Consider the subtleness of the sea; how its most dreaded creatures glide under water, unapparent for the most part, and treacherously hidden beneath the loveliest tints of azure.

Herman Melville, Moby Dick

This is my eighty-ninth 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	$829,474
Vanguard Lifestrategy Growth Fund	$42,725
Vanguard Lifestrategy Balanced Fund	$75,673
Vanguard Diversified Bonds Fund	$88,028
Vanguard Australian Shares ETF (VAS)	$505,498
Vanguard International Shares ETF (VGS)	$701,541
Betashares Australia 200 ETF (A200)	$297,692
Telstra shares (TLS)	$1,956
Insurance Australia Group shares (IAG)	$8,159
NIB Holdings shares (NHF)	$8,940
Gold ETF (GOLD.ASX)	$159,700
Secured physical gold	$25,127
Bitcoin	$1,079,961
Raiz app (Aggressive portfolio)	$22,918
Spaceship Voyager app (Index portfolio)	$3,920
BrickX (P2P rental real estate)	$4,547
Plenti Capital Notes Market Loan	$17,000
Total portfolio value	$3,872,859 (-$176,669)

Asset allocation

Australian shares	30.2%
Global shares	28.2%
Emerging market shares	1.2%
International small companies	1.5%
Total international shares	30.8%
Total shares	61.0% (-19.0%)
Total property securities	0.1% (+0.1%)
Australian bonds	2.2%
International bonds	4.0%
Total bonds	6.2% (+1.2%)
Gold	4.8%
Bitcoin	27.9%
Gold and alternatives	32.7% (+17.7%)

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

Comments

This month has seen a signficant fall in the value of the portfolio, with losses of around $177,000 – or around 4.4 per cent.

This follows a strong period of growth of the last six months – and returns the portfolio to just above the level it was at around the end of February.

The portfolio losses this month were broad-based.

Bitcoin corrected following the ‘halvening’ event, down around 9.5 per cent, constituting the majority of the losses. From here, the halvening will act to restrict the growth of newly mined Bitcoin relative to the existing stock to below the historical growth in the supply of gold.

Australian shares also fell around 3.8 per cent, and now sit just above the sub-target for domestic equities – of $1.15 million. Some of this fall can be attributed to the paying out of distributions, but a significant element reflects less confidence on the path of future interest rate reductions.

Global equities also fell with prolonged concern around the pace of inflation reductions across the United States. This led to a fall in the value of international equties of around 3.0 per cent.

Towards the end of this month, Japan’s currency also experienced significant rapid depreciation, in circumstances where their prevailing debt position makes raising rates to defend the currency problematic. This event has the potential to send out waves of destabilising impacts to other developed economies financial markets.

Added to this, bond holdings in the portfolio performed poorly, with losses of 1.9 per cent.

Amidst this growing instability, the gold holdings performed extremely strongly, rising nearly 6 per cent. This is likely due to a combination of factors, but interestingly historical correlations between the inverse yield of US real rates and gold prices have recently broken down, portending that the future of rates may have little to no influence on gold prices in this current phase.

A further move from the US Congress to seize Russian central bank assets held in the United States, liquidate these, and use the proceeds to fund aid to Ukraine is also likely resulting in a longer-term re-appraisal by sovereign actors of the safety of US Treasury bills and bonds as a safe asset, and a continuing reinvigoration of gold purchases by central banks.

Taken together, these moves leave the overall portfolio above its target, but still in losses for the month. The financial portfolio (completely excluding Bitcoin) sits at around $80,000 below its target level.

First quarter distributions: actuals and further investments

Over this month the first set of distributions to be paid since achievement of the equity target were received. This created for the first time the question of how to allocate these distributions, which are now not needed to be reinvested to reach towards a final target.

The actual first quarter distributions came in mildly lower than the estimates last month, due to lower than average distributions from the Vanguard funds in aggregate.

This meant first quarter distributions were just over $20,000, rather than the projected outcome of around $22,000.

A quarter of these distributions were set aside for future tax liabilities under PAYG tax arrangements.

This month, using the remains of the proceeds of these first quarter distributions, I made an additional investment in a further round of Plenti Capital Notes, with an offered yield of 9.0 per cent.

A small market offering was made, and was completely fulfilled within around a week. This will form part of the Australian fixed interest component of the portfolio.

This move recognises that the equity portfolio, at the receipt of distributions, remained above the equity target allocation, and so further equity purchases were not required. So it is best viewed as a short term (the indicative term of the notes is around two years) placing of excess of cash to work at a higher risk level, to preserve its real value over time.

With a total of $17,000 currently invested these Capital Notes (around 0.4 per cent of the portfolio), should capital loss occur, it will not imperil the broader portfolio objectives. By contrast, when considered on an after-tax basis, the return from available bonus high-interest rate accounts is currently negative.

Trends in average distributions and expenses

This month the two year trend of the narrowing gap between the trailing average of total expenses and average distributions continued.

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.

This month as has been the case for two years average total expenses (red line) rose. These expenses now exceed $7,400 per month.

The three year moving average of distributions (the blue line) continues to decline, as it has since early 2023, to be at just under $8,000.

The total ‘gap’ between distributions and total expenses is currently just over $500 per month, compared to around $2,000 per month in early 2023.

Progress

Measure	Progress
Portfolio objective – $2,870,000	135%
Financial portfolio income as % of total average expenses (2013-present) – $88,500	109%
Target equity holding in portfolio – $2,300,000	103%
Financial portfolio income as % of target income – $99,000 pa	97.3%

Summary

Once again, this month financial market movements have been at the lower end of my priorities, with high levels of project work and a renewed pulse of work-related travel.

During some of this I have taken in several interesting historically focused videos on lessons for investors around finance market mistakes, and the impact of war and peace on financial markets and asset prices.

Heedless of my distraction, markets this month served their irregular reminder that no series of gains is likely to go unbroken, delivering a reduction in value that is the largest in nearly two years. After a sequence of large gains through the past six months, however, this felt less like a reversal of a tide, and more a natural, expected event.

The reaching of both the equity target, and overall portfolio target throws up a different set of practical issues, day-to-day cash management issues of a different order of complexity than portfolio design.

One of these is simply – what to do with cash formally invested from my ordinary income?

Generally, over time, the answer will be that – just like portfolio distributions – it will go to build up a target cash buffer of approximately one years expenses.

This month, however, I transferred some into my brokerage account, as the equity markets took a fall, in case I needed to invest an amount to restore my minimum equity holdings in international and Australian shares to their notional $1.15 million target.

Any large fall would probably see me resume for the moment monthly investments, to seek to restore the holdings closer to these targets. Yet, the realities of market movements are such that it is quite likely that should a significant bear market arise, for example, the holdings would not be able to be restored in this manner. Or doing so would take additional years of contributions, rather than months.

So even as I prepare to make small relative injections if required, I am under no illusion that the task of maintaining a single absolute ‘floor’ level of equity holdings is on its face realistic in a number of quite possible scenarios.

One of these possible scenarios is some form of market event like March 2020. Another is something akin to the Global Financial Crisis through late 2008 to early 2009. Geopolitically, the world is arguably more prone to shocks now than at any time in the past 20 years, which could cascade through financial markets.

Currently, equity markets would need to fall around 3 per cent, to take the equity portfolio below its target. This falls well within the normal expected monthly volatility of equity market indexes.

As Melville describes, however, one needs to consider and remain humble about what the darkness of the sea obscures. The dreaded creatures that might glide under one’s vessel, and which are hidden even amidst the tints of azure.

There may be larger hazards to yet run, in other words.

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.