For a moment, nothing happened. Then after a second or so, nothing continued to happen.

Douglas Adams, The Hitchhiker’s Guide to the Galaxy

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

Portfolio goal

My objective is to achieve and maintain a portfolio of at least $2,750,000 by 31 December 2024 or earlier. This should be capable of producing an annual income from total portfolio returns of about $94,800 (in 2023 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.45 per cent.

A secondary focus will be achieving the minimum equity target of $2,200,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$759,139
Vanguard Lifestrategy Growth Fund	$40,104
Vanguard Lifestrategy Balanced Fund	$72,039
Vanguard Diversified Bonds Fund	$87,773
Vanguard Australian Shares ETF (VAS)	$369,961
Vanguard International Shares ETF (VGS)	$565,690
Betashares Australia 200 ETF (A200)	$275,870
Telstra shares (TLS)	$2,323
Insurance Australia Group shares (IAG)	$6,563
NIB Holdings shares (NHF)	$10,152
Gold ETF (GOLD.ASX)	$136,225
Secured physical gold	$21,550
Bitcoin	$465,270
Raiz app (Aggressive portfolio)	$20,727
Spaceship Voyager app (Index portfolio)	$3,481
BrickX (P2P rental real estate)	$4,484
Total portfolio value	$2,841,351 (-$14,754)

Asset allocation

Australian shares	34.6%
Global shares	32.5%
Emerging market shares	1.5%
International small companies	1.8%
Total international shares	35.8%
Total shares	70.4% (-9.6%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.3%
International bonds	5.2%
Total bonds	7.5% (+2.5%)
Gold	5.6%
Bitcoin	16.4%
Gold and alternatives	21.9% (+6.9%)

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

Comments

This month the financial independence portfolio saw only a small movement, a slight decline of 0.5 per cent, or around $15,000.

This means the portfolio continues to sit at nearly $100,000 above the target portfolio goal, albeit with a composition which is still significantly different from the final target allocation planned.

Over the month the portfolio has experienced gusts in either direction, with international shares adding to portfolio performance, but with the price of Bitcoin falling slightly, resulting in the muted portfolio headine number.

Over the month international shares experienced growth of around 2.0 per cent, while Australian shares fell in value around 2.6 per cent. The value of Bitcoin holdings fell around 5 per cent.

Gold holdings also gained in value by around 0.8 per cent over the month.

Equity and debt markets across the month were heavily infuenced by uncertainty and shifting expectations around the raising of the US debt ceiling. Through the month, the cost of default insurance on ‘risk-free’ US Treasury bonds exceeded levels seen in the Global Financial Crisis – highlighting the market’s strong perceptions that a formal default was a credible option.

Amongst this heightened focus, the annual In Gold We Trust report was released, pointing to the continuing preparations across a range of developing economies towards greater reliance on alternatives to the US dollar in cross-border payments, and highlighting the strong continued purchasing of physical gold reserves by central bank authorities globally.

All of this points to potential longer-term disruptions to the monetary conditions prevailing from the 1970s to the present, including movements to at least payment channels less dominated by US dollar flows than historically during that period.

This has at least the chance of impacting financial portfolios, most obviously in the case of this one, through the fact that around 33 per cent of all equity holdings, and close to a quarter of all portfolio assets are held in US dollar denominated equities.

Market movements through the month have led to international shares slightly edging ahead of the target 50 per cent allocation within the equity holding. This meant that for the first time in nearly 18 months, new investments were directed towards Australian equities, through Vanguard’s Australian shares exchange traded fund (VAS).

Reading the tides: projected distributions for the June 2023 quarter

With only one month until the second quarter ends, and the financial year closes, some of my attention has turned to what might be expected in distribution payments in early July.

The June quarter distributions are typically around 60 per cent of total annual distributions, making these distributions the largest single determinant of portfolio income through the year.

Distributions are projected on the basis of the average payouts of the exchange traded funds over the their available historical record, and an average of the most recent 5 years of payouts in the case of the Vanguard retail index funds. This latter approach is taken due to an observable upward trend in the June quarter payouts of these funds over the last 14 years of records.

From the chart it can be seen that the distributions projected for June 2023 are approximately the same as experienced in June 2022 – at $54,700. Beneath this stability, however, there are some significant changes in components.

Australian equity ETF distributions are projected to fall from over $17,000 last year to around $5,500, reflecting the 2022 results being quite an outlier in historical terms. By contrast, distributions from the Vanguard global share ETF (VGS) are projected to grow from less than $2,000 to $4,600 over the same period, largely because of the new investments made in this particular ETF over the past year.

Within the overall June quarter distributions, the distributions from the Vanguard High Growth retail index fund typically representing more than 75 per cent of the final outcome.

Yearly variations in this retail index fund distribution rate can easily, therefore, move the final quarter distributions sigificantly. This year the payout is projected to be close to historically normal levels, at around $39,000. It is quite possible, however, that it could be $5,000 lower than this, if the high result in 2021 is taken to out of the sample as an outlier.

Taken together, the current projected outcomes would lead to distributions in the first half of 2023 totalling around $61,000, a figure below that experienced over the equivalent period over the last two years, but above the records for 2017-2020.

If the projections are inserted into the full financial year record, the chart below is the result.

Here, the same broad trend can be seen, on a larger scale.

Total projected distributions are marginally down on last financial year, and well below the unusually high result in 2020-21. Final projected distributions are around $91,000 for the financial year, just below the target portfolio income.

The driver of these outcomes is the methodology of reliance on past averages for each investment vehicle, resulting in a tendency for projections to revert to the mean of the historical record.

This can be seen most clearly on a quarter to quarter basis in the chart below.

Overall, the past records and projection indicate that, in terms of income producing potential, the portfolio is on average meeting its goals over recent years.

Importantly, some of these are distributions of capital gains, of course, and so this does not directly match any broad concept of simply ‘living off interest and dividends’.

Trends in average distributions and expenses

This month average total expenses (red line) rose significant due to some larger one-off expenses to above $6,500, while the moving average of distributions (the blue line) also rose to exceed $8,800.

The chart above measures distributions against an estimate of total expenses. The total expenses figure is based on actual credit card spending, with the addition of a fixed allowance for annual fixed expenses.

It is relatively unusual in this series for both expenses and distributions to rise. The predominant pattern has been falling or stable expenditure, with slowly rising distributions.

Interestingly, however, the total gap between distributions and total expenses has been fairly steady over the past six months, at around $2,300 per month.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,750,000 (or $94,800 pa)	103%	134%
Total average expenses (2013-present) – $85,200 pa	115%	150%
Target equity holding in portfolio – $2,200,000	91%	N/A

Summary

This month saw the Bitcoin 2023 conference in Miami, which was available to be streamed online (video), and was an interesting stocktake of developments. The new Morgan Housel podcast also continued to produce thought-provoking content, with this episode on ‘playing a different game’ being particularly interesting.

More philosophically, this episode of Econtalk provided a relevant perspective on the impact of risks for long-term investing, including discussions of avoiding the ‘risk of ruin’, ‘ergodicity’ and the ease of overlooking ‘survivorship bias’. Finally, the now rarely in print Mad FIentist teamed up with Of Dollars and Data on this piece on discretionary safe withdrawal strategies.

Much of this month has been characterised largely by enervated markets, often moving in relatively small ranges, and with a low level of volatility. The diversification across the portfolio has further meant that those small movements that did occur, largely offset each other.

In this period, my attention has been restlessly elsewhere, intent on using this time to gain different perspectives on the evolution of the portfolio, to help me understand better what may come in the future.

This period of relative stagnant performance has coincided with some changes at work, which are not yet clear in their outcomes, but which could conceivably impell a choice to cease work in the next 1-2 years.

In this case, the equity portfolio within the financial independence is still only at about 90 per cent of its target, and so some caution might be natural. On the other hand, as mentioned last month, broader portfolio components such as superannuation holdings mean that the total of “all equity” owned is already around equal to the current portfolio target.

This highlights the interesting dilemma of choice.

At taking a decision to cease certain paid work, one is to a lesser or greater extent passing one’s fate to a a different holder. From one’s own actions, efforts, workplace, to a much more diffuse and elusive force – markets and the single run of market history which an early retiree will irreversibly encounter.

One is choosing a level of likely income that can be sustainably drawn over time, but another less visible choice is also being made. It is stepping beyond the theoretical probabilities of what history suggests might happen, and choosing to step into a ship destined to encounter a singular and visceral journey.

So for the moment, nothing has happened, and no step has been taken. And when it is taken, likely for a moment nothing will continue to happen, and yet the voyage to an unknown destination will have started.

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.