Begin doing what you want to do now. We are not living in eternity. We have only this moment, sparkling like a star in our hand and melting like a snowflake.

Sir Francis Bacon

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

Portfolio goal

My objective is to maintain a portfolio of at least $2,620,000 through 2022. This should be capable of producing an annual income from total portfolio returns of about $91,600 (in 2022 dollars).

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

A secondary focus through 2022 will be achieving the minimum equity target of $2,100,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$722,974
Vanguard Lifestrategy Growth Fund	$38,832
Vanguard Lifestrategy Balanced Fund	$70,238
Vanguard Diversified Bonds Fund	$88,101
Vanguard Australian Shares ETF (VAS)	$345,217
Vanguard International Shares ETF (VGS)	$318,198
Betashares Australia 200 ETF (A200)	$262,967
Telstra shares (TLS)	$2,052
Insurance Australia Group shares (IAG)	$5,524
NIB Holdings shares (NHF)	$8,856
Gold ETF (GOLD.ASX)	$119,070
Secured physical gold	$18,961
Plenti (P2P lending)	$12
Bitcoin	$313,070
Raiz app (Aggressive portfolio)	$18,915
Spaceship Voyager app (Index portfolio)	$3,110
BrickX (P2P rental real estate)	$4,719
Total portfolio value	$2,340,816 (-$281,221)

Asset allocation

Australian shares	39.6%
Global shares	28.1%
Emerging market shares	1.7%
International small companies	2.1%
Total international shares	32.0%
Total shares	71.6% (-8.4%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.7%
International bonds	6.2%
Total bonds	8.9% (+3.9%)
Gold	5.9%
Bitcoin	13.4%
Gold and alternatives	19.3% (+4.3%)

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

Comments

This month has seen the third largest decline in the portfolio since this record began in 2017 – with a loss in total value of over $281,000.

These falls follow two previous consecutive monthly losses, marking an unprecedented period of continuous losses extending since April.

Overall, the portfolio lost 10.7 per cent of its starting value in the past month. This has drawn it back to levels last seen in early 2021.

The portfolio has consequently fallen below the revised portfolio goal of $2.62 million at the end of the month, meaning the notional option to cease paid work has evaporated quickly, and perhaps for some time.

Just over one-third of the losses this month occurred in the traditional assets of equities, with some additional losses in fixed interest. A little less than two-thirds of the monthly fall in value is a function of some major price falls in the Bitcoin portfolio (of around 36 per cent).

Australian equities were one of the areas of most substantial losses, with falls of around 8.5 per cent. By comparison, international equities (and particularly US equities on an unhedged basis) fell around 5.0 per cent.

Bonds continued to perform poorly, losing around 2.7 per cent, while gold holdings slightly increased in value (around 2 per cent).

The portfolio losses this month reflect ongoing global pessimism around the capacity of major developed and emerging economies to curb strong inflationary pressures without inducing a slow down or recession in the real economy – with consequent adverse impacts on asset markets.

Policymakers are increasingly recognising that the set of tools available to them at this point in an unusual type of economic cycle are ill-suited to addressing the challenges of supply chain disruption and potential wage-cost inflation spirals.

Some advanced economies remain firmly in the mode of monetary expansion, while other monetary authorities are enacting or inducing substantial tightenings of credit conditions.

Expected higher inflation and interest rates have impacted on equity markets, and might be expected to continue to present problems from here, unless a clearer path to more stable price levels becomes apparent. Rising nominal corporate debt costs also signal potential future sources of instability, or unpleasant periods (video) ahead.

Despite recent sharp falls in Australian equities bringing the medium-term objective of reaching an equal allocation of Australian and international equities closer, domestic equities still make up 55 per cent of total equities.

In other words, large falls in Australian equities this month have ironically slightly assisted in moving closer to the asset allocation target. To further support this, investments this month have continued to be focused on the Vanguard international shares ETF (VGS).

Tracking the positions – updating quarterly and half-year distributions

The end of June provides an opportunity to look forward to the crystallisation of two quarters of portfolio distributions, based on projections and early guidance, and set up a later comparison of distributions payments against previous expectations.

In early July second quarter distributions will be finalised and paid.

Using the history of average payouts on a ‘cents per unit’ basis for the Vanguard retail funds, it is possible to forecast what an average set of distributions could look, and compare these to past years. In the case of the three exchange traded funds (VAS, VGS and A200), these have just released draft guidance on estimated distributions in the past week.

The chart below sets out estimated second quarter (i.e. April-June) distributions, based on the above published distribution estimates and past averages.

So far, second quarter distributions are about $13,000 higher than were expected in April due to higher than average distributions from Australian equity ETFs (A200 and VAS). As a result, this quarter total portfolio distributions are expected to be around $66,000.

A major sensitivity in the final overall result will be the eventual level of the Vanguard High Growth Fund retail fund distributions – as this is forecast to constitute over 60 per cent of the final second quarter payments.

The actual payouts from this fund will be influenced by capital gains distributions – in part arising from investors’ investments or redemptions this quarter – and so is variable.

To the extent that the Vanguard High Growth retail fund has an exposure to indexed Australian equities similar to the A200 and VAS exchange traded funds, actual distributions from it may turn out to be higher than the estimates made here.

The completion of the first quarter, and these second quarter projections, allow an updated glimpse of possible first half-year (i.e. 1 January to 30 June 2022) distributions.

The chart below sets out current estimates for this period in 2022 compared to historical levels.

From this it can be seen that half-year distributions of around $78,000 are expected, again above prior estimates in April.

As with the second quarter distributions, the Vanguard High Growth retail fund plays an outsized role, representing on average around 50 per cent of expected distributions, so the actual payouts for this fund will be a major determinant of final results.

Changing currents – tracking the level of portfolio distributions year by year

A different perspective on the evolution of distributions through time can be obtained by looking at the trend in the level of distributions across each quarter on a consecutive yearly basis.

The chart below does this covering the period of this record. Prior to 2017, there were essentially no significant distributions in either the March or September quarters (Q1 or Q3), aside from irregular payouts from the Vanguard bond retail fund.

The orange hashed bar for the second quarter of 2022 reflects the unfinalised state of these distributions.

From this perspective, a few observations are possible:

• There has been strong growth in March (Quarter 1) and September (Quarter 3) distributions, associated with increasing exposure to the exchange traded funds paying out in those periods

• These March and September distributions have had smoother path of growth, potentially reflecting their lower capital gains components and the relatively greater tax efficiency of the ETF structure compared to the legacy Vanguard retail index funds

• June distributions remain consistently the most significant, and also variable in absolute terms

• Over the past five years, the ‘evenness’ of distributions through the year has improved, with $20,000 of distributions now occurring outside of the main June and December distributions.

Trends in average distributions and expenses

This month average total expenses continued to rise from the lows of earlier this year.

In a change to past approaches, I have updated the method of estimating the moving average of distributions. This has changed the apparent direction of the blue line denoting distributions over the past several months. The way of calculating red line of total expenses remains unchanged.

Last month the blue line of the distributions estimate was pointing down. Mathematically, this is because some ‘holding’ estimates I had placed in there for the first half of this year represented essentially out of date projections based on either past averages of the relevant half-years, or annual estimates divided into monthly sub-totals.

With more data and further work to specify ‘expected’ or median distributions for each quarter, more detailed estimates are possible from here.

Feeding these into this analysis avoids the estimate of distributions being artificially low until the end of a financial or calendar year, and then suddenly leaping upwards as true values are able to be substituted in for the holding estimates.

The net result of doing this is to change the last six months of estimates to reflect my best estimates. Continuing to do this through time should reduce the amount that the distribution estimates line ‘bounces’ around, giving a clearer continuous signal of progress.

As a result of this change the blue line of distributions is currently at around $8,100 per month. The total expenses (red) line has increased to around $6,200, again rising slightly over the past month.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	89%	118%
Total average expenses (2013-present) – $84,400 pa	97%	128%
Target equity holding in portfolio – $2,100,000	85%	N/A

Summary

For only the second time since the start of this record, the portfolio has gone backwards over a twelve month period. In December 2018, the year on year loss was around $41,000.

By contrast, this month the portfolio is $255,000 smaller than a year ago, and more than $600,000 lower than just six months ago.

The past three months have represented the most sustained falls as a percentage of the portfolio since 2008. Yet this picture is somewhat distorted by the role of Bitcoin. Looking at just the traditional financial components of the portfolio (i.e. excluding Bitcoin as an investment), the falls this month have been equalled or exceeded twice before since early 2020 alone.

More significant than the oscillations through this past three months is that for the first time in a year, the portfolio is below its target – proving that the journey, while looking complete during this past year, was not. In fact, the current equity portfolio is as far away from its intended target goal as a year ago.

Despite this, the reality is that for all these negative outward signs, the journey persists much as it has to date – with continued work projects and deadlines, and regular investments to start to fill in the gap between reality and the target.

The higher than expected portfolio distributions to be received in early July will assist in this regard, helping to push forward reinvestment of dividends and other income at lower prices than were present at the beginning of the year.

This month I have been focused, mostly for reasons outside of financial independence, on issues of the developing macroeconomic and financial environment.

The recently released Annual Report of the Bank for International Settlements provides a comprehensive analysis of the challenges facing global markets and the financial system. Even local government bodies, such as the Australian Office of Financial Management (essentially the Commonwealth’s bond issuing agency) has provided recent strong commentary on the volatility they see ahead.

In such times it is wise to retain an open mind to future possibilities, sometimes informed by lesser known history.

An example of this is a recent academic paper boldly titled Bonds for the long-run, highlighting the surprising fact that corporate bonds, on average, outperformed equities during the nineteenth century. Another is the fact that global credit crises have a history going back arguably as far as 1772.

Claimed investment market certainties are often dispensed in volatile times to safeguard investors against feared behavioural traps, such as selling into down markets.

This is understandable, but should not blind us to the lack of absolute certainty underpinning any popular received investment truths. Asset return and inflation regimes can and do change, and the future can be different from the recent past. Risk that underlies the basis of the risk premium for assets at times does materialise.

Recently the winter solstice passed. Amidst the chill days and frost of this season, preparing for and reporting on portfolio distributions over the next week or so will be an enjoyably indoors task.

For the portfolio, further cold blasts and storms may lay ahead. Yet the gradually lengthening of the days from this quiet midwinter time of counting and estimating should serve as a reminder that I am indeed not living in eternity, and that these moments in time, too, can briefly sparkle and melt like snowflakes in one’s hand.

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.