Footfalls echo in the memory

Down the passage which we did not take

Towards the door we never opened

T. S. Eliot, Four Quartets – Burnt Norton

This is my forty-eighth monthly portfolio update. I complete this regular update to check progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars).

This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$787,739
Vanguard Lifestrategy Growth Fund	$44,262
Vanguard Lifestrategy Balanced Fund	$82,197
Vanguard Diversified Bonds Fund	$109,841
Vanguard Australian Shares ETF (VAS)	$262,908
Vanguard International Shares ETF (VGS)	$88,620
Betashares Australia 200 ETF (A200)	$255,235
Telstra shares (TLS)	$1,636
Insurance Australia Group shares (IAG)	$6,525
NIB Holdings shares (NHF)	$6,168
Gold ETF (GOLD.ASX)	$108,902
Secured physical gold	$17,569
Ratesetter (P2P lending)	$6,712
Bitcoin	$281,180
Raiz app (Aggressive portfolio)	$18,793
Spaceship Voyager app (Index portfolio)	$3,061
BrickX (P2P rental real estate)	$4,454
Total portfolio value	$2,085,802 (+$186,847)

Asset allocation

Australian shares	41.0%
Global shares	22.4%
Emerging market shares	2.1%
International small companies	2.7%
Total international shares	27.2%
Total shares	68.2% (-6.8%)
Total property securities	0.2% (+0.2%)
Australian bonds	3.9%
International bonds	8.2%
Total bonds	12.0% (-3.0%)
Gold	6.1%
Bitcoin	13.5%
Gold and alternatives	19.5% (+9.5%)

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

Comments

This month has seen the largest ever monthly increase in total portfolio in this four year record.

The overall portfolio has increased by over $186,000, pushing past the previous portfolio values achieved at the end of January. As a result, the portfolio has grown 9.8 per cent in total from the previous month, to reach over two million dollars for the first time.

The major contributor to the overall growth in the portfolio has been rapid rises in equity markets in the lead up to, and following, the US Presidential election.

There has also been a 29 per cent increase in the price of Bitcoin which has attracted further significant media and commentary.

The fixed interest components of the portfolio have remained stable, while the value of gold holdings has fallen around 10 per cent as other markets moved upwards.

The progress this month has come amidst one of the sharpest phases of growth in the entire journey. As an illustration, this growth represents over seven times the average monthly increase since 2017.

The chart below sets out the ‘shortfall’ to the current portfolio objective (in blue) since the beginning of this record.

A few short months ago, the distance from the final objective reached nearly $700,000. Yet now, at the right of this chart, a decided acceleration towards the portfolio finish line is visible.

Conversely, so are other markedly different periods – of years or half years – with little or no progress viewed in pure portfolio value terms.

These times were not wasted, however. They were employed in regular and steady accumulation of more exchange traded fund or managed fund units, which in turn underpinned sharply higher growth later. In those undistinguished valleys and reversals too, the journey proceeded.

Sailing out of trim – targets and actuals

The substantial progress made this month pushes to the fore some interesting questions to ponder around the nature of the portfolio objective.

For example: would crossing the portfolio objective ‘finishing line’ with an asset allocation quite different to the target allocation be a matter of little or great concern? And is it actually realistic to seek to avoid it?

In theory, if the target asset allocation in the portfolio plan was being perfectly met, reaching the portfolio target would imply an equity holding of around $1.63 million. While currently I am about $95,000 short of the overall portfolio target, current actual equity holdings are more than $200,000 short of this final target holding.

One possible response to these circumstances would be re-balancing as the target was reached, or gradually for a period after, however, this would have significant capital gains tax implications.

Broader allocation issues to consider also arise, around future investments.

A milestone of sorts was reached this month. This was the fixed interest portfolio, in dollar terms, falling further behind its target allocation amount than global equities.

This development means that there is an arguable case that future investments and rebalancing should be directed in order of priority first to Australian equities, second to bonds, and thirdly to global shares. This is the first time this position has ever occurred in the entire journey.

So far this observation has not changed any real world investment decisions.

At the moment both investment and re-investment of portfolio income decisions are targeted to the the most out of balance asset class measured by percentage, not dollar terms. This continues to drive new investments to equities. Over time that could change.

Applying this policy this month led to continued purchases of Vanguard exchange traded funds, with units bought in each of the international shares (VGS) and Australian shares (VAS) funds.

The changing cost of retirement

This month saw the release of the Federal Government’s independent review of retirement income, which has re-triggered public debate about the future of Australia’s superannuation scheme.

The lengthy report is full of fascinating data and insights on the performance of, and expectations from, typical retirement savings plans.

Early retirement is not by any means its focus, but it does touch on relevant issues for early retirees, such as drawdown and ‘bucket’ strategies. A further area of interest is a comparison of the strengths and weakness of ‘replacement’ and ‘budget’ approaches to retirement income setting (Section 2C). The report even reviews survey evidence of happiness after retirement (with 62 per cent reporting ‘better’ or ‘much better’ happiness).

In contrast, there is one critical underlying trends the retirement income report does not discuss in any detail, but which has fundamentally changed the pursuit of financial independence in the last thirty years. This is the slowly changing ‘price’ of financial independence itself.

The changing price is starkly evident to any reader of one of the classic texts of financial independence, Your Money or Your Life. In this book the model for early retirement is largely based on a portfolio of government bonds, as providing adequate and steady income for the early retiree.

Availability of US Treasury bond returns of 6 per cent is simply assumed in the book as a natural and unchanging order of the universe. This provides the basis for the provision of a safe ‘perpetual’ income stream for anyone that has reached financial independence.

Yet this particular assumption now looks like a historical anomaly or anachronism.

Bond rates have, over the course of the last 40 years, collapsed. This matters to seekers of financial independence in one simple way: the effective ‘price’ of financial independence has gone up. Put another way, over the last decade or so inflation covering a basket of goods and services has been low, but the price of early retirement has experienced the opposite, and significant inflated.

Measuring ‘inflation’ in the cost of income

To see this, consider the ‘price’ of retirement in the following way – what is the cost of purchasing a given income stream to sustain living expenses?

One way to think about this question is to consider the total cost to purchase a risk-free stream of income to produce a given income.

The table below sets out the median income of 10-year Commonwealth government bonds in the 44 years from 1969 until shortly after the global financial crisis, and in the past seven years (RBA). Assuming my own target of an $87,000 per annum income target, the right hand column sets out the cost of purchasing a completely risk-free stream of income that meets this target.

Table – Changing prices: the inflating cost of retirement

Period	Average 10-year bond yield	Cost of income
1969-2013	5.86 per cent	$1,484,000
2013-2020	2.63 per cent	$3,308,000

This provides an illustration of just how much the ‘price’ of a risk-free income in retirement has inflated in recent years. In fact, the cost has more than doubled.

The example is simplified and has limitations. For instance the yields are in nominal rather than in real terms. In addition, funding a retirement income stream from risk-less government bonds is an extreme position.

Yet the significance cannot be missed.

The price of achieving financial independence for a given level of risk has risen. It is true that investment in equities or other higher risk assets will form the basis of most financial independence plans. Compared to the average in the period 1969-2013, however, this inevitably means assuming more risk, most particularly, sequence of return risk.

Trends in average credit card expenses

Recent trends in expenses have shown little sign of changing.

As with recent months, average monthly expenditure on credit cards has continued to fall. The rolling average level of distributions since the beginning of this record is also falling, reflecting some larger one-off distribution payment in the data sample being excluded over time.

Looking to the more volatile monthly estimates, total expenditure continues to track at levels just above estimated distributions, while credit card expenses remain comfortable fully met.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,180,000 (or $87,000 pa)	95.7%	126.9%
Credit card purchases – $71,000 pa	116.7%	154.8%
Total expenses – $89,000 pa	93.5%	124.2%

Summary

This month I have been re-reading The Lords of Finance, a biographically focused history of the interwar period of European and US central banking and finance. It is a suitable reminder of the eternal challenges of dealing with uncertainty in markets and economic regimes.

Reinforcing this, progress this month has felt like a surprising and accelerated ascent towards the journey’s end. As prosaic individual numbers have been entered into the portfolio spreadsheet, combined they have quite suddenly start to approach what just eight months ago looked like a distant mountain peak.

It is clear this months progress, this pace, is not sustainable. The question is only if what comes next is a flatter period, reversals, or falls even perhaps as significant as occurred in March. Nevertheless, based on past movements it cannot be ruled out that in one or three months time an upward movement will see the unexpectedly early notional achievement of the FI ‘number’.

Adjusting to this series of ‘ifs’ is a new mental experience. After all, at a distance a target appears a fixed point, a binary point that one has either reached or not.

Yet, in fact the expanding cone of uncertain future outcomes appears wider than ever before, with investors hopes and expectations around future returns – according to this Schroders Global Investment report – being quite closely aligned.

This conclusion is surprising, and perhaps indicative that disappointment waits in the wings. So far, personally, however, this has not led to a desire to act to narrow that range of potential outcomes.

Rather than fear or a desire to ‘lock in’ the value of the portfolio by moving to more conservative allocations, in an elusive attempt to ‘crisis proof’ the portfolio, something else is playing out. I feel curious, impatient even, to know which particular door or passage will open ahead, revealing how this phase of the journey ends.