation to US companies.

Together with the growth in the absolute size of the equity portfolio, this means that over $510,000 of the portfolio is now invested in US listed firms. This is a significant increase from the $280,000 invested in US firms in 2020.

At the whole of equity portfolio level the increased exposure to the United States market is also borne out. US equities now make up 30 per cent of all equities, up from 24 per cent in 2020.

The country split of the entire portfolio is set out in Figure 3 below.

Concentration and diversification developments

Finally, there are some changes in the make up and nature of the indexes, which affect individual holdings, and concentration within the portfolio.

The largest single holding in the equity portfolio has moved from being CSL (previously totalling $64,000) to BHP ($96,000), following the removal of the dual-listing structure of the latter.

Market changes in the indexes have also altered the degree of portfolio concentration in top holdings. Concentration has increased in the Australian market, meaning that the top 10 equities now constitute 46 per cent of the total index holdings. This is up from 43 per cent in June 2020.

This has also occurred internationally, primarily due to the continued growth in the value of large technology sector firms, such as Google, Facebook and Microsoft.

The value of the top ten of these holding has increased from 16 to 18 per cent of the total value of global equities. Large technology firms such as Google, Facebook, Microsoft collectively make up around 5.5 per cent of the portfolio, with $95,000 of holdings attributed to them, compared to around $50,000 in mid 2020.

Despite this, diversification is still extremely broad.

Re-examining the index data, the equity portfolio is split between around 8,100 separate equity holdings. This is more than the previously reported figure of 7500 in 2020.

Trends in average distributions and expenses

This month average total expenses (red line) stayed flat at about $6,200 while the moving average of distributions (the blue line) continued to rise to around $8,300.

This measure changes only relatively slowly through time, and continues to locate a ‘crossing’ of portfolio distributions and total expenses around early to mid 2021.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	92%	121%
Total average expenses (2013-present) – $84,300 pa	100%	132%
Target equity holding in portfolio – $2,100,000	83%	N/A

Summary

As a the winter slowly recedes, signs of the impending spring begin to make themselves gradually felt.

Whether the portfolio emerges from this period of retrenchment and losses is still open. Intuitively, the path to normalisation of financial markets would appear to have much further to go, meaning the prospect of potentially more and larger losses through the remainder of the year.

Through the winter, there is always a sense of a loss of vitality, and breakdown of previously flourishing. Perhaps it is that which has taken my reading in a more wistful and reflective direction.

One of the books I have turned to is Three Days in Camp David, which tells the story of the final weekend in which the US President and representatives of other key institutions in the the US Administration resolved to remove the gold backing of the US dollar. William Shirer’s Collapse of the Third Republic, on the other hand, recounts the decline and fall of the French democratic regime over the course of just weeks in mid-1940, under the pressures of war.

This month I also enjoyed listening to a Long View podcast with Wade Pfau on safe withdrawal related issues. Another interesting item of reading is this (pdf) ASIC survey of the retail investment market .

Fittingly for the approaching spring, however, seeds are laid through the month – in the form of the regular new portfolio investments. It is largely due to these that the equity portfolio is still within 6 per cent of its maximum value, reached at the end of last year.

This presents the prospect of recovery and hope. While the oceans might appear bleak, the wind sits in the shoulder of the sail – and our ship may have stayed for us, to ensure we do not miss the journey ahead.

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.