Let’s withdraw; and meet the time as it seeks us

Shakespeare, Cymbeline Act 4, Scene 3

This is my seventy-first 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	$711,405
Vanguard Lifestrategy Growth Fund	$37,922
Vanguard Lifestrategy Balanced Fund	$68,711
Vanguard Diversified Bonds Fund	$85,661
Vanguard Australian Shares ETF (VAS)	$351,153
Vanguard International Shares ETF (VGS)	$426,221
Betashares Australia 200 ETF (A200)	$265,971
Telstra shares (TLS)	$2,089
Insurance Australia Group shares (IAG)	$6,208
NIB Holdings shares (NHF)	$8,004
Gold ETF (GOLD.ASX)	$115,668
Secured physical gold	$18,351
Bitcoin	$356,030
Raiz app (Aggressive portfolio)	$18,735
Spaceship Voyager app (Index portfolio)	$3,162
BrickX (P2P rental real estate)	$4,639
Total portfolio value	$2,479,930 (+$138,908)

Asset allocation

Australian shares	37.6%
Global shares	30.7%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	34.2%
Total shares	71.8% (-8.2%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.5%
International bonds	5.7%
Total bonds	8.2% (+3.2%)
Gold	5.4%
Bitcoin	14.4%
Gold and alternatives	19.8% (+4.8%)

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

Comments

This month reversed two months of falling portfolio values, with a sharp increase of around $139,000. The portfolio grew nearly 6 per cent in this expansion, its highest rate of growth in more than six months.

Despite this positive movement, the portfolio still is at a lower absolute level than achieved in early 2021, and is more than $540,000 lower than at the same point a year ago.

Consequently, the portfolio continues to track below the overall revised portfolio goal of $2.62 million.

The major sources of portfolio growth are clear – a recovery in equity markets both globally, and domestically. Australian shares increased in value around 4.3 per cent over the past month. Globally, the largely unhedged equities portfolio grew in value by around 7.2 per cent.

Bonds were volatile in their movements this month, but overall were flat in total performance by month end.

During the past month, Bitcoin has been peculiarly stable, aside from a small increase over the last week or so. Through the last two months, the price of Bitcoin actually registered the remarkable achievement of being less volatile than the benchmark US S&P500 index.

Over the month, Bitcoin holdings increased around 6.8 per cent in value, while the value of gold held remained essentially flat.

Over the past few months it has seemed that an unusually prolonged breakdown in the benefits of diversification was occurring amidst growing US dollar strength. A range of financial commentators have noted that the traditional 60/40 equity and bond portfolio has – as a result – delivered its worst outcome for around a century.

An increasing volatility and fragility in bond markets appears one symptom of a global financial system under significant pressure by greater amounts of sovereign debt issuance, tied to a continued stated commitment to monetary policy tightening.

Despite this environment, this month has seen a correlated rise off previous lows across risk assets, even as equity markets continue to track well below past peaks.

The shape of the trajectory of inflation, and how rapidly it dissipates will be critical to shorter term market directions. In the more revelant longer term, if sustained global recessionary conditions emerge, earnings growth for equities that are underpinning their valuations will fall substantially.

This month saw the final payment of third quarter distributions. This means the paying out of around $11,840 of dividends from the equity-based ETFs and Vanguard Diversified Bond fund.

A proportion of these were set aside to meet future tax liabilities, and the remainder were reinvested alongside regular investments. These investments were focused on the Vanguard international shares ETF (VGS).

Re-examining the ‘safe withdrawal’ rate – looking beyond US data

This month one paper that has been attracting my focused attention is a new study by Anarkulova et al The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets.

This paper reviews the traditional ‘4 per cent’ rule of thumb commonly discussed in financial independence circles, and a common basis for many early retirement targets.

In particular, it reviews the performance of a variety of blended equity and bond portfolios against a uniquely wider data set of developed country markets, to seek to establish the viability of the 4 per cent figure across time and markets outside the US.

The findings it produces are thought-provoking. Some of its keys conclusions are that:

• Across this wider data-set of returns a traditional 60/40 equity and bond portfolio only supports a withdrawal rate of 2.26 per cent if the constraint of a maximum 5 per cent ‘failure rate’ is applied;

• Retaining a 4 per cent withdrawal rate with the 60/40 portfolio results in a 17 per cent chance of financial ‘ruin’ (e.g. outliving the portfolio);

• Lowering the chance of ‘ruin’ is extremely costly, in withdrawal rate terms – for example, achieving a 99 per cent ‘success’ rate requires lowering annual portfolio withdrawals to just 0.8 per cent; and

• Increasing portfolio risk does not offset these pessimistic results – for example, increasing equity portfolio allocations over the 60 per cent assumed results in a lower safe withdrawal rate.

These findings obviously provide a broader international perspective on a large body of US returns focused work and commonly adopted benchmarks critical for early retirement.

In my personal approach to setting the portfolio goal based on an safe withdrawal rate of 3.5 per cent, the same considerations were central. While past Australian equities return data supported a rate of between 3.7-4.0 per cent, the lower figure was adopted.

This paper raises the challenging question: is that downward adjustment conservative enough? If these figures are robust – ought the adjustment have been to a rate of 2.26 per cent? Or even, reflecting the 80 per cent target allocation to equities, to 2.21 per cent?

These safe withdrawal rates (and a 5 per cent failure rate) imply a portfolio target of around $4.0 million, in turn implying a journey which is only around 60 per cent complete.

At the moment, there is nothing to be gained by rapidly changing course on the basis of this paper. Yet the proper approach is to pay heed to its central message.

This is that there are few a priori reasons to leverage our own key lifetime decisions to an unsafe assumption that because Australian equities have performed at a certain level for the past century, they will inevitably continue to support the same safe withdrawal rates that have emerged from that single contingent ‘run’ of history into the future.

Rather, multiple futures are possible – and even if most of these are highly positive, there is no reason to assume Australia does not face an equal chance of encountering equity markets as disappointing as experienced across many developed markets.

Careful consideration of these findings is as rational as the choice to enter into the common types of insurances – we do not purchase house insurance on the expectation of a fire or flood, but in spite of our knowledge that this outcome is objectively improbable.

For the moment, then, the target will remain, but this paper highlights the need to carefully review all of the evidence in January, as I move to examine the portfolio goal and plan.

Trends in average distributions and expenses

This month average total expenses (red line) stayed flat at close to $6,300 while the moving average of distributions (the blue line) continued a slow rise to above $8,400.

The continue growth of distributions means that some intrguing conceptual milestones now lay within close reach.

Total credit card expenditure since late 2013 has totalled just over $595,000. At present, average distributions since that same period have nearly reached that same figure.

Around 98 per cent of every credit card transaction since late 2013, in other words, has been met solely by the distributions of the portfolio. In coming months, therefore, it may be that distributions cross the final boundary to fully meeting all of these same credit card purchases.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	95%	124%
Total average expenses (2013-present) – $84,500 pa	103%	128%
Target equity holding in portfolio – $2,100,000	85%	N/A

Summary

Across the ancient world and Europe are scattered castles and fortifications, half preserved monuments to an impulse for seeking permanance and safety through history. In each of their thick walls is reflected a desire for control over actual or potential hostile forces.

Their ruination, however, is a reminder that the strongest fortification is no match for a change in the regime of technology, warfare or shifts in geopolitics.

Over the past twenty months, the slow reinforcing and maintenance of the financial independence portfolio has at times felt like the layering of another row of bricks or stones across an already high wall, even as outside forces amass and press outside.

There are at least two possible responses to this alarming circumstance.

One is to lean backwards against the wall, amidst the din, and remember the thickness of the walls, recalling and recounting the height of towers and the fastness of the gates, and the times they have held before. There is much to recommend this approach.

There is also, however, another approach.

That is to repair to the library and read about how walls fall, how keeps and strong gates have failed in the past, and what happens after. That is, how regimes change and history moves on. Such study is not for the purpose of strengthening the walls, it is to be able to know – and live within – the unfamiliar shape of the world afterwards.

It is with these thoughts that I have been reading this month.

This historically informed view of one possible future by Russell Napier provides some challenging thoughts. Another source of reflection has the The World of Yesterday, by Stefan Zweig – the memoirs of an Austrian writer of the ‘glorious summer’ of pre-world war one Europe, and observations on its slide towards the barbarities of two world wars and the near subsuming of humanist liberalism.

A third experience along the same lines was watching the documentary ‘TraumaZone‘ by BBC documentary maker Adam Curtis, focused on providing an impressionistic sense of the collapse of normal Soviet life at the end of the Cold War.

To be clear, I do not consider these types of events imminent, or even perhaps probable. Cold comfort, in some ways, as neither did those who lived through them.

Rather, they speak to the need to contemplate the seeming impossible and improbable, to truly test what, for example, an investment or economic regime change would mean.

Having the highest ever amount of equity assets spread out globally, and the highest in relative allocation terms since the second half of 2018 provides some cause for confidence.

Having around half the portfolio not denominated in Australian dollars is another source of potential protection from a negative ‘regime change’ in investment conditions.

A low exposure to government debt markets, through a small bond allocation represents yet another, as real yields remain deeply negative and financing pressures grow.

Finally, and perhaps least obviously, the portfolio sitting closer to its designed allocations than at almost any time over the past two years provides a final comfort. At least, in facing any challenges to come, it will do so from the original position intended.

Castles may not protect from those forces we cannot predict. Yet for the moment, they provide the opportunity to withdraw, and meet such times as do seek us.

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.