Through hardships and waves, We find the skies; The gods watch over the brave.
Virgil, Aeneid, Book III.192-195
This recorded journey towards financial independence started eight years ago, with an initial objective of building a passive income of $58,000 per annum by July 2021.
Since that time, goals have evolved and changed, with the most recent target being achieved from January 2024 onwards, as well as temporarily before that.
Each year in early January I spend time reviewing my investment goals and how I plan to reach them.
This post talks about reflections arising from this annual review, updates my portfolio goal, and reviews the measures and assumptions I will use. It also discusses how I will approach management of the portfolio and associated finances given the current achievement of each of my past portfolio goals.
The aim each year is to have a clear written record of the objectives, approaches and reasoning underlying the plan, to serve as a reference point through the year to come. The process also enables the updating of plans and assumptions for changes in circumstances, thinking, as well as available data and evidence.
The finding of the sky – a post-journey agenda
This year represents a markedly different period to contemplate than any since my journey begin, either in 2017, when this record began, or 1999, when the first investments were made, depending on how one counts.
It is the first year from which at the outset at least, it appears all of my past goals lay behind, achieved.
This could change overnight, with sharp and potentially extended movements in equity markets in particular.
From late 2021 to late 2023, for example, the portfolio went through phase of losses that meant it did not recover at its headline level for 23 continuous months. In the early months of the pandemic, market losses to the financial portfolio totalled around 16 per cent.
Similar losses occurring now would take the equity portfolio below its nominated target, and require further investments, or a strong recovery to reach it.
It is important to remember that other elements within the goal setting process take these possibilities into account. In particular, when a safe withdrawal rate is estimated, within its assumptions and tolerances is a historically observed pattern of drawdowns, which may include, sometimes, extreme periods of losses.
As an example, where a safe withdrawal is estimated over the last century, it will include consideration of outcomes where full retirement was taken in October 1929 (albeit, this may be included in the small ‘failure’ tolerance accepted).
This means that if one is to have full confidence in the concept of safe withdrawal rates, and one is satisfied that the historical run of experienced returns in the sample used to calculate the rate is an approximation of the worst that might ever be plausibly encountered, and one truly accepts the specified (if small) risk of ‘failure’ implied in a choice of a withdrawal rate, one might entirely ignore the risk of large portfolio losses the day or week of full retirement.
With this in mind, the immediate tasks are evolutions of the two set out last year, recognising that both have been currently achieved.
First, to provide for a reasonably assured passive income which is consistent in real after-inflation terms with the target chosen.
Second, to maintain reserves of cash that will be essential to future movement to entire reliance on investment returns and the application of the safe withdrawal rate to the portfolio over an extended multi-decade period.
Should financial markets fall substantially, it is possible I will use reserves in excess of the above requirement, as well as any regular distributions, to purchase new investment assets to restore in particular the targetted level of equity holdings.
Even as the sea threatens, he seeks the shore and safety
Homer, The Odyssey, Book V.297
Year in Review
This year just passed featured three main objectives to guide the journey towards financial independence.
First, a focus on maintaining the portfolio at a level above the portfolio target. A second object was achieving a minimum equity holding of at least $2.3 million. The third was reaching a cash reserve equal to typical total spending in a year.
Each of these objectives has been achieved through 2024.
They have been conditions for acting to change my working arrangements and plans. Through the last month or so, their achievement has allowed me to begin to move to do just that, and to set out a plan to step back to permanent part-time work, on an intellectually interesting project I continue to want to be involved in delivering.
The progress of the year can also be highlighted by recourse to the measures adopted at the beginning of the year. In each case, these have surpassed the target benchmark.
Measure
Progress
Portfolio objective – $2,870,000
116%→168%
Financial portfolio income as % of total average expenses(2013-present) – $88,900
102%→123%
Target equity holding in portfolio – $2,300,000
98%→114%
Financial portfolio income as % of target income – $99,000 pa
92%→110%
The portfolio itself has grown from $3.3 million to $4.8 million through the course of this year. This leaves the portfolio at more than double its nominal value of just four years ago.
That substantial expansion over this passed and prior years clearly reflects the growth in the value of Bitcoin holdings over time, as well as, to some extent, the increases in the value of gold holdings in the past several years.
This is highlighted by the chart below, which tracks the allocation to gold and Bitcoin at the commencement of each year, beginning from the first purchases of gold ETFs in mid-2009.
This recent growth now means that the combined contribution to the portfolio of both of these assets is sitting at an all-time high of 38.8 per cent, having previously being largely bounded between 10 and 25 per cent.
Yet, the most fundamental change has probably been the expansion of the equity holdings in the portfolio from $2.24 million at the end of 2023, to now approximately $2.62 million – around a $400,000 growth.
It is this which has ultimately given the confidence to make decisions around the shape of future work.
These diversified holdings across thousands of securities, in Australia and abroad are the bedrock of the financial independence journey I have followed. It is they that should, under most circumstances, provide income and capital growth to enable the protection of purchasing power into the future.
At the end of 2024 fixed interest instruments comprise around $327,000 of the portfolio, up around $100,000 since the beginning of the year.
Almost all of this recent expansion is due to the redirection of investments and distributions into Plenti Capital Notes. These are substantially more risky than a median bond holding, or cash, as indicated by the level of offered returns, at around 9 per cent.
This expansion means that the level of fixed interest holdings sits at its highlest level in absolute terms in the journey.
An overall picture of the impact of these changes on the portfolio allocation can be seen below.
Broadly speaking, each other portfolio component has been reduced in prominence by the striking growth in Bitcoin over time, rendering the portfolio a different proposition – at least temporarily – from that which has faced any new year to date.
Reviewing the progress of the year
During this quiet part of the year I have spent time thinking about my investment journey, and the decisions made as well as those to come. I have not spent time, however, reconsidering the fundamental investment allocation and risk choices made throughout.
Previously, each year would end with a careful review of any developments in data, studies or academic literature on asset returns and volatility, to inform my future investment policy and safe withdrawal rate estimates.
This year, that seems a redundant exercise.
As the portfolio and equity goals are met, studiously reviewing the incremental data and reports is unlikely to materially shift the result of a sustainable safe withdrawal rate, or if it did, such a change would in turn be unlikely to result in a change in the overall portfolio goal.
The principal change I am likely to make is to update the portfolio goal to maintain its value in real purchasing power terms against the relevant earnings benchmark. As an illustrative example, simply assuming 3.5 per cent inflation over the past year as a placeholder, this would result in a new target of $2.97 million, and an updated secondary equity target of around $2.37 million.
As can be seen, both of these target are already met. Yet the magnitude of the increases from this process of updating should give pause.
They point the way to the substantial difficulty at the heart of reaching financial independence sustainably over time – the general advance of the price level over years.
One question I have over the set of distributions due to be finalised in coming days is: will there be evidence of the preservation of purchasing power in the distributions themselves? That is, will they be appreciably higher than, for example, two or three years ago in nominal dollar terms?
Some early estimates from the Vanguard and Betashares ETFs are that they are appreciably higher, but this is yet to be confirmed.
Unlike previous years, these distributions will not be automatically reinvested over time, and their fate is yet to be determined. When they are confirmed, however, the distributions will also again be reviewed in a separate portfolio income report.
Monthly Portfolio Update – December 2024
This is my ninety-seventh 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).
A secondary focus will be achieving the minimum equity target of $2,300,000.
Portfolio summary
Vanguard Lifestrategy High Growth Fund
$910,564
Vanguard Lifestrategy Growth Fund
$46,264
Vanguard Lifestrategy Balanced Fund
$80,701
Vanguard Diversified Bonds Fund
$91,066
Vanguard Australian Shares ETF (VAS)
$551,071
Vanguard International Shares ETF (VGS)
$808,937
Betashares Australia 200 ETF (A200)
$319,282
Telstra shares (TLS)
$2,137
Insurance Australia Group shares (IAG)
$10,718
NIB Holdings shares (NHF)
$6,576
Gold ETF (GOLD.ASX)
$187,790
Secured physical gold
$29,510
Bitcoin
$1,653,703
Raiz app (Aggressive portfolio)
$25,155
Spaceship Voyager app (Index portfolio)
$4,337
BrickX (P2P rental real estate)
$4,713
Plenti Capital Notes Market Loan
$89,000
Total portfolio value
$4,821,524 (+$5,888)
Asset allocation
Australian shares
26.3%
Global shares
25.6%
Emerging market shares
1.0%
International small companies
1.3%
Total international shares
27.9%
Total shares
54.3%(-25.7%)
Total property securities
0.1%(+0.1%)
Australian bonds
3.4%
International bonds
3.4%
Total bonds
6.8%(+1.8%)
Gold
4.5%
Bitcoin
34.3%
Gold and alternatives
38.8% (+23.8%)
Presented visually, the pie chart below is a high-level view of the current asset allocation of the portfolio.
Comments
This month the portfolio has only slightly grown, expanding just 0.1 per cent, or increasing in dollar terms through the month by just under $6,000.
This comes after substantial growth in past month, and falls well with the typical daily – or even hourly – variation of the value of the portfolio.
This month saw a welcome reassertion non-correlation between the asset classes, producing a balanced result overall.
Australian equity holdings returned losses of around 3.0 per cent over the month.
By contrast, with currency impacts playing a role, international equites provided a positive return of around 2.6 per cent. Bond holdings were also negative during the period (with losses of around 0.4 per cent).
Bitcoin made a small gain through the month, again likely assisted by currency impacts of a devaluing Australian dollar.
Gold holdings increased in value by grew in value by 3.5 per cent. Remarkably, this means that on average the gold ETF holdings accumulated since 2009 have outperformed all equities purchased over the same period, Australian and global.
