Still round the corner there may wait

A new road or a secret gate,

And though we pass them by today,

Tomorrow we may come this way

And take the hidden paths that run

Towards the Moon or to the Sun.

J.R.R Tolkien, ‘Walking Song’, The Lord of the Rings

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

As discussed in my recent post, my primary goal is to maintain a portfolio of at least $3,000,000 which is capable of providing a passive income of around $103,500 (in 2025 dollars).

Portfolio income summary

Investment	Amount
Vanguard Lifestrategy High Growth (retail fund)	$11,622
Vanguard Lifestrategy Growth (retail fund)	$497
Vanguard Lifestrategy Balanced (retail fund)	$792
Vanguard Diversified Bonds (retail fund)	$279
Vanguard Australian Shares ETF (VAS)	$10,919
Vanguard International Shares ETF (VGS)	$5,797
Betashares Australia 200 ETF (A200)	$6,146
Telstra shares (TLS.ASX)	$48
Insurance Australia Group shares (IAG.ASX)	$215
NIB Holding shares (NHF.ASX)	$168
Plenti/Ratesetter (P2P lending)	$3,052
Raiz app (Aggressive portfolio)	$324
Spaceship Voyager app (Index portfolio)	$0
BrickX (P2P rental real estate)	$13
Total Portfolio Income – Half-Year to December 31, 2024	$39,872

The chart below sets out the 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

This half-year to 31 December 2024 the portfolio produced total distributions of $39,872, or around $6,600 per month over the past six months.

As occurred in 2023, this is the second highest amount of distributions paid out for this December half-year period (after the equivalent period in 2020). It only narrowly exceeds, however, the payouts for the same period last year.

The full calendar year distributions were $94,957, which is the third highest level ever over the period 2000-2024.

This calendar year result was around 9 per cent higher than the estimate made a year ago (of around $87,000), which was based on past average distribution rates per unit for the Vanguard retail funds and exchange traded funds.

Part of the reason for this is that that forecast did not include significant income which was to flow through 2024 from the investment of $89,000 in Plenti Capital notes. This has, in the event, produced $3,400 of income.

As it largely designed as an opportunistic holding investment for otherwise excess cash, I have not included this income in my simplified reporting which accounts for the Vanguard funds and equity-based ETFs, but excludes smaller individual share holdings, and amounts held in micro-investing apps Raiz and Spaceship. Together, these which typically constitute much less than 5 per cent of all distributions.

This means there may be some small variances between the full figures reported in the table above and some of the graphs and projections that are based on data in the simplified set of Vanguards and equity ETFs.

The relatively recent pattern of a ‘flattening out’ of the levels of portfolio distributions across the year can again be seen in the chart below, in particular through the growth from year to year in Quarter 1 (March) and Quarter 3 (September) in particular.

This has arisen from increased investments over time in ETFs paying out on a quarterly basis, and the automatic shift in Vanguard legacy funds to newer funds with quarterly payouts.

Long-term trends in portfolio income: 2000 to 2024

The end of the year permits a longer-term perspective to be given, which covers the entire financial independence journey to date.

This calendar year just passed distributions totalled around $95,000 – or approximately $7,900 per month.

This the third highest level of calendar year distributions on the entire journey, and is around the mean of the last five years of results.

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

The red dotted line (the RHS axis) tracks the average level of the portfolio across each year.

There are now twenty-five years of data in the above chart reflecting a sustained investment journey from the early years of my professional career until now.

Over that time, the types of investments and market conditions have changed substantially. Within each of these bars is income generated by an changing mixture of funds and fixed interest investments, across a variety of markets and conditions.

From the above, it can be seen that measures of portfolio value have visibly ‘delinked’ from distributions in the past year – likely because the portfolio value is reflecting the recent growth in the value of Bitcoin.

Over the past five years, the median average annual distribution has been around $83,000 while the mean average has as mentioned been around $95,000.

There remains a heavily compounding feature to the timing of distributions. Around 75 per cent of the nominal value of all distributions has occurred since 2017, and over 40 per cent in the past four calendar years.

As in previous reports, it should be noted that for simplicity the graph above tracks nominal dollars and so mildly overstates the ‘real’ value of recent distributions and portfolio values compared to distributions earlier on the journey.

This slightly exaggerates the relative apparent significance of recent progress compared to earlier years, but it does not change the essential analysis.

The results for this year would seem to indicate a general tendency for the distributions to fall in a range of between $80,000 to $100,000 per annum, but with substantial temporary variations each year.

A changing composition of portfolio distributions: from 2017-2024

The individual composition of the portfolio distributions received over the past eight years of the journey continues to evolve.

Many of the trends evident here are slow moving, incremental, and have been discussed sufficiently in previous income reports.

They flow naturally from a focusing of all major new investments from 2018 to early 2024 into just three exchange-traded funds – A200, VAS and VGS.

In the half-year to December 2024, less than a third of total distributions came from the largest Vanguard fund, where once this fund essentially defined the level of overall portfolio income, due to it making up 60 per cent of the portfolio.

The chart below shows this slow evolution in action – setting out the different level and components of each of the past eight calendar years.

For a different view of the same data for this year, the composition of the full 2024 calendar year distributions is set out in the pie chart below.

Longer-term perspectives on the changing composition of distributions: 2000-2024

A different perspective on the same processes, applied across a longer time period, is provided by the chart below.

This details the level of, and changes in, major components of portfolio distributions over the past two decades.

The dominating feature of this chart remains the high and variable distributions from the Vanguard High Growth fund (teal).

These often include a large element of paid out capital gains arising from fund rebalancing to meet allocation targets, or fund redemptions, neither of which are pure investment income generation.

Over the past four year distributions from the VAS (purple) and A200 (blue) and to a lesser extent VGS (grey), exchange-traded funds have continued to grow to become become significant in their own right.

The Vanguard international ETF had an exceptionally high payout in June of this year, potentially driven by capital gains and currency impacts, but has since returned to more normal levels.

One other just noticeable difference this year is the re-emergence of interest income to be a visible contributor with the Plenti Capital note – marked in darker blue. Earlier parts of that line also represent interest income, mostly from Plenti peer-to-peer lending or other high interest savings accounts.

Hidden path or secret gate: estimating 2025 portfolio distributions

In this report a simplified approach is taken to presenting estimated future portfolio distributions.

With the general trend towards a fairly stable level of quarterly payouts over time and no new investments being made, there does not appear to be as significant value as previously in breaking down estimated distributions by quarter.

The chart below instead is a new one that aggregates forecast quarterly distributions into a full calendar year estimate.

As mentioned, this chart sets out forecast distributions based on median payouts from the Vanguard funds and equity ETFs only. It does not include, therefore, expected interest income from the Plenti Capital notes, which might be expected to be around $8,000 over 2025.

Generally, the forecast suggests portfolio income of around $89,000 for 2025, or around $97,000 if the Capital Note income is included.

A new road: a ‘working hours equivalent’ perspective on portfolio distributions

In past entries I have discussed the perspective of the portfolio itself as a invisible and virtual substitute ‘worker’, tirelessly labouring to generate income through the year.

The chart below shows the development of annual portfolio income over the journey, calculated on an hourly basis, i.e. the per hour ‘earnings’ of the portfolio, counting each and every hour of the year.

The second way to view the same data is by considering the ‘earnings’ of the portfolio within only normal working hours.

This assumes that the portfolio only produces earnings in hours in which an ordinary worker would – so it equates to approximately the standard pre-tax hourly ‘wage’ the portfolio is able to produce.

Over the last year, actual ‘per working hour’ earnings have been around $48, up from around $39 last year.

A road uphill or down: estimating constant dollar trends in portfolio distributions

Yet what is evident from the nominal ‘per hour’ charts above is that the portfolio has produced an uneven pattern of distributions.

In the last few posts, a consistent theme has been the substantial and sometimes less visible – at least in some FI content and commentary – challenge of sustaining a stable real income from a portfolio of assets. It is a difficulty sharply exacerbated in periods of inflation, or monetary growth.

Curious about the performance of the portfolio in this regard, I transformed the nominal distributions per ordinary working per hour chart above into constant 2023 dollar terms (inexactly) using the RBA’s inflation calculator, with the result for 2017 to 2024 below.

Looking at this, two points are clear.

• First, there is a good deal of variation year to year (reflecting the simple mathematical relationship of this hourly ‘ratio’ to total distributions which themselves varied).

• Second, there is only a small discernible upward trend (red dotted line) over an eight year period when measure in constant dollar terms. This is despite the underlying financial portfolio producing this income growing from $970,000 to $2,719,000, or around 2.8 times, through the period. That is, eight years ago a portfolio of around the third its current size was producing a higher real portfolio income – $49.92 per working hour – compared to 2024, around $48.06.

On its face, this second point is a surprising finding.

Part of the answer to the conundrum of a much larger portfolio delivering less equivalent hourly income is likely the particular pattern of capital gains payouts during this period.

In June 2017, for example, Vanguard’s high growth fund paid out nearly $38,000, and capital gains for 2017-2018 were around $47,000 in total.

This will have had the impact of lifting the initial 2017 figure, and, as capital gains reduced in subsequent years, suppressing the result. A similar anomalously high capital gain for 2021 produced an even higher figure of around $69 per hour of ‘earnings’ in 2023 dollars.

To account for this impact in an approximate way, it is possible to produce the same ‘per working hour’ analysis using investment income as measured in taxation reporting terms, excluding reported capital gains.

This will have the effect of removing from consideration all capital gains made (which it should be noted, is not strictly consistent with the theoretical concept of total return investing).

The result of doing this is significant, as can be seen from the chart below.

What this appears to show is a far more linear progression, as might be expected given the portfolio growth over that period.

For the last financial year, it shows an per hour rate of $45.32, nearly double that of eight years ago. This is a more intuitive result, given the portfolio grew between 2 to 3 times over that period.

A couple of other factors are also likely impacting on the trend of income from the portfolio, outside of portfolio size and capital gains.

• One is a generally low level of interest rates through the middle part of the period between 2016 to 2024.

• A second is the concerted move to increase foreign equities exposure from the middle of 2020 to the beginning of 2024. Due to lower dividend payouts than Australian shares (an average approximately around 2-3 per cent versus apprximately 4 per cent), this would be expected to lead to portfolio income increasing at a lesser rate than during 2017-2020, where new portfolio investments were mostly placed in domestic equities.

Finding the long-term average distribution rate for the financial portfolio

The other clear factor disconnecting portfolio payouts from portfolio size is the increasing proportion of the portfolio made up of Bitcoin.

To identify the effect of this overall, as well as to see the long-term trends and variations of the average rate of distributions as a percentage of the portfolio (an average ‘yield’ of the portfolio), the below chart sets out the record from 2000 to 2024 on two different bases.

First, a red line tracks the distribution rate of the traditional financial portfolio – with Bitcoin removed. The second blue line tracks the distribution rate of the whole financial independence portfolio, with the zero-yielding Bitcoin holding included.

The findings from this approach are illuminating.

There is a steady trend distribution rate of about 5 per cent for the traditional financial portfolio, despite changes across 25 years in portfolio allocations, composition, and previaling interest rates.

The impact of including Bitcoin in the estimation is to lower the trend rate of distributions by about one percentage point, with this effect becoming significant from around 2018 onwards.

Round the corner: using the portfolio distributions

Based on distributions announcements for the exchange traded funds A200, VAS and VGS and the December distributions from the Vanguard funds, there will be approximately $20,000 of capital available for use over the next two weeks.

This sum is less than the full half-year total reported above because September quarter distributions from a number of the funds and ETFs have already been paid and were added to cash reserves.

I intend to set aside around 33 per cent of these payments in cash to meet future Pay As You Go Instalment tax liabilities.

The remainder I provisionally intend to hold in a high interest savings account, for potential use in any equity market down-turn, as mentioned in my review of my investment plans.

If this should occur, I would invest either in domestic or foreign equity ETFs (VAS or VGS) in a way to seek to keep these each in equal balance over time.

Passing by today: the dwindling need for a formal ’emergency’ fund

Every six months since 2017 I have reviewed the level of my required emergency cash reserves, which in the initial stages of the journey were based on having a years expenses separate and outside of the portfolio.

This has been to cover any unexpected periods without employment, or large unanticipated one-off expenses.

With the reaching of the target, however, the potential functions or at least appropriate descriptor of this fund shift somewhat. Put simply, an entire loss of employment income would not constitute any kind of emergency where the portfolio sits above its target.

It now might be conceptualised in a way as an absorbing ‘buffer’ between the the volatility of portfolio distributions, and ordinary expenses, with sufficient liquidity to meet one-off contingencies so as to not require the sale of any portfolio assets in case of major unexpected expenses.

The fund for last year was notionally set at a level of providing the equivalent of one year of expenses equal to my then Portfolio Goal target income of $99,000. This year I will use the estimated expenses over the past three years, of $99,600.

I determine how much cash is required for the emergency fund by reference to the gap between an estimate of average distributions and the target income (i.e the fund is set equal to the portfolio target income minus expected full year distributions).

For this input estimate of expected full year distributions, the average of a raw five-year average of annual distributions, an alternate estimate based on average per fund or ETF unit distributions, and long-term estimates of total distributions as a percentage of the portfolio.

These three approaches combined indicate likely forward distributions of around $95,300 per year that could be used to meet expenses, leaving a gap or notional fund level needed of around $4,000.

The emergency fund set in July last year was $8,000, and it is currently at this level. My approach is therefore to reduce the cash reserve to this lower amount of $4,000. This is down from $33,000 in 2020, continuing the pattern of growing distributions enabling reduced emergency reserves.

As noted, while the emergency fund is dwindling away over time in importance and size, portfolio distributions over the past year have been directed towards a more general cash reserve. This general cash reserve has the above discussed goal of enabling a years expenses being able to be met in liquid form without needing to be concerned about the quarter to quarter volatility and the precise timing of portfolio distributions.

In addition to this there is a small contingency fund (currently of around $22,000) designed to meet unexpected one-off expenses without compromising the functioning of the general cash reserve. Neither of these funds make up a formal part of the reported financial independence portfolio.

Observations

The first portfolio report written eight years ago was five paragraphs long, and contained exactly one graph.

It tracked the overall level of distributions over the half year, and recorded that investments at that time produced around $1974 per month.

Much has changed since that time, in particular, a curiousity to understand the trends, likely future levels, and changes in components of portfolio distributions has led to longer reports over time.

They have become moments to pause and reflect on the progress in the journey, as well as to better understand what might happen next that was relevant for the financial goals set.

This means the current portfolio report is built on the concerns and curiosities along the journey so far. Many of these have dropped away as the portfolio goal has drawn near, and then been met. It is easy to produce the same data and charts, and for consistency through time and for the interest of readers, it is provided.

The original purpose of the record is to test the thesis that financial independence from a diversified portfolio is achieveable in practice, and documenting the actual experienced issues that occur along the way. Remembering this, analysis is of most utility when it helps answer the broad question: will the portfolio, by itself, produce sufficient real income to replace a targeted level of income sustainably through time?

This update seems to reinforce that the answer to this question is a tentative yes, so far at least.

The past year saw around $95,000 in total portfolio distributions. The past financial year saw investment income, excluding capital gains, of around $90,000, with an additional $13,000 of franking credits accruing.

Importantly, this finding seems to hold – so far – when the issue of maintaining real after-inflation ‘purchasing power’, as well as just in nominal terms is considered.

In constant 2023 dollars, the past five years of distributions have averaged around $94,000 – albeit assisted by some exceptionally high one-off distributions with capital gains or returns components in 2017 and 2021.

More specifically, an initial concern that the income generating potential of the portfolio was failing keep up with changes to real after-inflation prices appears to be provisionally not supported by the analysis of real ‘per ordinary working hour’ trend since 2017.

Instead, analysis would seem to suggest a long-term average distribution rate of around 5 per cent is a reasonable outcome to anticipate into the future, if the past represents any guide.

For the past few years, I have strained with data to look around this corner – to see whether there was indeed a new road or secret gate. With due humility to the fates who alone spin and measure the threads of the future, the ‘tomorrow’ of the walking song may have arrived. The hidden paths appear more visible today than yesterday, running on to the sun or moon.

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 $13,000 were received from all shares, ETFs and Vanguard retail funds, bringing the total half year distributions on a notional ‘pre-tax’ basis to approximately $53,000.

For analytical simplicity some composition graphs exclude small income from smaller holdings such as IAG, NHF and Telstra, as well as Raiz, Spaceship and Plenti. The total income excluded by this approach for most of the period has constituted less than two 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.

Note for readers

Over the last few months, there has been a noticeable degradation in the useability of my standard blogging interface. As an alternative, and because I am not interested in becoming a coder, plug-in or website management expert, I have created a rough and ready backup Substack and imported past posts. The formatting of past posts may not be as tidy as here, but should the blog ever seem to ‘disappear’ or cease, it will likely just be a signal that I have switched entirely to Substack and started posting there.