The wave that is always turning

Right into the front of the ship

Is said to cause everyone’s heart

The most trouble

Pindar, Nemean, VI.52-56

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

Portfolio goal

My objective is to achieve and maintain a portfolio of at least $2,750,000 by 31 December 2024 or earlier. This should be capable of producing an annual income from total portfolio returns of about $94,800 (in 2023 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.45 per cent.

A secondary focus will be achieving the minimum equity target of $2,200,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$734,301
Vanguard Lifestrategy Growth Fund	$39,255
Vanguard Lifestrategy Balanced Fund	$70,774
Vanguard Diversified Bonds Fund	$87,970
Vanguard Australian Shares ETF (VAS)	$380,543
Vanguard International Shares ETF (VGS)	$456,983
Betashares Australia 200 ETF (A200)	$288,097
Telstra shares (TLS)	$2,179
Insurance Australia Group shares (IAG)	$6,189
NIB Holdings shares (NHF)	$9,414
Gold ETF (GOLD.ASX)	$123,055
Secured physical gold	$19,529
Bitcoin	$361,020
Raiz app (Aggressive portfolio)	$20,910
Spaceship Voyager app (Index portfolio)	$3,215
BrickX (P2P rental real estate)	$4,477
Total portfolio value	$2,607,911 (+$166,421)

Asset allocation

Australian shares	38.2%
Global shares	30.8%
Emerging market shares	1.5%
International small companies	1.9%
Total international shares	34.3%
Total shares	72.4% (-7.6%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.5%
International bonds	5.6%
Total bonds	8.1% (+3.1%)
Gold	5.5%
Bitcoin	13.8%
Gold and alternatives	19.3 (+4.3%)

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

Comments

The portfolio has had a significant month of growth over January – expanding by 6.8 per cent – or $166,000.

This is the largest increase since March last year, and the seventh largest monthly increase on record. It returns the portfolio to the levels last seen through the middle of last year.

Last month the portfolio goal was revised from $2.62 million to $2.75 million to reflect inflation and a slight lowering of the safe withdrawal rate. The increase in the portfolio this month exceeded that lift in the target, meaning the end goal is nearer in net terms than at the end of last year.

Just over half of the monthly growth was due to a rebound in the price of Bitcoin, which increased in value by 33 per cent since the beginning of the year.

The other substantial contribution was from an expansion in the value of Australian and global equities. These increased around 5 per cent and 1.2 per cent respectively.

Gold holdings also recorded a small increase in price (1.8 per cent), and bonds also made a minor gain – of 2.1 per cent – following previous sustained falls.

Asset pricing movements this month have largely centred on revisions to expectations around inflation and interest rate increases, both in Australia, United States and across developed economies.

In the latter two cases, there is some evidence that inflationary forces have at least temporarily peaked, particularly as continued quantitative tightening in the United States is removing monetary liquidity from markets.

The strong performance of Bitcoin almost carried the portfolio to the previous portfollio goal of $2.62 million.

Other aspects of the portfolio are also strong, however. For example, the total level of equities held inside the portfolio are at their highest ever level, exceeding peaks of value achieved in December 2021. Indeed, the equity component of the portfolio alone is now larger than the entirety of the portfolio was exactly three years ago.

This month, reflecting the longer-term goal to achieve an equal allocation of global and Australian equities, regular investments were focused on the Vanguard international shares ETF (VGS).

Altered bearings: shifting perspectives of progress

As discussed at the end of last year, while headline events, and the overall portfolio value might shift and change through time, on the journey there are a number of silent currents operating within the portfolio, reinforcing progress.

Looking beyond the monthly fluctuations in total portfolio can help identify smaller events and trends that serve a signals for the future. Different metrics and perspectives can help see these further off, and provide a fuller understanding of what is occurring over longer time-frames.

An example of that is looking at the changing relationships between some of the asset classes within the portfolio, such as the ratio of the value of equity assets held to fixed interest assets over time.

For most of the journey this ratio was around 3 to 1, meaning around $3 in equity holdings for every dollar in bonds or fixed interest. At the beginning of this record in early 2017 it was 2.5.

Over time, the pursuit of an increased target equity allocation has markedly shifted the ratio. The close of this month sees it at its highest ever level, at 9 to 1.

In other words, for every dollar currently in bonds or other fixed interest assets, nine dollars is invested in the equity of Australian and global firms seeking every day to serve customers better, invest for the future, and innovate to be more profitable.

The same story, though slightly less dramatic, applies to the ratio of equities to all other portfolio assets.

Over the entire period of this journey, this ratio has been around 2 to 1. In the earlier years high bond allocations drove this level, more recently, the ratio has been supressed by the growth in the value of Bitcoin holdings.

Today, that ratio stands at close to 2.6, meaning that $2.60 of equity value is hard at work for every single dollar held elsewhere.

Another small marker on the journey is that the previously single dominating component of the portfolio – the Vanguard High Growth retail fund – has fallen to less than a third of all financial assets held (i.e. traditional index funds and exchange traded funds, excluding Bitcoin).

By contrast, at the start of this record in 2017, this single investment vehicle alone represented 60 per cent of all portfolio assets owned.

Closing the range: reviewing the remaining gap to the target portfolio

Towards the closing phases of this journey an alternative perspective can be gained by asking: what would it take for the journey to be completed?

In the early and middle of the journey, generally the answer to this question was a raw – and menacingly large – number, or perhaps an estimate of the number of years until completion.

In this part, however, what is striking is the dominating impact of asset price movements, compared to additional savings, or even time itself.

As an example, it would take less than a 5.5 per cent growth in the overall portfolio – less than that achieved in the last month – to theoretically meet the overall portfolio goal.

The same process of the achievement of the target becoming more exposed to standard market fluctuations is also at work around the equity portfolio sub-target of $2.2 million.

Two years ago, equity prices would have had to have increased by around 52 per cent to meet the target. Now, an advance of around 16.5 per cent would result in the equity target being met. This is still a large movement, but it is not outside of range of plausible movements over a small number of months.

Looking further at the sub-targets – or target asset allocations – is another perspective on the distance to the final goal.

The chart below sets out each asset allocation target (blue) compared to the actual value currently held in that allocation (red).

From this, it can be seen that area of greatest shortfall is in global equities, where the portfolio of international equities is around $200,000 lower than the final target (effectively, of 40 per cent of the total portfolio). The distance between the target and actual Australian equity holdings is much closer, only around $100,000.

By contrast, actual asset holdings are a little above the sub-targets for bonds and Bitcoin, while being slightly below targets in the case of gold. Each of these variations, however, either are or have in the last few months been relatively small or transitory.

This reinforces the picture that the primary task remaining is completion of the core ‘engine’ of the portfolio, through continuing investment in global, and then secondarily, Australian equities.

Trends in average distributions and expenses

This month average total expenses (red line) continued to track slightly above $6,300, while the moving average of distributions (the blue line) increased, to just beyond $8,500.

This chart now includes the actual level of distributions up to the end of 2022, compared to the previous graphs which had to use stand in median estimates for the anticipated levels of distributions in parts of that year.

As the distributions fell reasonably closely to the estimates, these have not been significant changes.

Broadly, the trend continues of expenditure slightly rising, as newer months without lockdowns enter the sample, leading to the average more closely tracking the more normal expenditure patterns since.

Distributions continue to rise, meaning a gap of around $2,200 between distributions and expenses continues to be sustained and even slightly widen.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,750,000 (or $94,800 pa)	95%	124%
Total average expenses (2013-present) – $85,000 pa	106%	138%
Target equity holding in portfolio – $2,200,000	86%	N/A

Summary

The long summer period of relative rest and an abundance of time is drawing to a close.

Through it I have read Paul Volker’s autobiography Keeping At It, in which the former Federal Reserve Chair tells of his approaches to seeking to end the last ‘great inflation’ period of the 1970s. Even more fascinating has been The Price of Time, by financial historian and commentator Edward Chancellor – whose Devil Take the Hindmost is also a classic of the historical ‘bubble’ genre.

His latest work traces the history and function of interest rates from early Sumerian civilisations, through to the negative rates experiment recently conducted on financial markets. Its message is clear – there is nothing normal about the post-Global Financial Crisis history of interest rates – and we might expect long-lasting consequences.

Others are also looking at the possible disruption to traditional asset allocation approaches. Since the close of a poor year for bonds and equities (video), some are declaring the death, or indeed the rebirth, of the 60/40 equity and bond portfolio.

This paper (pdf) from the Future Fund lays out some of the longer-term issues, and reflects this attempt to grapple with what the new world of asset pricing and performance might look like. Another interesting related discussion took place in this 2023 Goldmoney roundtable (video), and the International Monetary Fund is also reporting on some potential structural, long-term changes in the demand for gold from central banks. Finally, this piece from AMP economist Shane Oliver provides some interesting data on historic periods of out and under-performance of Australian and global markets.

Each year starts with a relatively in-depth examination of the portfolio which benefits from absorbing papers and discussions like these.

Even so, with any portfolio, and especially one on a long journey over time, it can always be viewed from different perspectives. Inevitably a process of internal editing, of choosing one’s instruments and measures, occurs. This process can obscure as well as reveal.

It is interesting to contrast the situation now, to the position in the early part of a journey. In a voyage, a small change to the chosen bearings at commencement can have a outsized impact on the destination.

Yet for this particular journey, it is the winds, gusts, a few waves – which are to be expected – at the closing stages that may define manner of its ending.

At the start of the journey, merely pointing the right direction – by setting aside savings and investing them in diversified equities – and commencing were not dependent on external conditions. All lay within some measure of control and even a serious fall in the value of those small initial investments could not long delay progress.

Over the journey, a kind of habituation to volatility has developed.

At the start of the record, if it had been explained that a month might see a loss of a $200,000, or a gain of $100,000 in financial assets alone – excluding Bitcoin – it would have been difficult to process at anything beyond a theoretical level. Yet both have occurred since 2019. This volatility represents effectively the gain or loss of several years of median wages, on basis of events and changing valuations over a few weeks.

During this latter phase, this habituation made these gains and losses appear far less visceral than might be supposed.

And yet, the relentless changing perspectives imposed by mathematics continue. Now, a wave, a few waves or a current might carry the voyage onto its destination. The wave that is turning right under the bow of the ship, in this way, truly carries more hopes and troubles than those already passed through.

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.