A ship should not ride on a single anchor, nor life on a single hope.

Epictetus, Golden Sayings, Fragment xvi

Setting out: looking beyond the horizon

In sea navigation, lines of position allow the fixing of the true position of a ship by helping to account for drift from wind or currents.

Each month this record regularly assesses the position reached with a relatively narrow focus on changes and trends affecting the financial independence portfolio. This is consistent with the intention of documenting a journey towards financial independence, and retirement well before the traditional age.

The primary focus on financial independence has meant that until the beginning of 2019, I did not regularly record the impact of superannuation on the achievement of the portfolio’s objectives.

From that time, I recorded a simple ‘All Assets’ measure of progress, which effectively counted the impact of superannuation on the measures. Typically, super has recently represented around 30 per cent of additional ‘buffer’ on progress against the goals set.

In this longer post, the aim is to look beyond the FI portfolio which is reported on, and provide more detail on what the whole financial asset picture looks like – taking into account both superannuation and the FI portfolio.

Measuring the changing position across the journey so far

The goal and plan has always been to target financial independence through my private investment portfolio alone, with superannuation perhaps providing an additional margin of safety.

Reflecting this, superannuation – the approximate Australian equivalent to 401K accounts in the US – has been a quietly evolving part of this financial journey in the background, since the earliest phases.

Over time, I have generally sought to contribute beyond the minimum guarantee amounts, making voluntary contributions with the approximate target of reaching an average 15 per cent of earnings in overall contributions.

This has resulted in a steady growth in the superannuation across time, as can be seen in Figure 1 below.

Clearly evident above are the impact of some market declines – in the second half of 2018, and the most recent March 2020 market falls. Yet also as apparent is the overall trend of steadily compounding returns across time.

The changing profile and significance of super in the journey which has resulted from this is summarised in some different ways in Figure 2 below.

This chart sets out three alternative ways of looking at super, as it relates the journey.

It compares the amount of super as a proportion of:

1. the financial independence portfolio (in blue, i.e. super divided by the FI portfolio)
2. a measure of total wealth (in red, which is calculated as super divided by all investment assets – with this latter made up of the sum of the FI portfolio and super)
3. the final portfolio target (in green, i.e. super divided by the portfolio goal of $2.585m)

Each of these are subtly different lenses to bring out its contribution and importance as Figure 2 illustrates.

The story this chart shows is threefold.

• Emerging dominance of the FI portfolio: Even as it has grown in absolute size, super has been gradually overshadowed by the growing financial independence portfolio. In 2007, super alone was around two-thirds the size of the small but expanding portfolio. While a short period of lower investment and greater super contributions across 2012 to 2014 briefly reversed the trend, generally super has fallen as a proportion of the FI portfolio.
• Super’s relative decline compared to all assets: Superannuation has declined as a proportion of all investment assets – or total wealth. This reflects the same underlying growth of the financial independence portfolio. In 2007, super formed around 40 per cent all assets owned. This is now declining towards around 20 per cent. That is, super has gone from representing 4 out of every 10 dollars of all financial assets, to now around one in five dollars. The slower decline of this measure is due to the absolute growth of the super assets in a favourable taxation environment alongside the financial independent portfolio.
• But parallel growth in the absolute size of super to be a large ‘buffer‘: Superannuation has gone from being an insignificant factor compared to the final portfolio goal of $2.585m, to now representing an amount equivalent to 30 per cent of the goal. This progress flows from the goal being fixed, and the progress and compounding growth of superannuation over time. Yet in broad terms, it points the the important fact that super has gone from an amount that was irrelevant to the target, to potentially assisting in meeting it, or providing a substantial ‘buffer’ above it.

From this it can be seen that while the FI portfolio continues to be the largest part of the journey, the super portfolio has continued to grow quietly. It is now a potential material factor in providing a ‘margin of safety’ should the FI portfolio encounter other risks.

Locating the stores: how is the superannuation held?

The changing relative significance of superannuation in the journey is one issue.

Just as important, however, are other questions such as: how is the superannuation component invested, and what does this mean for overall portfolio asset allocation, risk and performance?

The answer to these questions flow from the specific type of fund in which my superannuation is principally invested.

This is a retail National Australia Bank-linked product administered by Plum Super. The fund is a legacy product called ‘Assertive Index Plus’.

The fund mainly relies on passive index approaches, however, in some of its holdings, there is according to the product disclosure statement some ‘selective’ use of active managers.

A number of changes to the ownership of the fund have occurred over the years. In fact, it began life as a Vanguard Superannuation product, prior to Vanguard exiting the retail superannuation market in the 2000s. They appear to still have plans to re-enter the market after a long absence.

The allocation of the Assertive Index Plus funds reflects its earlier life as a Vanguard indexed high-growth fund. As a result, it targets holding 37 per cent Australian shares, and 44 per cent international shares. Alongside that is a 15 per cent fixed interest component, with two-thirds of this in Australian bonds. There is a small residual target holding in international property securities (4 per cent).

In terms of performance flowing from this allocation, nominal fund returns have been 10.2 per cent over the past five years.

The Plum Super fund holds 97 per cent of my superannuation, however, there are two further minor superannuation holdings.

One is a government defined benefit scheme too limited in size to have any impact on planning, and a further holding is in Unisuper. It is also too small to influence any analysis, and has been held principally to provide continued access to several associated insurance products.

Combined, these two small funds represent around 0.6 per cent of all assets held, and so are excluded for simplicity for the purposes of the asset allocation analysis.

Fixing the centre of effort: comparing the asset allocation

A key question is the extent to which the superannuation investment choice made impacts on overall portfolio allocation (e.g. the ‘All Assets’ portfolio).

Figure 3 below compares the FIRE portfolio as regularly tracked in monthly updates with the wider ‘All Assets’ portfolio which includes superannuation holdings.

Figure 3 – Comparing the FIRE Portfolio and ‘All Assets’ Portfolio

Asset class	FIRE Portfolio	‘All Assets’ Portfolio	Difference %
Australian shares	36.5%	36.5%	0.0%
International shares	25.6%	29.6%	+4.0%
Property securities	0.2%	1.0%	+0.8%
Bonds	8.6%	10.2%	+1.6%
Gold	4.6%	3.7%	-0.9%
Bitcoin	24.4%	18.9%	-5.5%

What can be seen from this comparison is:

• The two portfolios are broadly similar in allocation – At a level of overall asset allocation, the portfolios are closely aligned, with the primary difference flowing from Bitcoin clearly forming a smaller proportional part of the ‘All Assets’ portfolio, and slightly higher proportional holdings of international shares and bonds.
• Equity exposure is greater, but still below target on an ‘All Assets’ basis – Even though the Plum Super fund has an approximate 80 per cent exposure to equities, this additional equity is still not enough to ensure the ‘All Assets’ portfolio as a whole achieves the target 75 per cent equity allocation.
• Bitcoin exposure is somewhat reduced – When considered on an ‘All Assets’ basis, total financial exposure to Bitcoin falls to less than 20 per cent, or 1 in 5 dollars.
• Diversification is marginally greater in the ‘All Assets’ portfolio – If diversification is simply viewed in terms of more assets being more evenly spread across different asset classes, the ‘All Assets’ portfolio is slightly more diversified due to greater bond, international equities, and property securities holdings.

Overall, due to the relatively close alignment in asset allocation, the ‘All Assets’ portfolio with superannuation included is likely to perform similarly to the FI portfolio.

The slightly increased bond holdings, international equities and property holdings are likely to mean slightly lower volatility over time for the ‘All Assets’ portfolio, potentially at the cost of reduced risk-adjusted returns.

Line of sight: what do the two portfolios look like in practice?

Asset allocation numbers alone only capture an incomplete view of the differences between two portfolios.

An alternative way to visualise the two different portfolios is to look across the investment types or vehicles, remembering that they can be either multi-asset or single asset focused.

Figure 4 below sets out the composition of the FI portfolio as currently held.

By comparison, Figure 5 below shows the composition of the ‘All Assets’ portfolio, including the Plum Superannuation fund.

Figure 5 shows that on an ‘All Assets’ basis superannuation is the second most important investment held. By value it comes in just behind the Vanguard High Growth fund which received regular contributions across March 2001 to May 2018.

This Vanguard fund, the Plum Super holdings and Bitcoin collectively represent around 64 per cent of the total portfolio, with the three major equity exchange traded funds (VAS, VGS and A200) making up another 24 per cent.

To put some actual dollar amounts and further context to these charts, the summary in Figure 6 below lists out the investments by type, in descending order of current (rounded) balance.

Figure 6 – ‘All Assets’ portfolio summary

Investment type	Balance
Vanguard Lifestrategy High Growth Fund	$820,800
Plum Superannuation – Assertive Index Plus	$774,300
Bitcoin	$677,500
Vanguard Australian Shares ETF (VAS)	$358,100
Betashares Australia 200 ETF (A200)	$295,900
Vanguard International Shares ETF (VGS)	$224,400
Gold ETF (GOLD.ASX)	$110,400
Vanguard Diversified Bonds Fund	$100,900
Vanguard Lifestrategy Balanced Fund	$79,900
Vanguard Lifestrategy Growth Fund	$44,100
Raiz app (Aggressive portfolio)	$21,200
Additional Superannuation (Unisuper + government)	$18,900
Secured physical gold	$17,600
NIB Holdings shares (NHF)	$7,900
Insurance Australia Group shares (IAG)	$6,700
BrickX (P2P rental real estate)	$5,000
Spaceship Voyager app (Index portfolio)	$3,500
Telstra shares (TLS)	$2,100
Plenti (P2P lending)	$1,500
Total ‘All Assets’ portfolio value	$3,573,400

Future movements: superannuation fees

Reviewing superannuation holdings for this analysis probably constitutes the most dedicated and focused time spent on the issue of superannuation through the entire journey.

This is largely a product of taking a fairly ‘set and forget’ approach in recent years, after a period in the 2000s of gradually increasing the level of contributions as part of a salary packaging option.

A significant disadvantage with my current superannuation fund is relatively high fees – at around 0.7 per cent. On the existing balance, this equals around $5,700 per year, or over $110 per week.

This is well above the average blended fee of around 0.2 per cent for the FI portfolio, and is a large motivation for change. Almost 60 per cent of all investment fees paid annually are linked to this superannuation account.

As a consequence of this fee level and a lack of conviction in even a limited or ‘selective’ use of active management in the Plum fund, I am quite likely to seek to move these funds back to Vanguard’s pending superannuation offering, when it becomes available.

If this entry is continued to be pushed back, I have previously considered a few other low cost index-based superannuation funds, and may renew my investigations.

Port in a storm: assessing the impacts of safe withdrawal rate

The role that superannuation itself plays in my journey to FI is has been more ambiguous.

Currently it represents a kind of additional buffer to sequence of returns risk – providing protection in circumstances where the primary portfolio suffers large losses in the first years of early retirement.

One way to represent this is considering the impact of the superannuation balance on the assumed ‘safe withdrawal rate’. Counting the superannuation funds in addition to the FI portfolio effectively lowers the actual safe withdrawal rate of retiring today from around 3.3 per cent to 2.5 per cent.

That is, counting super lowers it from a quite conservative withdrawal rate for Australia, to one that would not have failed across more than a century of Australian market history.

Indeed, one important fact if one considers Australia’s future could be less ‘lucky’ than its past is that a safe withdrawal rate of 2.5 per cent has also had a reasonable chance of being successful across most developed markets across the past century.

Entirely excluding Bitcoin from any analysis provides another perspective, which may be valuable based on its volatility.

In this case, the counting of super lowers the safe withdrawal rate from around 4.3 per cent to 3.1 per cent.

That is, it effectively makes the difference between a potentially moderate chance of failure to maintain the goal income, to a vanishingly small chance of running out of funds over a 30 or 40 year period, at least based on Australian market history.

Based on 2010 data from Professor Wade Pfau in this study (pdf), however, it should be noted that a 3.1 per cent withdrawal rate either failed, or came close to failure, across 7 of 17 developed markets over the past century.

Implications for the journey: a second anchor?

For much of the journey, superannuation has not been a major focus of attention. As that journey draws towards its closing stages, however, this benign neglect is gradually shifting.

Certainly, not being able to access superannuation until a preservation age in around 15 years time makes a special type of consideration necessary.

In some ways, in these circumstances super is best viewed as a kind of reserve of stores placed along a path to be taken. Upon reaching it, the portfolio can be refilled, and progress. The similarity between my FI portfolio and the superannuation holding makes this easier, as they are effectively interchangeable, fungible bundles of assets.

Superannuation continues to have a level of legislative risk around it, although this can be assumed to lessen gradually over time towards preservation age, due to the likely political costs of restricting access to those soon to receive access to their super.

As such, it is not an asset that feels quite as tangible, or which in reality is as liquid and adaptable as the FI portfolio holdings. Yet the absolute sum in superannuation is too large to ignore.

For the present then, super remains a definite, though uncertain force in the future, its role as unknowable as the shape of future tomorrows. Or perhaps ultimately a second anchor, to hold the ship fast in storms to come.

_{Note: Nothing in this this piece should be taken as financial advice or a recommendation of any particular approach or financial product, both of which will depend on personal circumstances.}