So foul a sky clears not without a storm.

Shakespeare, King John, Act IV.ii

This is my seventy-second 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	$734,665
Vanguard Lifestrategy Growth Fund	$39,052
Vanguard Lifestrategy Balanced Fund	$70,528
Vanguard Diversified Bonds Fund	$87,212
Vanguard Australian Shares ETF (VAS)	$373,659
Vanguard International Shares ETF (VGS)	$440,759
Betashares Australia 200 ETF (A200)	$282,996
Telstra shares (TLS)	$2,121
Insurance Australia Group shares (IAG)	$6,056
NIB Holdings shares (NHF)	$8,760
Gold ETF (GOLD.ASX)	$118,146
Secured physical gold	$18,782
Bitcoin	$279,557
Raiz app (Aggressive portfolio)	$20,104
Spaceship Voyager app (Index portfolio)	$3,231
BrickX (P2P rental real estate)	$4,642
Total portfolio value	$2,490,270 (+$10,340)

Asset allocation

Australian shares	39.4%
Global shares	31.6%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	35.2%
Total shares	74.7% (-5.3%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.6%
International bonds	5.8%
Total bonds	8.4% (+3.4%)
Gold	5.5%
Bitcoin	11.2%
Gold and alternatives	16.7% (+1.7%)

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

Comments

This month has seen a small overall gain in the portfolio, of around $10,000. As a result, the portfolio grew by around 0.4 per cent, and ends the month quite close to the position it started.

A year ago, the portfolio briefly reached around $3.04 million, on the back of sharp gains in the value of Bitcoin. Today, a different story is in evidence, with Bitcoin holdings being a weak performer over the month, following the FTX collapse and bankruptcy.

As a result, the portfolio continues to track at a lower level than achieved in early 2021, and is still below the overall revised portfolio goal of $2.62 million.

The most visible movement this month was the fall – by around 22 per cent – in the price of Bitcoin, following relevations of the insolvency and use of customer funds of FTX and associated Alameda Research.

This brought further focus on other potential vulnerabilities in exchanges. This fall came after a period of relatively low volatility in the price of Bitcoin, and this lower volatility regime seemed to reinsert itself again following the falls, with trading ranges that are quite narrow in historical terms.

By contrast, most other elements of the portfolio showed growth.

Australian equities advanced around 6.4 per cent. Gold holdings increased by 2.1 per cent, and bonds reversed some previous losses, ending up around 1.8 per cent. International equities, however, slightly declined (by 0.2 per cent).

The dominant driver for short-term movements across most of the portfolio continue to be the shifting expectations around future inflation pathways, and the implications of this for further monetary policy contraction or ‘pivotting’.

At the headline level, while the overall portfolio remains largely moored, there are important shifts occurring in the actual story of the portfolio underneath. While by definition there will be fewer ‘firsts’ or surprising developments in a portfolio largely sitting around previous levels, this does not mean there will be none.

The equity portfolio is a demonstration of this principle.

This month, the overall equity holdings of the portfolio reached an all time high in dollar terms. Throughout the entire journey, there has never been a greater absolute value of equities held. This is despite the ASX200 being essentially flat, excluding dividends, over the past year and global equity indexes being down more than 15 per cent year on year.

Similarly, the portfolio is more closely trimmed to equity exposure than at any time over the past 15 years of focused investing, at around 75 per cent. This compares to a historic average of around 67 per cent since 2007. The equity component of the portfolio is now only around 5 per cent below its target allocation.

Looking more broadly, at all equities held – including both in superannuation and the financial independence portfolio, there is a parallel trend. The total amount of equities held across this ‘all assets’ portfolio is $2.48 million, only about 0.2 per cent below the peak of January 2021.

As has been observed in previous updates, some of this emergence of the prominence of the equity portfolio has occurred in proportion to falls in Bitcoin. As Bitcoin has fallen in value, equities have increasingly assumed their intended function at the heart of the portfolio.

This month, as has been the case through the year, regular investments were focused on the Vanguard international shares ETF (VGS).

Forecast Quarter 4 distributions – filling in the gaps

In around one month, fourth quarter distributions will be finalised for the range of exchange traded funds and Vanguard funds that make up the core of the financial independence portfolio.

These are typically smaller than the second quarter (June) distributions, owing principally to the pattern of Vanguard index fund payouts.

Forecast distributions are derived using the median distribution over the histories of the exchange traded funds. In the case of the Vanguard funds, an average of the past five years of distributions is used, as this is more representative of – in particular – the tendency of the Vanguard High Growth distributions to grow in value over time.

The chart below sets out quarterly realised distributions over the past five years for the major portfolio funds, with the transparent orange bar representing a forecast.

Looking at the the trends in fourth quarter distributions can help identify longer term trends with the portfolio. The chart below sets out the components of realised distributions – and a forecast for this year.

Currently the forecast is for distributions of about $25,000, with more than half of that coming from a single Vanguard High Growth retail index fund.

There has been a general trend of unstable growth in fourth quarter distributions, with instability of the Vanguard High Growth funds payouts the biggest factor. This means that this funds distributions could be higher by $10,000, or significantly lower.

Trends in average distributions and expenses

This month average total expenses (red line) stayed flat at close to $6,300 while the moving average of distributions (the blue line) continued to increase towards $8,500.

This chart continues to show distributions rising steadily beyond total average expenses, even as those expenses begin to recover from their pandemic lows.

As the next monthly update is prepared, there will be some partial information – from the exchange traded funds – on the actual, rather than assumed level of distributions accrued in this period. This will alter the gradation of the last six months of this line, potentially increasing its level.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	95%	126%
Total average expenses (2013-present) – $84,500 pa	103%	136%
Target equity holding in portfolio – $2,100,000	89%	N/A

Summary

As the year starts to draw to a close, there is a sense of storm that has passed, and perhaps another to come.

With some work projects starting to draw to a close from February, and fewer commitments across the next two months, there will be more time for assessing the passage of this part of the journey, and contemplation of possible changes.

It is possible that 2022 will be the last year in the particular work circumstance I have been in for the past decade or so. Some potential triggers for changes are on the horizon, a natural part of any journey.

There is something unique and elegiac about potential lasts.

There are work-related events I can see coming up in the medium-term which I doubt I will be around to attend. I once calculated that if my financial independence journey were cast as a single work day, I was in the late afternoon. As of today, there is about 30 minutes of the work day to proceed, in terms of the portfolio accumulation to its final target.

Just enough time to turn one’s mind to a few remaining tasks, to execute them well – and have the lasts, at least well left. Too long to simply sit idle by, in unfocused inactivity.

One practical preparatory act this month has been reviewing the new Vanguard superannuation offering in more detail. It appears to offer slightly low fees than my current Plum (Assertive Index) investment fund, with a monthly saving of around $60 on a comparable allocation.

Over time, this compounds to a potential $37,000 of additional benefits over 20 years. In my personal circumstances, I am likely to make the formal decision to change over superannuation providers in coming weeks, having reviewed the product disclosure statements carefully. Over time, I consider it likely that Vanguard’s commitment to keep fees competitive will provide a cap on future administration costs.

This month I finished The World of Yesterday, by Stefan Zweig and moved on to other historical works with less direct linkage to financial independence issues, such as a history of the second world war from the perspective of the Soviet Kremlin. Like the Zweig memoir, however, this work highlights the fragility of personal lives, including financial and physical security, in an era of emerging great power conflict.

Increasingly, my personal interest has moved to some of the larger macroeconomic and finance trends occurring at the moment, including the evolving role of the US dollar system and its implications for investment markets. Listening to this discussion between Hugh Hendry and the famous investment commentator Lacy Hunt provided some unique insights into the possibilities in this area this month.

A year ago, I considered that heading into an unknown future, with an allocation substantially exposed to shares, with a significant minority in Bitcoin, might be tolerably well suited to meet a range of different potential futures. The passage of the year has not really borne this out, but even so, my comfort with the current portfolio’s allocation remains.

Certainly asset markets have undergone something of a storm over the past year. The sky remains unclear, if not foul. Yet a worse storm may still be required before it clears. The task is to weather this, while remaining positioned to take advantage of what will be in time, a turning season.

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.