Adopt the pace of nature. Her secret is patience.

Ralph Waldo Emerson

Twice a year I prepare a summary of total income from my financial independence portfolio. This is my sixteenth portfolio income update since starting this record. As part of the transparency and accountability of this journey, I regularly report this income.

My primary goal is to maintain a portfolio of at least $2,870,000. This should be capable of providing a passive income of around $99,000 (in 2024 dollars).

A secondary focus is maintaining a minimum equity target of $2,300,000.

Portfolio income summary

Investment	Amount
Vanguard Lifestrategy High Growth (retail fund)	$20,096
Vanguard Lifestrategy Growth (retail fund)	$907
Vanguard Lifestrategy Balanced (retail fund)	$1544
Vanguard Diversified Bonds (retail fund)	$199
Vanguard Australian Shares ETF (VAS)	$8,149
Vanguard International Shares ETF (VGS)	$18,386
Betashares Australia 200 ETF (A200)	$4,622
Telstra shares (TLS.ASX)	$48
Insurance Australia Group shares (IAG.ASX)	$127
NIB Holding shares (NHF.ASX)	$180
Raiz app (Aggressive portfolio)	$316
Spaceship Voyager app (Index portfolio)	$0
BrickX (P2P rental real estate)	$16
Total Portfolio Income – Half-Year to June 30, 2023	$54,993

The chart below sets out the income or distributions received on a half-yearly basis from the financial independence portfolio over the past eight years.

The following pie chart is a breakdown of the contribution of each major current investment in the portfolio to the total half-yearly distributions.

Comments

Distributions in the half-year to June 30, 2024 have totalled just under $55,000 – equivalent to around $9,165 per month over the past six months.

These distributions are slighty above, in aggregate, the expected half-year results based on median estimates of past distributions.

Distributions have risen consistently for the past three half-year periods, and these June results constitute the third highest half-year distributions in the record.

Despite this, it is notable that they are not appreciably different in overall level than June distributions received even as far back as June 2017, which was only the second ever portfolio income report. Such a comparison needs to recognise, however, that these earlier distributions at a similar level likely included a component of realised capital gains, rather than true ‘income’.

The portfolio has now reached a state of relative stability in its component parts.

Past portfolio income reports have focused on the increasing proportion of income from exchange traded funds, as incremental new investments boosted their role in the portfolio over time.

Now, however, with only episodic new investments being made either in Plenti Capital notes, or in cases where the capital value of the equity part of the portfolio dips below its target ($2.3 million), there will not be such significant shifts in the composition of distributions to note.

Rather, outside of future incremental simplifications, the major building blocks of the portfolio will stay roughly as they are, with only evolving market movements through time shifting their component parts around modestly. These future simplifications may include the closing of Raiz and Spaceship accounts, and possibly the elimination of some smaller direct equity holdings.

For the 2023-24 financial year as a whole, distributions of $94,531 were received. This is about 6 per cent above the median forecast of around $89,000.

The chart below highlights that the June distributions (with 2024 actuals and projections in grey) continue to be the single largest set of payments received through the year.

This remains the case even as payouts in the first and third quarters flowing from those exchange traded funds (A200, VAS, VGS) that pay out on a quarterly basis have increased over time.

From seed to tree: reviewing trends in the levels of portfolio income from 2000 to 2024

The close of financial year provides an opportunity to look back at longer term trends in portfolio distributions over the past 25 years.

Across the financial year just past, portfolio distributions of just over $94,000 were received, or around $7,900 per month on average. This is the third highest level of payments in a financial year in the record.

The chart below gives the full history of total portfolio distributions in nominal dollars, with green bars indicating the period covered since the start of this record.

The red dotted line tracks the average level of the portfolio through each financial year.

Generally, there has been a reasonably close correlation between portfolio size and the level of distributions. The exceptions to this have been years of unusually high distributions, at times likely impacted by paid out capital gains, or the deferral of dividends in the early phases of the pandemic.

For simplicity the chart above only tracks nominal dollars through time, ignoring the impact of inflation.

This approach means it mildly overstates the ‘real’ value of recent distributions and portfolio values, or put another way, understates the purchasing power of those distributions received earlier in the journey.

Distributions in both nominal and real inflation adjusted terms have been heavily back-ended, with low values at the beginning of the journey as the portfolio size was smaller, compounding towards later years.

Around 68 per cent of the real (inflation-adjusted) value of all distributions received have been received in the past seven years of a 25 year investing journey. Distributions received represent around 30 per cent of the total portfolio value at the end of the year.

Looking across the past five years, there has been some volatility, but the average of annual distributions has sat at around $92,000.

Work of an hour: an alternative perspective on portfolio income from 2000 to 2024

An alternative measure I have used to consider the level of distributions in recent years has been as the equivalent of an hourly ‘wage’ produced by the portfolio.

The chart below sets out the amount of portfolio distributions received per hour, spread across every hour of the night and day of a full year. It therefore reflects portfolio distributions received regardless of whether I slept or worked, arising purely from private investments held.

For the past financial year, this shows that the portfolio continued to produce distributions of $10.79 per hour, regardless, every hour of the night and day across the past 12 months.

Or as another way to consider the distributions payouts, the silent and uncomplaining portfolio ‘worker’ has earned around $48 per normal working hour through the last year, which is about the current (mean) average pre-tax Australian ordinary earnings hourly rate.

Continuing changes in the composition of portfolio distributions: 2017-2024

As noted earlier, since 2018 there haas been a trend of a slow change in the relative composition of portfolio distributions away from the Vanguard retail funds, and towards distributions from ETFs.

The chart below sets out the different level and components of half-year to June 30 period over the last eight years.

Broadly this shows that the four Vanguard funds held are playing a less significant role over time.

The chart below provides the same comparison, but across the full financial years. Once again, the growing role of ETFs.

One of the unusual outcomes of the past financial year has been the significant level of distributions from the Vanguard Global Shares ETF (VGS) – at $25,283. This has accounted for more than a quarter of all distributions, despite international shares usually having much lower levels of dividend payouts.

Here, there is likely either a currency movement impact, a distributed capital gains, or a index rebalancing event in play, and I do not expect this result to be repeated soon.

The pie chart below highlights the same broad shift around the make up of distributions, with 59 per cent of distributions over the last financial year flowing from the exchange traded funds, and only 41 per cent originating from the Vanguard retail funds.

Taking a longer view on the changing composition of portfolio distributions

For a longer view on the performance and pattern of distribution components over time, the chart below sets out the level of, and changes in, major components of portfolio distributions over the past 25 years.

The key feature of this chart – especially over the past ten years – has been the high and variable distributions from the Vanguard High Growth fund (teal).

It is important to note that these distributions often contain significant paid out capital gains that occur due to fund rebalancing or fund redemptions, and so do not represent pure passive ‘income’ on invested capital. These paid out capital gains are especially present in some of its recent peaks in distributions.

Over the past two or three years, the variability of the High Growth distributions has somewhat moderated, potentially in part a function of the movement into newer structured versions of the funds.

In addition, the rise of ETF distributions into a position of making a material contribution to the portfolio distributions can also be seen.

Distributions from the VAS (purple) and A200 (blue) exchange traded funds are clearly visible, but most dramatically this is also apparent from the recent growth in VGS (grey) distributions to be the second highest line in the chart.

Portfolio distributions and expenses: reaching the cross-over point, the wrong way

A common measure for tracking the achievement of, or progress towards, financial independence is the level of portfolio income compared to normal actual expenses.

The chart below sets out the proportion of estimated total expenses (recorded credit card expenses plus estimated additional annual fixed expenses) that have been met by portfolio distributions through time.

To filter out volatility of month-to-month variations, rolling three-year averages of both distributions and expenses are used in the chart.

This chart incorporates the latest distributions data and continues to demonstrate the trend in evidence in previous portfolio reports.

Falls in distributions, particularly since record highs in 2021 and 2022, together with a rise in expenditure, has led to a sharp and accelerated downward slope over the past 18 months.

Over the past month, it has now, as forecast fallen below 100 per cent, to 97 per cent.

Presented differently, the same trends can be seen when examining measures of the absolute dollar levels of distributions and total expenses.

This is shown in the following chart, which takes a three-year moving average of both distributions and total expenses up to the end of June.

This shows that the cross-over point has been reached, but in entirely the wrong direction, and it may be expected to continue for some time, perhaps until any strong lift in distributions.

The changing work for portfolio distribution payments

These June quarter distributions will provide around $33,900 of capital for either saving into a cash reserve or potential reinvestment over the next month.

This total is less than the full half-year total reported because March quarter distributions (of around $20,000) from a number of the funds and ETFs have been paid out.

Following my standard practice, I will set aside 25 per cent of the second quarter distributions to meet associated future tax liabilities, and quarantine these funds in a high interest saving account.

The remaining $25,000 is likely to be split between two functions.

• First, a cash reserve consistent with seeking to build a buffer of 12 months of normal expenses will contributed to – helping to meet my third pre-condition for permanently changing any work arrangements;

• Second, some will be set aside in a separate cash account for possible reinvestment in the market, should the portfolio’s equity holdings fall below the target of $2.3 million in a correction this year.

Any new investments will of course be directed based on my current asset allocation plan.

Reviewing the emergency fund: reduced role and level

Each half-year I review the level of the emergency fund, which is a cash reserve sitting outside of the portfolio.

This fund is currently notionally set at a level of providing the equivalent of one year of expenses equal to my Portfolio Goal target income of $99,000. It is designed to cover expenses in any unexpected periods without employment income or to help meet any major unanticipated expenses.

To set the actual level of the emergency fund, I estimate the gap between the target income and an estimate of average distributions (i.e the emergency fund is set equal to the portfolio target income minus expected full year distributions). This is to recognise that the role of an emergency fund focused on loss of employment income reduces as regularly accessible and paid out distributions increase.

In this case, the expected distributions estimate is reached by averaging three different estimation approaches.

The first is the average of the last five years of actual distributions. The second is the current method of projecting distributions from average per unit payouts, and the third is by applying the lowest payout as a percentage of total financial assets to the current balance of financial assets.

Applying this indicates likely forward distributions of around $91,000 per year that could be used in an emergency. This implies a target or required cash reserve of around $8,000, compared to the current level of $16,000.

My approach is therefore to reduce the cash reserve to this lower amount.

This continues a pattern of progressive reductions in the target value of the emergency fund, for example, from here onwards it will be less than a quarter of the target of $33,000 set five years ago.

Observations

This portfolio income report is the first to be released following the portfolio having full reached its overall target, as well as its secondary target of $2.3 million in equities.

As noted in the most recent report in December 2023 , a turning point is being reached with these portfolio income reports.

They continue to offer concrete evidence of the journey so far. Yet with no systematic new investments being made in the core equity portfolio, the portfolio income from here can be expected to ‘level off’, and grow less visibly than in past years.

This means the report becomes a kind of regular check of trends in underlying income generation from the portfolio, rather than as critical measure of progress towards a distant goal. Issues of the particular sources of the total portfolio distributions, and their relative contribution from half-year to half-year recede in importance and interest.

Over time, the portfolio income, in theory, should at least keep pace with inflation.

It does not, of itself, need to fully meet the portfolio income target of $99,000 in 2024 dollars, as I am comfortable with some level of selling down capital gains in years where income falls beneath this level.

It is of note that this is my twenty-fifth year of recording distributions received.

They have evolved from a tiny shard of additional income ($327 per year), to now being a significant economic generative force of their own, pushing forward the momentum on the journey.

Despite recording such outcomes before, the fact that distributions have met around 99 per cent of all credit card charges since 2013 – and delivered an hourly boost of $7.73 night and day over the same period – is still remarkable to consider.

Over the next year, based on past distributions the portfolio can be expected to generate around $89,000 per annum, well above the median Australian wage.

As I contemplate this, what is interesting to think about is how this generative process from the portfolio can help underpin a life that is gradually adjusted over time to include more time for thought, reflection, gaining knowledge, and truly exploring and trialling different modes of life.

During a cost of living crisis facing many, with heavy pressures on many, this feels like an almost impossible to contemplate luxury, and it is one for which I am grateful.

This outcome is a function of thousands of decisions, transactions, choices over the past 25 years.

In this sense some of the pace of nature has been present, and through a long phase of patient preparation quiet progress has been made. From here, hopefully, that same powerful patient force, drawing on the bounty of those past choices, will continue to carry the journey forwards.

Explanatory Notes

Income distributions reported above do not include associated franking credits. My current preference is to seek to track cash actually delivered to my bank account as a tangible and easy to calculate measure. Last financial year franking credits valued at approximately $14,000 were received from all shares, ETFs and Vanguard retail funds, bringing the total half year distributions on a notional ‘pre-tax’ basis to approximately $68,000.

For analytical simplicity some composition of distributions graphs exclude the small amount income from smaller holdings such as Plenti, IAG, NHF and Telstra, as well as Raiz, and Spaceship. The total income excluded by this approach ($911) constitutes less than 1.7 per cent of the total income received over the period.

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.