There is a world beyond ours, a world that is far away, nearby and invisible
Maria Sabina
This is my eighty-first 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 | $771,760 |
| Vanguard Lifestrategy Growth Fund | $40,305 |
| Vanguard Lifestrategy Balanced Fund | $72,510 |
| Vanguard Diversified Bonds Fund | $87,091 |
| Vanguard Australian Shares ETF (VAS) | $413,503 |
| Vanguard International Shares ETF (VGS) | $600,036 |
| Betashares Australia 200 ETF (A200) | $284,603 |
| Telstra shares (TLS) | $2,137 |
| Insurance Australia Group shares (IAG) | $7,373 |
| NIB Holdings shares (NHF) | $9,954 |
| Gold ETF (GOLD.ASX) | $134,913 |
| Secured physical gold | $21,323 |
| Bitcoin | $466,898 |
| Raiz app (Aggressive portfolio) | $21,323 |
| Spaceship Voyager app (Index portfolio) | $3,560 |
| BrickX (P2P rental real estate) | $4,455 |
| Total portfolio value | $2,941,776 (-$9,399) |
Asset allocation
| Australian shares | 35.4% |
| Global shares | 32.7% |
| Emerging market shares | 1.4% |
| International small companies | 1.8% |
| Total international shares | 36.0% |
| Total shares | 71.4% (-8.6%) |
| Total property securities | 0.2% (+0.2%) |
| Australian bonds | 2.2% |
| International bonds | 5.1% |
| Total bonds | 7.3% (+2.3%) |
| Gold | 5.3% |
| Bitcoin | 15.9% |
| Gold and alternatives | 21.2% (+6.2%) |
Presented visually, the pie chart below is a high-level view of the current asset allocation of the portfolio.
Comments
This month saw a small loss of around $9,000 in the financial independence portfolio, equivalent to a contraction of about 0.3 per cent.
This continues the period of relatively muted month-to-month volatility in the portfolio, with the portfolio sitting at an essentially unchanged level since the beginning of the financial year.
There was a relatively mixed experience across the portfolio components in August.
The sharpest percentage falls in value were experienced in Bitcoin (at -4.4 per cent). Some legal appeal developments in the United States around possible US ETF offerings helped reduce earlier larger falls. By constrast, gold securities increased in value by around 2.5 per cent.
The large equity component of the portfolio also demonstrated this mixed result.
Australian equities fell in value approximately 0.7 per cent through the month, while continued strength in global equities and a weaker exchange rate produced a capital return of around 1.3 per cent across the same period for international share holdings.
In the shrinking fixed interest component of the portfolio, an increase in bond yields led to the value of bond holdings falling by 0.3 per cent.
The ongoing losses in the bond portfolio, when combined with the stronger performance of gold through this year, has bought about a new development in the portfolio. Since March of this year international fixed interest holdings have started to make up a smaller component of the portfolio than the gold holdings.
Through the month there was considerable pessimism on equities, which was only reversed in the last few days of the month by a lower than expected domestic inflation outcome, signalling a potential pause on future Australian interest rate rises.
Overseas, central bankers and other leaders were gathered at Jackson Hole for the annual gathering on international outlooks for financial and other macro-economic markets. A theme of the keynote speech from US Federal Reserve Chair was that overall global interest rates may need to remain higher even as measured inflation falls, to ensure a return to a path of relative price stability.
The conference also heard a paper presentation from US academic and author Barry Eichengreen on the diminishing prospects for governments to be able to either ‘grow’ or ‘inflate’ their way out of substantially higher public debt stocks, previously used mechanisms for managing high debt levels. The overall message from the research paper was that options that were previously available to government, including ‘financial repression’ were increasingly reaching their natural limits.
The gains through the month made by international equities has meant that to continue to target a 50/50 allocation between Australian and global equities as set out in the plan, all new investments through August were made in Vanguard’s Australian shares ETF (VAS).
Projected third quarter distributions – a lower trend continued or broken?
At the end of September third quarter distributions will be finalised, to be paid across early to mid October.
These are consistently smaller than the June and December quarter payments, due to the timing of payouts from funds, and the cycle of most dividend payments.
Distributions so far through 2023 have been well down on previous years, and so it is possible this pattern will continue through into this current quarter.
Set against this, the projections over the past two years – using average distributions payouts – have under-estimated the level of actual distributions by between $3,000-4,000.
Applying the average level of payouts through history to the equity exchange traded funds, and the median payout to the more ‘lumpy’ series of payments of the Vanguard Diversified Bond retail fund results in the projected distributions below.
The central estimate is for third quarter distributions to reach around $10,000, or around the same level as in 2021.
There are relatively narrow bounds on the level of uncertainty in these payments, compared to the larger June and December distributions.
If all funds delivered their maximum historical payouts, the total could be as high as $15,000. If all simultaneously delivered their lowest historical levels, a rather unlikely event, total quarter distributions as low as $5,000 would be the result.
Trends in average distributions and expenses
Over past weeks I have updated my estimates of regular fixed and discretionary costs, i.e. those which are not picked up in records of credit card expenditures. Estimates of these are required to build up – through adding them to the record of credit card expenditures – an approximate estimate of total annual expenses.
This is done semi-regularly, usually at the beginning of the year, but in this case had not been done since January 2022. The updated estimates therefore pick up price increases in some insurance costs, utilities, rates, and also increased notional ‘set aside’ cash amounts for regular car replacement.
Inflation has impacted these types of costs significantly, with estimates of these costs rising 12 per cent in this 18 or so month period. Together with an increased level of average credit card spending since early 2022, this results in a total increase of around $10,000 in estimated annual expenses.
This has led to a re-estimation of the gap between distributions and total expenses, based on this new higher level of fixed expenses.
The chart below measures distributions against this newly revised estimate of total expenses. The total expenses figure is based on actual credit card spending, with the addition of the mentioned monthly allowance for fixed expenses.
As can be seen below, average total expenses (red line) continued to rise from a new higher re-estimated base, reaching above $7,000, while the moving average of distributions (the blue line) continues to declined through 2023, to just under $8,300.
It is evident from this chart that unless some trends reverse, there may be a ‘second crossing’, which is not really a situation I have contemplated or expected. In other words, the average of distributions will fall below estimated total expenses.
Pressure in this regard might be particularly strong in the next year or so, when abnormally high distributions received in the first half of 2021 fall outside the sample used to estimate the three year average of distributions. Indicatively, distributions since that time have averaged around $6,800 per month.
As a result of the revisions in data and estimates, the total ‘gap’ between distributions and total expenses is now around $1,300 per month, significantly down from around $2,000 per month in early 2023.
Progress
| Measure | Portfolio | All Assets |
| Portfolio objective – $2,750,000 (or $94,800 pa) | 107% | 139% |
| Total average expenses (2013-present) – $87,700 pa | 116% | 151% |
| Target equity holding in portfolio – $2,200,000 | 95% | N/A |
Summary
As the journey progresses, it is interesting to observe that more broadly Australians, at least if judged by some data, are increasingly finding early retirement to be less accessible, or perhaps less desirable than ever.
The Australian Financial Review recently noted that the average age of retirement had moved up from 53.5 years to 64.3 years over the past 20 years – a movement which given strong markets over the period presumably at least in part reflects a change in preferences.
Another potential change in preferences was picked up in a recent wealth report, that showed sharply falling levels of enjoyment or satisfaction from Australians managing their wealth in the past year.
Amidst these broader sentiment and societal shifts, more personally, this month has been one of muted progress, amidst mixed markets.
If progress since 2019 is extrapolated purely linearly, the equity portfolio should reach its target of $2.2 million within around eight months. Each month, however, is inevitably a variation around that trend line, and there is no a priori reason to just use data from 2019.
So instead each month is a careful exercise in practised detachment, which can become more or less difficult as markets play out. Yet at some point, as discussed last month, the weight of past choices begins telling on the present. Pushing on progress, even if hard to observe.
A small example of this progress can be illustrated.
In 2017, the total of third quarter distributions paid out had the notional effect of closing the gap to the final equity target by around 0.2 per cent. At the end of this month, assuming average distributions, third quarter payments will by themselves close around 10 per cent of the remaining gap to the target equity portfolio.
In this way, the impact of past choices, closer to the target, can assume a new importance.
The same point can be made around future more substantive distributions, with fourth quarter December distributions often reaching around $20,000, or June quarter two distributions being routinely between $30,000 to $40,000. Each of these payments likewise could potentially go further to cover the remaining distance for the equity portfolio.
The other half of the equation in financial independence terms is always expected expenditure. The adjustments to the estimate this month illustrate a critical point not to be overlooked in financial independence – the impact of inflation.
While often elided away in many basic introductory materials on financial independence, the battle against changes in the cost of living through time is one of the biggest challenges. History shows that ensuring investment income and total returns exceed inflation by a meaningful margin is not a trivial task, even if it has seemed relatively easy in the couple of decades of lower inflation just passed.
In times of higher inflation, such as we are experiencing, nominal investment income can rise appreciably, giving a false sense of comfort, even as these same investment returns actually fail to keep pace with price levels in real terms.
It is no doubt true that lifestyle choices, frugality and substitution aroud the types of purchased goods and services can offset this. It is also true, however, that common measures of prices are already typically assuming some level of substitution away from expensive purchases through time, and changes in the ‘basket’ of consumption that in some cases might be considered as representing a degradation in net living standards.
With generally falling inflation levels, this issue may again slightly recede into the background into the future. As observed by the US Federal Reserve Chair, however “we are navigating by the stars under cloudy skies” in this regard.
As this month progresses, we shall learn just a little more about whether, or at which time, this navigation of markets may bring the portfolio to the world that is at once far away, invisible, and yet nearby.
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.