Remember that you are an actor in a drama, whatever kind the playwright desires

Epictetus, Encheiridion XVII

This is my fifty-ninth 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	$820,102
Vanguard Lifestrategy Growth Fund	$43,914
Vanguard Lifestrategy Balanced Fund	$79,229
Vanguard Diversified Bonds Fund	$98,895
Vanguard Australian Shares ETF (VAS)	$365,976
Vanguard International Shares ETF (VGS)	$248,767
Betashares Australia 200 ETF (A200)	$287,934
Telstra shares (TLS)	$2,036
Insurance Australia Group shares (IAG)	$6,081
NIB Holdings shares (NHF)	$7,944
Gold ETF (GOLD.ASX)	$107,668
Secured physical gold	$17,186
Plenti (P2P lending)	$809
Bitcoin	$905,100
Raiz app (Aggressive portfolio)	$20,771
Spaceship Voyager app (Index portfolio)	$3,461
BrickX (P2P rental real estate)	$4,982
Total portfolio value	$3,020,855 (+$260,052)

Asset allocation

Australian shares	33.5%
Global shares	21.0%
Emerging market shares	1.5%
International small companies	1.9%
Total international shares	24.4%
Total shares	57.9% (-17.1%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.4%
International bonds	5.4%
Total bonds	7.8% (-7.2%)
Gold	4.1%
Bitcoin	30.0%
Gold and alternatives	34.1% (+24.1%)

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

Comments

This month the financial independence portfolio rose in value by $260,000, growing around 9.4 per cent in a single month.

As a consequence the portfolio has just unexpectedly crossed the threshold of $3.0 million, less than a year after the portfolio passed $2.0 million in value.

The monthly movement across October was the largest ever change in the value of the portfolio in dollar terms, and the third largest increase in percentage terms since this record began in 2017.

Unusually, over the month the capital value of all major traditional financial asset classes – equities, bonds, and gold – fell quite uniformly. Each declined by between 1.0 to 1.5 per cent.

In the case of Australia equities, payments from September quarter dividends meant that a small positive total return of around 0.5 per cent was achieved. This helped portfolio equity holdings reach their highest ever value this month, of about $1.75 million.

The poor recent performance of fixed interest bonds extended this month. The total value of Vanguard Diversified Bond fund holdings, for example, have declined around 10 per cent this year – noting that this also includes paid out distributions.

The unmistakeable forward motivating force for the portfolio was Bitcoin, which increased in value by 35 per cent through the month. This contributed over 90 per cent of the overall positive movement of the portfolio – or around $235,000.

This pushing forward is a broadly similar pattern as that seen for most of the year to date.

Momentum has been further accelerated by the US Securities and Exchange Commission approval in recent weeks of a number of Bitcoin futures exchange traded funds, and continuing macroeconomic expectations of higher inflation outcomes in the United States, and globally.

Even as this occurs, both Bitcoin holders and its emerging community of commentators continue wonder what exactly “it” is, and debate whether it is time, a clock, or indeed an Italian renaissance city. The answer is not wholly clear.

The wider financial market, inflation and other monetary policy developments are increasingly feeding into bond market outcomes, with the Reserve Bank’s yield curve targeting measures pushed aside by short-term bond market participants last week, amidst rising global yields and falling bond prices.

As a radical demonstration of this, the Australian two-year bond rate experienced the sharpest upward movement in 20 years. For the moment at least, some governments appear to be back into a more traditional the position of following, rather than shaping and defining, fixed interest markets.

Amidst these broader instabilities and developments I continued to target the longer-term asset allocation goal of an equal balance between global and Australian shares.

As a result this month new investments were mostly directed at the Vanguard global shares (VGS) exchange fund.

A milestone passed – third quarter distributions continue to grow

With the September quarter now passed, third quarter portfolio distributions discussed last month can be exactly calculated.

The below chart sets out the history of third quarter distributions over the past five years.

The 2021 results represent the largest set of payments for the third quarter by some margin, reaching $10,280.

This exceeded earlier projections by around 20 per cent, and further signals the arrival of this set of distributions to a significant level in terms of their contribution to expected annual distributions.

Dividends from Australian equities dominated this set of payouts, making up more than 90 per cent of the total value.

In part, these higher dividend payouts likely continue to represent the distribution of income initially held back on a precautionary basis through the early phases of the pandemic. This factor was also a driver of higher previous distributions.

The continued growth in distributions from exchange traded funds has led to a second milestone being reached recently.

Since 2017, and in fact through essentially the entirety of the journey, the dominant source of portfolio distributions has been the Vanguard High Growth retail fund.

Now, however, growth in the exchange traded holdings (A200, VAS and VGS) means that for the the first time the Vanguard High Growth fund makes up less than half of total projected future distributions.

Yet the impact of the Vanguard retail index funds (which collectively include smaller separate holdings in growth, balance and diversified bonds funds), taken as a whole, is still significant.

From the chart above it can be seen that the Vanguard retail funds combined still make up nearly two-thirds of projected distributions, with the exchange-traded funds making up just over one-third.

With and without – reviewing the performance of the pure ‘financial portfolio’

This month makes starkly apparent that while the financial independence portfolio is one entity for most purposes, it is made up of two distinct though interacting parts – namely Bitcoin, and everything else.

It is useful to occasionally step back and view what is happening beyond the extraordinary and visible contribution that Bitcoin is making to the journey, and to focus the smaller underlying ‘financial portfolio’.

Here, that term is taken to refer to the total of every traditional portfolio asset class in the portfolio, excluding Bitcoin.

Starting at the most basic level – this can be done by momentarily assuming away Bitcoin holdings, and seeking to understand the shape and performance of the remaining ‘financial portfolio’.

Defined this way, the financial portfolio currently has a value of around $2.11 million. The chart below sets out the overall asset allocation of this narrower financial portfolio.

What is immediately apparent is that it is strongly growth-oriented. Around 82 per cent is allocated in equities, and close to 50 per cent of financial portfolio holdings are Australian-based equities. The remainder of the assets are split between bonds and gold.

The financial portfolio examined over time – course divergence

Another different perspective is offered by the performance over time on a ‘with’ and ‘without’ Bitcoin basis.

Until 2019, diverges between the entire portfolio and the narrower financial portfolio were limited and temporary – a brief rise and fall in the value of Bitcoin in 2017 being the only exception to this.

The chart below tracks the progress of the overall portfolio ‘with and without’ Bitcoin from 2019 to the present.

As can be seen, the financial portfolio has performed in the same broad manner as the overall portfolio, but with markedly less volatility. Growth since in March 2020 pandemic equities pull-back has been strong and relatively consistent.

This same trend can be seen if the monthly change in the financial portfolio is examined.

The chart below sets out changes in the value of equities, bonds, gold and property holdings over the past two years.

This shows the generally lower levels of overall volatility in the financial portfolio compared to the overall financial independence portfolio.

Movements in the financial portfolio value generally fall below $50,000 per month and are often much smaller.

This is consistent with recent findings that Bitcoin has been approximately four times as volatile as US equities on a weekly basis over the past five years. Further interesting observations on the impacts of Bitcoin on a more traditional portfolio are in this piece (h/t Aussie HIFIRE).

Tracking a new meridian for the financial portfolio – progress to the equity target

One of the critical metrics I look at in contemplating my readiness to consider changed or reduced work arrangements is the progress towards the dollar value target for equity holdings.

This dollar target is around $1.93 million, being calculated as 75 per cent (i.e. the equity asset allocation target in the portfolio plan) of the total portfolio goal.

By this measure, too, progress has been continuing steadily over the last two and a half years.

At the beginning of 2019 the equity portfolio was only at around 50 per cent of the final target for equity holdings.

During March 2020, significant progress made over the prior year was effectively reset, but strong markets since have contributed to the equity portfolio reaching around 90 per cent of the total final equity target today.

The remaining ‘deficit’ to the equity target by this measure is around $190,000.

In summary, two key observations can be made:

• A strong trend of underlying financial portfolio growth with lower volatility – assessed on a ‘without Bitcoin’ basis, the financial portfolio has continued to grow steadily, advancing towards the original goal.

• The journey is not yet quite complete in financial asset terms – assessing just the narrow ‘financial portfolio’ assets, there is some distance to travel before the journey is complete, with a need to continue to build equity holdings.

There is likely no perfectly correct way to view the portfolio in times of significant market transitions, when the nature, permanence and value of major portfolio elements are less than certain.

Viewing the portfolio on a ‘with and without’ basis can, however, provide an extra perspective on the progress, movements and risks inherent in sub-components of the overarching portfolio.

Trends in average distributions and expenses

Monthly credit card expenses continued their fall this month, consistent with the lockdown conditions which were mostly prevailing through this period.

As anticipated, day-to-day living expenses have declined to such a degree that I have temporarily lowered regular payments on the card, to avoid the account moving into a credit amount.

Three-year average distributions are continuing to slightly increase each month, and equivalent average credit card expenses have also continued their steady fall.

The blue line of distributions, therefore, continues to rise and is at around $7200. The credit card expenses (red) line continues to track downwards, to now under $4800.

The most recent results are illustrated in the chart below.

As with last month, there is a significant and expanding ‘gap’ opening up between average total distributions received and monthly credit card expenses.

Only a period of more normalised post-lockdown expenditure patterns will reveal how permanent and wide that gap – which is currently around $2,000 per month – proves to be.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,585,000 (or $90,500 pa)	116.9%	148.0%
Total average expenses (2013-present) – $84,000 pa	125.9%	159.4%

Summary

Months such as this reinforce that to a greater or lesser extent, we may carefully deliberate upon and choose the starting of a journey, but there is less choice about how arrival occurs.

What is also being demonstrated over the past few months is a strange fact about the relative importance of decisions made on the journey. These are made, as it were, through a glass darkly.

The decision to experiment in Bitcoin was an investment of just over $4,400 across 2015-16, less than a car purchase made at the same time, and less in fact than experimental amounts eventually placed in other investments such as trialling BrickX.

Yet it transpires that this act of experimentation, counted at this passing moment at least, has turned out to be more consequential than any of these other comparably-sized economic decisions.

Peculiarly, it has exceeded, for the second time, the dollar value of the previous largest single investment vehicle, the retail Vanguard High Growth fund, which has received regular contributions over a period of around 17 years.

Similarly, it as exceeded for the moment the combined impact of superannuation contributions over 20 years of work.

Here, too, is a sign of portfolio change and expectations upended: at the beginning of this record that fund was the bedrock of the portfolio, making up nearly 60 per cent of the total portfolio.

Now, combined, Bitcoin and the equity-based exchange traded funds represent 60 per cent of the portfolio by value, and only around 1 in 4 dollars sits in the Vanguard High Growth fund.

This month has been largely spent in lockdown, but with the opportunity to take many longer walks in nearby nature reserves.

On these I have been avidly listening to Trillions, a detailed biographically-based retelling of the history and development of index funds and ETFs, written by Financial Times journalist Robin Wrigglesworth.

This has also encouraged a re-reading of one of my favourite books on the history of financial concepts – Against the Gods: The Remarkable Story of Risk by Peter Bernstein. It highlights the roots of the idea of risk and its evolution through time, again by examining the lives of key early contributors to risk and probability.

These long walks listening to books were really an attempt to capture and hold time, a concept explored in this interesting Guardian piece focusing on those seeking to be ‘time millionaires’, in control of their single most valuable asset.

In fact, there is a strong case to be made that the entire FI and FIRE movement is simply seeking this: to be the equivalent of ‘time millionaires’.

By an inescapable inversion, time itself will determine if this unforecast progress, pushed by unanticipated forces, will reverse. What is true today, may change and be altered by tomorrow.

For the moment, then, time remains the playwright of a drama whose acts and scenes are as yet unrevealed.