The moving finger writes; and, having writ,
Moves on: nor all thy piety nor wit.
Shall lure it back to cancel half a line,
Nor all thy tears wash out a word of it.

Omar Khayyam

This is my eighty-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	$761,609
Vanguard Lifestrategy Growth Fund	$39,947
Vanguard Lifestrategy Balanced Fund	$72,181
Vanguard Diversified Bonds Fund	$87,529
Vanguard Australian Shares ETF (VAS)	$454,520
Vanguard International Shares ETF (VGS)	$607,310
Betashares Australia 200 ETF (A200)	$275,474
Telstra shares (TLS)	$2,036
Insurance Australia Group shares (IAG)	$7,525
NIB Holdings shares (NHF)	$9,096
Gold ETF (GOLD.ASX)	$138,218
Secured physical gold	$21,884
Bitcoin	$634,473
Raiz app (Aggressive portfolio)	$21,884
Spaceship Voyager app (Index portfolio)	$3,494
BrickX (P2P rental real estate)	$4,434
Plenti Capital Notes Market Loan	$5,000
Total portfolio value	$3,145,606 (+$154,243)

Asset allocation

Australian shares	34.0%
Global shares	30.7%
Emerging market shares	1.3%
International small companies	1.7%
Total international shares	33.7%
Total shares	67.6% (-12.4%)
Total property securities	0.1% (+0.1%)
Australian bonds	1.9%
International bonds	4.7%
Total bonds	6.9% (+1.9%)
Gold	5.1%
Bitcoin	20.2%
Gold and alternatives	25.3% (+10.3%)

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

Comments

The financial independence portfolio moved in a strongly positive direction this month, with a gain of around $154,000.

This means the portfolio sits about any previous month end figure, and just below it highest value ever calculated in November 2021.

Overall, the portfolio grew by 5.2 per cent, making it the second strongest monthly performances of the year.

The growth in the portfolio was broad-based.

Global equities grew in value by 5.0 per cent. Bitcoin rose in value by 5.2 per cent. Australian equities also joined in the expansion, appreciating around 5.0 per cent. Even bond holdings turned in a positive perfomance, of around 3.0 per cent

The only significant capital losses across the month were a reduction in gold prices, resulting a 2.1 per cent loss on gold ETF holdings.

This performance occurred in a period of continued growing acceptance that Australian interest rates may still not have peaked, or may not be in a position to decline as rapidly as those overseas due to domestic inflationary forces.

The strong performance in both traditional and some alternative assets has delivered one of the larger monthly movements in the period of the record.

Even looking to just the ‘financial portfolio’ (excluding the impact of Bitcoin), an expansion of over $120,000 took place, and similarly, the value of equity holdings also jumped around $114,000.

This means that the reaching of the equity target, one of my critical thresholds or benchmarks, is within reach. An appreciation of equity values of 3.4 per cent could easily deliver this outcome. Of course, there are many years in which equity values fail to meet this figure, as well.

The investments through the past month were made to target a continuing equal allocation between Australian and global equities as set out in the plan. This month, this approach, combined with the relative performance in each market index, has led to investment in Vanguard’s Australian shares ETF (VAS). Also this month, the Plenti Notes market investment made recently paid its first round of interest, of around $40 per month.

Is the ‘stocks for the long run’ thesis always right?

Amidst the strong equity market performance, I spent some time this month reviewing a paper which seeks to dispute several central premises of modern investment advice and theory.

The paper is Stocks for the Long Run? Sometimes Yes, Sometimes No by Emeritus Professor McQuarrie at Santa Clara University, and is due to be published in the prestigious US Financial Analysts Journal.

The work re-examines the long-term historical record of US, and some foreign equity markets, drawing on a new expanded data set, including stock and bond returns from much earlier than pre-existing returns records.

The key finding is an uncomfortable one. It is that the idea of a fixed or relatively predictably positive equity risk premium (the higher return for owning equities, above the yield of risk-free bonds) may be much more contingent and exceptional.

The existence of a relatively reliable equity risk premium is the foundation stone of Jeremy Siegel’s rightly well-known book Stocks for the Long-run, and, implicitly, every investment allocation that primarily relies on equities to deliver real returns over time.

The updated paper finds, however, that:

• Stocks don’t always beat bonds, even over time: the assumption that equities will tend to beat bonds is not safe, even over extended periods
• Rather returns ‘regimes’ may oscillate: stocks and bonds may experience long-term ‘regimes’ of strong performance of one or other asset class – and even relatively long holding periods will not guarantee a superior performance of equities
• The short US sample can mislead: a stable positive equity permium may be a peculiarity or unique statistical artefact of US post-World War 2 economic conditions, not a normal state to which reversion can be expected over time
• The observations are robust to US and global markets: multi-decade periods of equities earning less than bonds occur across US and international markets
• Adding time does not always help in long-term adverse regimes: stocks can underperform bonds from holding period across 20, 30, 50 or even 100 years
• Single asset allocation bears higher risk of underperformance: consequently, the value of diversification across asset types (such as substantial allocations to both equities and bonds) has been understated in recent portfolio construction literature
• Returns may be more ‘fractal’ than mean-reverting: rather than equities becoming lower risk the longer they are held, the structure of equity and bond returns may be better described as ‘fractally distributed randomness’ than as measurable and predictable averages.

Implications for financial independence portfolio construction

Together, these findings challenge the underpinning strategies of many equity-heavy financial independence portfolio approaches – including this one. An explicit premise of the current plan and allocation is the strong historical record of higher real returns from equities, compared to other asset classes.

Over the years this has seen a gradual reduction in the level of bond holdings in the portfolio, from around 30 per cent, to around 7 per cent today.

My plans have always acknowledged that they are based on an assumption that a long historical record is the best available – if imperfect – guide for the future, and have tried where possible to draw on international perspectives wider than the quite singular US (and Australian) equity market experiences. Last month’s reflections dwelt on precisely the uncertainties involved in the assumption of an equity premium

Despite this, this paper is the most significant challenge to the set of suppositions underpinning the current portfolio, and have been causing me considerable thought.

In an era where bond losses have occurred, arguably improving the prospect of future positive returns under standard models, it is perhaps easier to see how bonds might track closer in performance to equities than they have over the past few years.

I am not rushing to any particular portfolio action on the basis of this finding, but it will form part of my annual review of investment plans.

My current portfolio exposure to equities is only 67 per cent, rather than the 80 per cent long-term target. Notionally, against my current targets, I am still modestly overallocated to bonds. If one excludes the Bitcoin holdings momentarily – this picture changes, to an 85 per cent allocation to equities, and a 9 per cent holding of bonds.

Replotting a course?

One way of viewing the current allocation is that it is a 67 per cent probabilistic ‘bet’ on the correctness of the Siegel thesis, that the equity risk premium is likely to be present and positive over the relevant investment horizon. There is a collective 33 per cent counter-bet, through other holdings, that these other asset classes will perform in a superior way.

That is one way to view the matter, and yet it is not the dominant approach in mind in portfolio construction, which is rather to benefit from as wide a form of diversification, and imperfect correlation between asset performances, and a maximisation of real portfolio returns within an acceptable ‘risk of loss’ envelope.

What this paper suggests is care and at least deliberative recognition of risks in adopting simplifying assumptions such as the outperformance of equities over the long-term. The asset allocation decision, together with the level of initial and ongoing investments, is the most consequential for future returns and risks. There are no easy short-cuts guaranteeing success.

Trends in average distributions and expenses

This month the trailing average of total expenses continued to climb towards average distributions.

The chart below measures distributions against an estimate of total expenses. The total expenses figure is based on actual credit card spending, with the addition of a monthly allowance for other fixed expenses.

As can be seen, average total expenses (red line) continues to gradually rise, as it has since April 2022, now exceeding $7,200 per month. By contrast, the moving average of distributions (the blue line) continues a decline that has been in evidence throughout 2023, to below $8,100.

The total ‘gap’ between distributions and total expenses is now just $800 per month, compared to around $2,000 per month in early 2023.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,750,000 (or $94,800 pa)	114%	146%
Total average expenses (2013-present) – $87,700 pa	124%	157%
Target equity holding in portfolio – $2,200,000	97%	N/A

Summary

Objectively speaking, the portfolio is closer than it ever has been to the secondary target – a pre-condition of movement to different work arrangements or some kind of early retirement – of $2.2 million.

One might expect this would lead to fevered daily calculations, a leaning forward and anticipation of a new life afterwards, of sharp changes, and the precise wording of letters of resignation. Yet, that is not the case.

Likewise, it is easy to imagine an approaching fearfulness, a risk aversion lest a life worked toward should suddenly be ripped away, through a turn of fate, a market event, recession, or some other force pushing asset prices below current levels. That to, is absent.

Instead, looking upon the scene, a few things stand out.

One is the changes in perspective arising from the growth of the portfolio size. Equities need only appreciate around 3.4 per cent – or $72,000 – for the equity target to be reached and exceeded. At the beginning of 2021, four years into this record of journey, the equivalent figures were 50 per cent, and $480,000. And once, earlier in the journey, a distance of $72,000 to close might have felt like the work of many months, or a year, rather than possibly of a few weeks of positive market movements.

The second is that as the target approaches, its centrality fades, and I find myself more interested in, distracted by, other interests.

Principal amongst these is the desire to continue to learn about the operations of markets from different perspectives, and an interest in how markets arrived at their current point. An example of this is this video set by documentary maker Adam Curtis on the history of British capital markets from the 1960s to the 2000s. I have also been listening to the Michael Lewis audiobook on the FTX bankruptcy, Going Infinite, covering the development of crypo-exchanges across the past ten years.

A third is the sheer difficulty of the task, in prospect, of achieving and sustaining early financial independence in a world of varying, low, and sometimes negative real returns, amidst more or less constant inflationary pressures.

This is not to say, it is impossible. It is feasible in some cases to save oneself to financial independence in a short time, with enough of a gap between income and expenses.

Yet over longer time frames, and after the ‘target FI number’ is notionally achieved, what is stark is the sheer continual eroding force of the loss of purchasing power over time, and potential serious economic events playing out on a time scale that does not allow for modest ‘readjustments’ or flexibility to save the day.

Sometimes these realities are obscured by the illusion of nominal returns and dollars, sometimes by a kind of erasure from consideration of ‘tail events’, that occur to capital markets with some regularity.

As an example of the nominal estimation issue, the equity target of $2.2 million is based on a nominal target income of $94,800. Adjusting through for the 5.4 per cent inflation in the past year, generating the same ‘real’ dollar value (i.e. providing an equal call on goods and services) would suggest an equity target of $2.31 million is required at year end just to retain real purchasing power envisaged as of January in this year. In other words, over $100,000 of additional savings or retained returns is required just to secure the same potential target income, after a year of higher than average inflation.

An intriguing podcast this month with Marc Faber pointed to one behavourially focused perspective on this, rooted in an understanding of wealth as a relative benchmark. Rather bleakly, Marc Faber observed that losing or gaining wealth through returns or the erosion of inflation was, in some senses, less important than the relative gain or loss against external benchmarks.

Much of the FI community would likely shudder and disagree with this perspective, replying high-mindedly that one should exclusively focus on one’s own desires and needs, and ignore relative benchmarks of comfort, or purchasing power. And yet, substantial evidence would suggest that humans – perhaps for good, or perhaps for ill – do not think this way.

The Austrian economist Hayek once remarked that he did not think it an exaggeration to say that history is largely a history of inflation, usually engineered by governments for the gain of governments. Two decades of lower inflation may have shrouded this fact.

The past year has been a reminder that history is still with us, and as raw and changeable as it ever was. The moving finger writes, and having written, moves on. In this case, forcing us to confront that even having read the past carefully, we cannot know what is yet to be written.

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.