The Athenians preserved the boat—a thirty-oared ship—on which Theseus sailed with his companions and came back safely until the time of Demetrius of Phalerus, changing out the older wood and replacing it with strong, new parts until the ship became a famous example to philosophers of the problem of growth. Some say that it remained the same ship, others claim it did not.

Plutarch, Life of Theseus, XXIII.i

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

Portfolio goal

My objective is to reach a portfolio of $2,585,000 by 31 July 2022. This would produce a real annual income of about $90,500 (in 2021 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$798,662
Vanguard Lifestrategy Growth Fund	$43,783
Vanguard Lifestrategy Balanced Fund	$80,032
Vanguard Diversified Bonds Fund	$104,634
Vanguard Australian Shares ETF (VAS)	$301,213
Vanguard International Shares ETF (VGS)	$131,409
Betashares Australia 200 ETF (A200)	$270,303
Telstra shares (TLS)	$1,812
Insurance Australia Group shares (IAG)	$5,929
NIB Holdings shares (NHF)	$6,276
Gold ETF (GOLD.ASX)	$100,378
Secured physical gold	$16,153
Plenti (P2P lending)	$4,565
Bitcoin	$848,070
Raiz app (Aggressive portfolio)	$19,793
Spaceship Voyager app (Index portfolio)	$3,180
BrickX (P2P rental real estate)	$4,533
Total portfolio value	$2,740,725 (+$251,033)

Asset allocation

Australian shares	33.6%
Global shares	18.5%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	22.1%
Total shares	55.7% (-19.3%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.8%
International bonds	6.1%
Total bonds	8.9% (-6.1%)
Gold	4.3%
Bitcoin	30.9%
Gold and alternatives	35.2% (+25.2%)

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

Comments

This month has seen a continued appreciation of Bitcoin dominating virtually all other portfolio developments, a trend that has been firmly in place since October of last year.

The value of Bitcoin holdings rising by $197,000 has pushed the portfolio above the financial independence target goal set three just months ago. In short, this has delivered an outcome in March that was intended to be only reached at the end July of next year. So the portfolio goal has been passed. Yet the gain underpinning this achievement is contingent and highly provisional.

Bitcoin’s value in the portfolio rose by another 30 per cent across the month, being the major contributor to the overall portfolio growing by $251,000. This is both the largest ever monthly change, and growth, of the entire journey.

The performance of other assets was modest in scale by comparison. Equities moved ahead this month, with global shares (5.8 per cent) performing slightly better than Australian equities (3.2 per cent). Both gold and bonds slightly decreased in value.

The end of this month means payment of first quarter dividends and distributions from the major exchange traded fund holdings and the Vanguard diversified bond retail fund.

Based on averages of available past distributions, these might normally be expected to deliver a total of around $4,400. Those announced so far seem broadly in line with past averages, if not a little above, but finalisation of the full payment amounts will not be available until next month.

This month applying the asset allocation policy resulted in further purchases in the Australian shares (VAS) fund.

Ending in the same ship, or a cage of words?

Last month I observed that under its own momentum, the journey seemed at risk of completing itself. And so it has transpired, at least temporarily. If this month has taught the world anything, however, it is that whatever its size, a ship is never truly safe, even if it is in the closest of waters.

This is even more true where the ship itself is made of different materials from the one that set out – like Theseus’ famed vessel. Due to volatility in Bitcoin, this journey could shift from complete to incomplete overnight. So while notionally representing an ‘ending’, this feels like a potentially temporary state, and the journey goes on.

The reason for this is simple.

While this month the portfolio has around $1.5 million in equities, this is more than $400,000 short of the eventual equity portfolio target – 75 per cent of the portfolio goal – of $1.93 million. For the reasons discussed last month, I am not attracted to undertaking a rebalancing operation to reach this target, and prefer to continue to invest to meet the equity holding target.

Nor to one place trusted – a diversification marker reached

This month has also seen the passing of a less obvious marker in the water. For the first time in the two decades of the portfolio, the majority of the portfolio is now in non-Australian dollar exposed assets.

This measure is estimated by adding the unhedged components of the global equity and bond portfolio, gold and Bitcoin holdings, and comparing that to the total portfolio value. The major components of the Australia dollar exposed assets held are Australian shares (the VAS, A200 ETFs and the Australian shares portion of the Vanguard Lifestrategy funds), and some hedged global equities also within the Vanguard retail index funds.

The proximate cause of the crossing of this threshold is the growth in the value of Bitcoin, with a small additional contributing factor of recent directing of international equity investments into Vanguards global unhedged ETF (VGS).

Since 2007 the average level of non-Australian dollar denominated assets has averaged around 35 per cent. It has only ever risen above 40 per cent at times of elevated Bitcoin prices. Since November however it has been pushed upward, and has now expanded to form around 52 per cent of total portfolio assets.

In a world of rather correlated domestic and global equity markets, it is worth not over-estimating the significance of this precise benchmark.

Previously, on now distant seeming international flights, as the Australian shore has slipped away under the aircraft, I have paused and considered the meaning of the measure. One simple way to conceptualise the significance of this one measure is – how much of the portfolio value exists beyond these shores? That is, how much is locked in businesses, assets, debt contracts – and now computers solving complex cryptographic puzzles – in the lands beyond?

Heading into the vast blueness that any international trip from Australia encompasses, emphasising the smallness of what lays behind, it usually seems comforting to think that the portfolio is also constantly hard at work beyond these limited shores.

Updating the data and perspectives on global investment

A more quantitative analysis of the impact of global diversification is offered by the publication this month of the annual Credit Suisse Global Investment Returns Yearbook (pdf). This flagship publication collects data on global asset returns over the last 121 years, and always provides intriguing analysis from prominent academic finance commentators, Dimson, Marsh and Staunton.

One of the timely issues tackled by the report this year is the relationship between inflation and equity returns. That is: do equity holdings protect against or outperform inflation? As Dimson, Marsh and Staunton note, the negative correlation between inflation and equity prices is one of the most commonly accepted empirical findings in finance:

Yet it is widely believed that common stocks must be a good hedge against inflation to the extent that they have had long-run returns that were ahead of inflation. But their high ex-post return is better explained as a large equity risk premium. The magnitude of the equity risk premium tells us nothing about the correlation between equity returns and inflation. It is important to distinguish between beating inflation and hedging against inflation (p.16)

The analysis in the report shows that, historically speaking, high inflation has damaged equity returns, and that equity returns fall short of bond returns in periods of deflation.

Testing the ‘Demons of Chance’ in long-term investing

Whether an investor will live through such a period is up to what the report terms ‘the demons of chance’. It reminds us that sometimes even long-term perspectives and simple extrapolation from history can fail the unlucky investor.

A striking example given is that over the 20 year period from early 2000 a global equity investor might have observed a realised annual equity return of 10.5 per cent over the previous twenty years, and perhaps may have reasonably expected to capture a comparable return. Yet over the next decade, the investor would have earned a negative 0.6 per cent per annum return.

This perspective is reinforced by this paper which highlights that when a wide set of international markets are analysed, based on historical market performance figures, a well-diversified individual equity investor has a 12.1 per cent chance of loss of purchasing power over any given 30 year period. This compares to a 1.2 per cent chance if the investor had correctly selected – before the fact – the United States equity market as the most successful market and exclusively invested there.

A further issue to bear in mind – and strong reason for equity diversification – is that a majority of market gains are driven by an extremely small subset of successful equities, which are largely impossible to identify in advance.

Trends in average distributions and expenses

Credit card expenses started to fall over the last month, compared to the two previous months, to below the long-term average.

The overall trend remains downwards, with credit card spending falling approximately $1000 per month over the three years of the record, as average distributions generally rise, albeit with some dips and flat periods along the way.

The shorter-term observed falls in the three-year average of distributions has continued this month.

This arises from the three-year average now including further months of (lower) estimated half year distributions than actually experienced in 2020, and also the average still reflecting some extremely high distributions received in the first half of 2017. From June, when the actual distributions should be known, replacing the estimates, and the early 2017 figures drop out, this provisional position is likely to change.

The record of distributions compared to total expenses in the chart below shows progress through this recorded journey, against the broader benchmark of distributions meeting total expenses.

The chart above shows that the capacity of the portfolio to support average spending over the past three years is still close to 90 per cent, with a small downward movement this month, but a longer term upward trend.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,585,000 (or $90,500 pa)	106.0%	133.5%
Total average expenses (2013-) – $85,500 pa	112.2%	141.2%

Summary

The past several months has had a surreal quality, in financial terms. Pushed forward towards the goal rapidly, there is a breathless, dream-like quality to the speed at which the threshold was crossed, and thereafter.

A natural defence to this changed state has been to imagine as inevitable a turn-around in fortune, a reversal and sharp slipping away. That may come. Perhaps that is indeed the larger chance, or likeliest of possible futures. Yet perhaps the hardest future to rationally examine, to pick apart and think carefully upon, has been simply this: what if there is no major change from here?

To be clear, this is not an expectation of future gains. It is a more modest claim, just confined to the continuance of roughly current prices. This would mean the portfolio staying above or around the existing portfolio goal. It also means Bitcoin representing nearly 1 in every 3 dollars of the portfolio, unplanned as that position is.

My journey has involved investing in, and studying, equity markets for around 20 years. Exposure to these markets represents around 55 per cent of the portfolio right now. With Bitcoin having come from nowhere to represent around 30 per cent of the total portfolio now, there is a sense in which I have been seeking to ‘catch up’ my learning to this now much larger asset. Essentially, this task is building on the simply risk management tool of considering the question: what if I am wrong? That is, what if over the longer-term there is no dramatic rise or fall from here?

While it is possible that Bitcoin is a ‘bubble’, affixing this label to it is not a substitute for careful thinking about its rise, and entertainment of the possibility that this position is a myth. A range of investment banks, commentators and even conservative insurance firms with long-duration liabilities are reassessing previous positions, and some are arguing that it is possible a ‘tipping’ point driven by expansion in the money supply is emerging. Only time, which has witnessed many more confident obituaries for Bitcoin than accurate predictions, will tell.

This month brought the news that fellow Aussie FIRE blogger Pat the Shuffler had entered the ranks of property owners, with this podcast giving all the details. A thoughtful long-form read on FI issues also came with this piece on one post-FI trajectory, and I also enjoyed this recent Affix podcast on FI issues.

Developments this month – and this trajectory – are a reminder that the vessel and journey can change beyond recognition, giving rise to that unsolved question: has the journey been completed in the same ship that was boarded?

**Update** – I was pleased to be featured alongside other Australian FI bloggers in the April Money Magazine cover story ‘Retire Early’. A warm welcome to any new readers! Please feel free to follow my journey by subscribing or just browse and look back at the earlier part of the journey.