There are years that ask questions, and years that answer.

Zora Neale Hurston

This is my eighty-sixth 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 $2,870,000. This should be capable of producing an annual income from total portfolio returns of about $99,000 (in 2024 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 $2,300,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$811,421
Vanguard Lifestrategy Growth Fund	$42,151
Vanguard Lifestrategy Balanced Fund	$75,377
Vanguard Diversified Bonds Fund	$89,232
Vanguard Australian Shares ETF (VAS)	$503,637
Vanguard International Shares ETF (VGS)	$672,613
Betashares Australia 200 ETF (A200)	$296,854
Telstra shares (TLS)	$2,153
Insurance Australia Group shares (IAG)	$7,652
NIB Holdings shares (NHF)	$9,768
Gold ETF (GOLD.ASX)	$138,996
Secured physical gold	$21,987
Bitcoin	$727,092
Raiz app (Aggressive portfolio)	$21,940
Spaceship Voyager app (Index portfolio)	$3,766
BrickX (P2P rental real estate)	$4,541
Plenti Capital Notes Market Loan	$5,000
Total portfolio value	$3,434,180 (+$114,667)

Asset allocation

Australian shares	33.8%
Global shares	30.7%
Emerging market shares	1.3%
International small companies	1.6%
Total international shares	33.6%
Total shares	67.4% (-12.6%)
Total property securities	0.1% (+0.1%)
Australian bonds	2.1%
International bonds	4.5%
Total bonds	6.6% (+1.6%)
Gold	4.7%
Bitcoin	21.2%
Gold and alternatives	25.9% (+10.9%)

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

Comments

This month the financial independence portfolio continued to grow, increasing by around $114,000.

As a result, the portfolio continues to track at the highest level it has ever reached. In the last days of the month, growth in equity values also meant the secondary objective of a minimum equity portfolio of $2.3 million was also met.

The portfolio grew by 3.5 per cent across the month, with the four past months alone having increased the total size of assets under management by over $500,000.

The drivers of the positive monthly performance were two-fold. Global equities increased in value by 5.3 per cent, while Bitcoin rose in value by 5.8 per cent.

By contrast, Australian equities returned a modestly positive performance (of 1.4 per cent), when payments of dividends are included.

Portfolio bond holdings produced small losses, of around 1.1 per cent. This was more than offset by an appreciation in the value of gold ETF holdings.

This month saw US equities continue to perform strongly, due to receding fears of a domestic recession, and the continued appreciation of the seven largest technology focused stocks. These ‘magnificant seven’ have significantly outperformed broader benchmarks of medium and smaller listed US firms. In turn, US equity market outperformance of international markets is at the highest level seen in decades

As noted, the growth in prices in equity markets has rapidly taken the portfolio to fully meeting the secondary objective, which was set only a month ago, of reaching $2.3 million in equity holdings.

Both the Australian and international components of that target ($1.15m each) are now met. Whether they remain so falls, for the moment at least, within the essentially random and noisy fluctuations of daily market and currency movements.

This month saw the immediate reinvestment of December distributions. Investments made were weighted toward Australian equities through Vanguard’s Australian shares ETF (VAS), effectively representing in large part a manual reinvestment of paid out dividends.

This has allowed the portfolio to track closely to its intended equal allocation between Australian and global equities as set out in the plan.

A critical assessment of lifecycle investing: Anarkulova et al

One of the most common ideas in retirement investment planning is the notion that one’s bond allocation should increase with age, or proxomity to retirement, to aid in the avoidance of sequence of returns risk, and wealth protection.

A new paper from Anarkulova et al titled Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice reviews this common advisory position, using a wide set of historical data from across developed economies. Importantly, this means that findings of the paper are not subject to the limitation of being solely based on the singularly strong performance of the US stock market over the past century.

The broad findings are that an all equity portfolio outperforms a traditional 60/40 fixed equity and bonds allocation, or other variants using bonds, such as the ‘target date’ approach.

Specifically the paper finds that:

• Bonds are a riskier investment than often considered, a long horizons: in particular, as horizons increase, a correlation to domestic equities increases, as does the risk of extreme downside events
• The stronger equity performance is not without volatility: while an all equity portfolio performs better on many metrics, it can encounter larger drawdowns, and higher volatility on the way to these superior outcomes
• An amount of home bias makes sense: A 35/65 domestic and international equity split can be optimal in performance terms for non-US investors in accumulation and retirement stages
• Even small allocations to bond typically subtract from performance: with allocations as low as 5-10 per cent making some (negative) difference

This paper is an interesting counterpoint to the paper discussed in November around the lack of guarantees that equities will outperform bonds over all investment horizons, and the presence of ‘regimes’ where this occurs, and then does not.

Its finding on the role for a substantial allocation to domestic equities supports my current position of exposure to both domestic and international equities, while also raising the possiblity that in view of a broad data set taking in foreign data, the optimal allocation may be closer to 35 per cent, than 50 per cent.

These findings are built on a wider data set, yet can still only be markers of probable outcomes, based on the single ‘run’ of history that has happened. There is simply no surety that the future will neatly align, in my particular investment horizon, with the experience of the past. As such, studies such as these become informative of possible reasons for actions, rather than sources of confident guidance.

The current portfolio adopts a 50/50 weighting of international and domestic stocks in reliance two main sources, a 2013 paper by Klement et at that looks as the optimal balance using Australian data from 1970-2012, and a Vanguard allocation paper which used 1988-2011 Australian data to form its conclusions. Further details of these findings are set out here.

Importantly, neither of these papers adopted the global ‘country agnostic’ approach of Anarkulova.

That is, they are each reliant on past characteristics and embedded relationships of Australian and international returns remaining stable. The Anarkulova data does not, potentially increasing its robustness to futures which look different from the past, in terms of the structure and sources of returns. Put another way, if the future relationship between Australia’s equity market and the global markets is equally likely to look like the relationship of other developed markets and global equity markets, this latter paper may be more informative of optimal strategies, at least prospectively.

Currently, the portfolio has around 6.6 per cent of its total value in bonds, down from more that 26 per cent at the commencement of this record. In fact, this month an interesting milestone was passed. For the first time on the journey to date, for every $1 in bonds held in the portfolio, there is now more than $10 in equities. So, for the moment at least, the portfolio strategy chosen aligns with this aspect of the findings of the new paper.

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 $7,300 per month.

By contrast, the moving average of distributions (the blue line) continues a decline that has been in evidence throughout 2023, to around $8,200. These past distribution figures have undergone minor revisions, to be based on actual outturn distributions, rather than projections, up to the period December 2023.

The total ‘gap’ between distributions and total expenses is now just $900 per month, compared to around $2,000 per month in early 2023.

Progress

Measure	Progress
Portfolio objective – $2,870,000	120%
Financial portfolio income as % of total average expenses (2013-present) – $88,200	106%
Target equity holding in portfolio – $2,300,000	101%
Financial portfolio income as % of target income – $99,000 pa	94%

Summary

A month ago the portfolio target, and even more critically the portfolio’s equity target were reset, to preserve in real value terms the intended post-FI income level.

At the time, this implied at least a few more months of equity growth, reinvestment and savings to meet the target, raised by $100,000. That target is now unexpectedly met, at least while present market valuations persist.

Should this continue to be met in coming weeks it will mean a turning in the activities of the portfolio from accumulation of new equity based assets, to the securing of cash reserves to serve as a cash buffer of one year’s expenditure.

There will be no new investments in the portfolio, and depending on the capital values of the equity segment of the portfolio at those points, there may even be no re-investment of March or June dividends.

Plans for funding possible large lump sum investments, such as any housing repairs or upgrades will also come into great focus.

Increasingly the task will be a more practical and organisational one of setting in place the means of meeting these, with either assets that sit outside of the portfolio, or in some cases, through the liquidation of some of the small ‘sub-scale’ asset holdings, such as the amounts built up in the higher fee vehicles such as Raiz and Spaceship.

This sense of the end of focused accumulation being in prospect has also dissuaded me, for now, of experimenting in the use of the Vanguard Personal Investor vehicle, which could in theory save some brokerage transaction costs in any acquisitions from here. The difference this would make is marginal and theoretical if no regular further equity investments are needed. And so for now I will continued my current approach.

No doubt this new environment will feel strange and otherworldly, compared to continuing a routine of material fortnightly investments established as early as March 2001, in the case of the largest Vanguard index fund.

Yet I am also the same person who put in place the set of arrangements to enable this end. Changing from one state to another is not a technically different task – even if it may present novel emotional, mental and intellectual aspects.

The portfolio has remained a little in the background as the journey’s end has been formally reached on paper.

This month, I enjoyed Big ERNs cautionary look at some aspects of the Die with Zero approach to retirement planning. My interest in history, with only the loosest and most speculative links to future portfolio outcomes, has been a relatively greater focus.

An example of this has been a close rereading of Sean McMeekin’s Stalin’s War, reading Richard Overy’s Blood and Ruins: The Great Imperial War 1931-1945, and a viewing of the 1988 Adam Curtis series on American and British relations, ‘An Ocean Apart’. As British leaders declare that the world is moving from a ‘post-war’ to a ‘pre-war’ world, such works have an ominous and heavy relevance to the conditions that might lay ahead.

Truly, there are years that ask questions and years that answer them.

The years of the journey up to now have posed and reposed the same question in different forms: was this – financial independence – a possible and realistic goal? Can it be achieved, in the real world of variable market conditions, inflation, and taxes?

This year be will be the year that answers this question, at least in tentative and contingent form – as the important ‘sequence of returns’ higher risk zone is tranversed. In some senses, the hazards of these last leagues in the voyage seem high, every gust holding the potential to develop into a storm. Yet, all the same, an answer, a verdict, will be delivered.

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.