All of this has happened before. All of this will happen again.

J.M.Barrie, Peter Pan

This is my seventieth 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	$678,031
Vanguard Lifestrategy Growth Fund	$36,524
Vanguard Lifestrategy Balanced Fund	$66,842
Vanguard Diversified Bonds Fund	$85,539
Vanguard Australian Shares ETF (VAS)	$336,849
Vanguard International Shares ETF (VGS)	$372,579
Betashares Australia 200 ETF (A200)	$254,676
Telstra shares (TLS)	$2,052
Insurance Australia Group shares (IAG)	$5,828
NIB Holdings shares (NHF)	$8,922
Gold ETF (GOLD.ASX)	$115,862
Secured physical gold	$18,365
Bitcoin	$333,214
Raiz app (Aggressive portfolio)	$18,111
Spaceship Voyager app (Index portfolio)	$2,993
BrickX (P2P rental real estate)	$4,635
Total portfolio value	$2,341,022 (-$63,972)

Asset allocation

Australian shares	38.2%
Global shares	29.6%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	33.2%
Total shares	71.3% (-8.7%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.6%
International bonds	5.9%
Total bonds	8.5% (+3.5%)
Gold	5.7%
Bitcoin	14.2%
Gold and alternatives	20.0% (+5.0%)

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

Comments

Losses in the portfolio worsened this month, with a futher fall of around $64,000 in the value of the portfolio. This resulted in a contraction of 2.3 per cent in the size of the overall portfolio.

This means that the portfolio now sits just above a level orginally reached in the early months of 2021. In other words, a period of more than 20 months has passed, with no sustained increase in portfolio value.

The portfolio continues to sits well under the overall revised portfolio goal of $2.62 million.

The largest losses this month occurred in the Australian shares segment of the portfolio, with falls of around 6.3 per cent in the value of holdings. By contrast international shares fell by slightly less, only losing 3.9 per cent.

Bonds also continued to fall in value, as yields sharply increased through the month. The value of bonds declined 3.4 per cent, and total holdings fell to under $200,000 for the first time since the second half of 2015.

In a break from past months, Bitcoin has defied recent correlations with equities markets and slightly gained in value across the month, rising by 1.9 per cent. Similarly, gold as a defensive asset has moved from recent losses to increase by more than 2.5 per cent on a monthly basis.

The past month has largely been dominated by the expectation, and then delivery, of sharper higher US interest rates, with the Federal Reserve’s implementation of a 0.75% rise.

Structurally, the expected path of interest rates have moved up, and there appears to be increased recognition of the potential for this to result in global recessionary conditions. Financial instability and pressures in markets appear to be growing, as evidenced by the requirement for the Bank of England to intervene in its bond market following a recent spike in yields. Geopolitical risks are also elevated across Europe.

Distributions for the third quarter are currently being finalised.

From provisional estimates from the three exchange traded funds, it appears that total distributions will be above forecasts last month of around $8000.

Instead, higher than average payouts across the Australian and global shares ETFs look set to push overall third quarter distributions to almost $12,000.

Once again market forces appear the unwitting assistant to the medium-term objective of reaching an equal allocation of Australian and international equities, albeit through sharper falls to Australian shares.

This means that the absolute gap between the per cent allocations of Australian and global equities is now just 5 per cent – arguably approaching something close to a margin of error. Increasingly, small sustained differences in relative performance of Australian and global will actually determine or even eliminate this gap.

As that has not yet occurred, investments this month have continued to be focused on the Vanguard international shares ETF (VGS).

Aids to navigation – updating the taxation record

On any important journey, it pays to pause to take bearings from time to time, to check progress and ensure the direction of travel is right.

On the financial independence journey, this means confirming where you are tracking, using different sources. The main benchmark employed day-to-day is how close the portfolio is to the final target of $2.62 million. Others indicators are the level of distributions actually paid out and projected based on past average payouts.

These each provide some sense of location, but completely independent of these is another source: reported taxation data. This is built on the tax returns and information submitted each year, and in particular the investment income recorded at Items 13, 20 to 24 of the annual tax return.

In past years I have undertaken detailed posts of on trends in taxable investment income. While there are elements of continuity in looking at this issue for the 2021-22 financial year there are also some new developments which, while not warranting a stand-alone post, are interesting to note.

Taxable investment income rose around 10 per cent over the previous financial year, totalling $75,481 for the financial year 2021-22.

This is the highest ever recorded taxable investment income received, and highlights that the result of previous year was not necessarily an anomalous result. Rather, what may be emerging is a new basic level of investment income. Over the past 16 years, overall falls in investment income have been rare, and typically mild.

At current levels, even if the investment income fell by the largest amount experienced to date – 36 per cent in 2011-12 – it would still sit well above the range experienced over the across the first four years of this record.

On parallel course: tracking the financial portfolio and taxable investment income

The level of taxable investment income has grown largely in parallel to the overall portfolio.

The chart below plots this relationship, mapping taxable investment income to the changing level of the financial portfolio (i.e. the full portfolio removing the value of Bitcoin).

Interestingly, looking at the last two years of this graph, income appears to be somewhat higher than a strict relationship might otherwise suggest.

That perhaps provides some caution on future levels of investment income.

Even so, it is the case that the investment income produced as a percentage of the financial portfolio was still just 3.8 per cent – which is exactly the average over the past 12 years.

The role of capital gains and portfolio income

Another component reported in annual tax returns is the realised capital gains in the past financial year (Item 18H). A chart of this is set out below.

Here what is seen is a reversion to a level comparable to most of the journey, of between $30,000-$40,000 per annum. It further frames the high levels of distributions in financial year of 2020-21 as an outlier may be unlikely to be replicated in the near future.

This is reinforced when an overarching view is taken of the levels of combined investment income and capital gains is set out, as in the chart below.

Again, this highlights that while in income terms 2020-21 was fairly normal, outsized realistions of capital gains were in evidence.

Set against this, the result for the other past years looks like a pattern of continued steady growth in both income and total income and capital gains, largely consistent over the past eight years.

Franking credits: pushing the journey forward

A further force pushing the journey forward in a more subtle way, is franking credits – credits effectively reducing the level of tax liability in an amount equal to the company tax already paid by dividend issuing companies.

The level of these franking credits has grown steadily over past years, as the portfolio has grown. Nonetheless, as the chart below illustrates, something remarkable has happened across 2021-22.

This chart – which focuses only on the major portfolio components of the Vanguard index funds and Australian equity ETFs – shows the value of franking credits received more than doubled last year.

This was a broad-based increase, and occurred over a period in which most new investments were being funnelled into international equities, which does not result in any additional accrual of franking credits.

A goal achieved: by tax measures?

The substantial boost in franking credits received this year has contributed to a first – the taxable investment income received exceeding the portfolio income goal ($91,600). The chart below represents the sum of the taxable investment income received annually, and franking credits received.

As such it represents, conceptually, a form of total ‘pre-tax’ earnings of the portfolio.

In some ways, this can be seen as the ‘achievement’, at least on paper, of the portfolio goal, for the first time – at least in terms of this taxation-based approach.

This is some sign of the continuing underlying progress of the journey, that perhaps is not so clearly evident from trends in the level of the total portfolio over the past 20 months or so.

Trends in average distributions and expenses

This month average total expenses (red line) rose slightly to around about $6,300 while the moving average of distributions (the blue line) continued to slowly rise to around $8,400.

This continues the recent trend of there being around a $2,000 ‘gap’ between average distributions and total expenses. One point to observe will be whether current inflationary pressures start to erode that gap over future years, as more observations from 2022 come into the totals used to calculate these averages.

It is also worth noting, linked the above taxation data analysis, that the taxable investment income received last year would have just covered the current level of average total expenses (at around $75,000 per annum, or around $6,300 per month).

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	89%	118%
Total average expenses (2013-present) – $84,600 pa	97%	128%
Target equity holding in portfolio – $2,100,000	80%	N/A

Summary

This period of overall portfolio stagnation and decline has been the longest in the journey so far.

In part this is a natural function of the larger impacts of the gusting winds of markets on a larger invested portfolio. It is also, uniquely, a product of a significant and prolonged decline in the value of Bitcoin over the past twelve months.

As I distract myself from day-to-day volatility by reading a meditation on the history of interest rates by Edward Chancellor – The Price of Time – these ‘winds’ of macro-economic forces will continue to play out across the portfolio in unpredictable ways.

Some of them are well summarised in this JP Morgan report Long-term Capital Market Assumptions.

More and more, however, I find I am noticing other less obvious secondary – but potentially structural -trends in the portfolio, hidden beneath the volatile headline numbers.

One is the steady decline in the overall value of the Vanguard High Growth fund – which is around $165,000 lower than in its recent peak in December 2021, as distributions and paid out capital gains gradually reduce its overall significance in the portfolio.

Once it comfortably was the largest single asset in the portfolio. Now, however, that place is routinely taken by the superannuation fund currently held. For the past year or so, the three major equity ETFs have also moved to the center stage as holding the majority of equity assets.

Another subtle change is the realignment driven by asset allocation and market conditions. The Vanguard International Shares ETF has emerged this month as the second largest investment vehicle, moving ahead of Bitcoin, and the Vanguard Australian Shares ETF.

More broadly, this contributes to the equity exposure of the portfolio being close to its highest ever levels, even as markets have fallen, and challenging conditions seem to be ahead. During this phase of heightened international tensions and focus on the contingencies of globalised trade links, around 1 in 3 dollars in the portfolio is located in markets beyond Australian shores.

The taxation data from the past financial year reinforces this sense of change laying beyond the headline numbers, with the notional achievement of the portfolio income goal last year, and the steady underlying growth in taxable investment income reaffirming the directions in recent portfolio income reports.

Amidst a storm, it is well to remember that other ships have sailed even the sharpest tempests safely.

This may not be easy, and the worst could conceivably lay ahead, rather than behind. At the time of writing the US sharemarket is suffering its fifth worst performance for a calendar year in history. Meanwhile, US bonds are delivering their worst performance since 1949.

These are arresting facts, yet they point to a larger truth. This has happened before, and will happen again. Our task is to weather it, armed in that knowledge.

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.