And since I am embarked on the boundless sea and have spread my full sails to the winds, there is nothing in all the world that keeps its form. All things are in a state of flux, and everything is brought into being with a changing nature.

Ovid, Metamorphoses, Bk.XV

Twice a year I prepare a summary of total income from my financial independence portfolio. This is my fourteenth portfolio income update since starting this record. As part of the transparency and accountability of this journey, I regularly report this income.

My primary goal is to maintain a portfolio of at least $2,750,000 which is capable of providing a passive income of around $94,800 (in 2023 dollars).

A secondary focus is achieving a minimum equity target of $2,200,000.

Portfolio income summary

Investment	Amount
Vanguard Lifestrategy High Growth (retail fund)	$16,568
Vanguard Lifestrategy Growth (retail fund)	$928
Vanguard Lifestrategy Balanced (retail fund)	$833
Vanguard Diversified Bonds (retail fund)	$102
Vanguard Australian Shares ETF (VAS)	$6,187
Vanguard International Shares ETF (VGS)	$7,245
Betashares Australia 200 ETF (A200)	$4,532
Telstra shares (TLS.ASX)	$45
Insurance Australia Group shares (IAG.ASX)	$76
NIB Holding shares (NHF.ASX)	$156
Raiz app (Aggressive portfolio)	$251
Spaceship Voyager app (Index portfolio)	$0
BrickX (P2P rental real estate)	$19
Total Portfolio Income – Half-Year to June 30, 2023	$36,942

The chart below sets out the income or distributions received on a half-yearly basis from the financial independence portfolio over the past seven years.

The following pie chart is a breakdown of the contribution of each major current investment in the portfolio to the total half-yearly distributions.

Comments

Distributions in the half-year to June 30, 2023 have totalled $36,942, equivalent to around $6,157 per month over the past six months.

This level of distributions is much lower than was projected, and is – albeit narrowly – the lowest level of June half-year distributions since 2016. That is, before this record of the journey began.

These distributions are marginally below the equivalent June distributions in 2019, despite the income-generating financial portfolio at that time being much smaller (at around $1.3 million) than currently (around $2.3 million).

The half-year results are a product of much lower than projected distributions across both first the second quarters, with the second quarter results playing a much more decisive role, due to their size.

While ETF distributions as a total have fallen compared to the same period last year, the principal gap to past results is due to a much reduced June payout from the Vanguard High Growth retail fund. In the June quarter, this paid out less than half its average level since 2017.

This essentially created a deficit of around $20,000 against past projections based on these averages.

In turn, this meant that recent May projections of distributions of around $55,000 for the June quarter were exposed as far too optimistic, when compared to the actual second quarter distributions of around $30,100.

The same trends impact the results of the financial year just ended.

In FY2022-23 portfolio distributions totalled $67,000, well below the forecast financial year result of around $89,000. The distributions also fell well short of the baseline forward-looking projection of portfolio income (using the mean of past payouts per unit) of around $77,000 per year.

It is a clear reminder that averages and the projections based on them can only be indicative, and are subject to the demons of chance. Even here, however, the types of averages considered can matter.

The financial year distributions of around $66,000 are actually slightly above the projected level of distributions reached using the median of past payouts per unit of $65,000. In other words, in fully 50 per cent of cases, it might reasonably be expected that distributions for this period could be less than this amount.

As can be seen in the chart below the June distributions continue to be by some margin the single largest set of payments received through the year.

This is despite – as seen above, and as discussed in this past portfolio update – a broadening out of the pattern of distributions through time with recent investments in exchange traded funds (A200, VAS, VGS) that pay out on a quarterly basis.

Reviewing trends in the levels of portfolio income from 2000 to 2023

The close of financial year allows an updated view to be given on longer term trends in portfolio distributions.

Across the financial year just past, portfolio distributions of $67,000 were received, or around $5,600 per month on average.

As the chart below shows, this is within the general range of portfolio distributions across the financial years since the beginning of this record. Yet it is substantially below the past two years.

The chart below gives the full history of total portfolio distributions in nominal dollars, with green bars indicating the period covered since the start of this record.

The red dotted line tracks the average level of the portfolio through each financial year.

Previously, a close connection between the portfolio size and the level of distributions has held fairly constantly across the journey. This has, however, broken down over the past two years.

Instead, a much larger portfolio is producing comparable levels of portfolio income to that which was generated by a smaller set of assets two to three years ago.

It is impossible to know the exact cause of this, but some factors may be identified. The first is that distributions across 2020 to 2021 may have been especially volatile due to pandemic impacts, and consequent monetary policy interventions.

In the first instance, this may have led to a withholding and then deferred payout of past profits, as firms first held capital in reserve as a precaution, and then paid out greater amounts subsequently.

Monetary policy interventions may have also created substantial asset price inflation, resulting in higher than normal capital gains. For this reason, FY2020-21 and FY2021-22 portfolio distributions (which combined included around $120,000 of capital gains) may be unrepresentative, and unrepeatable.

A second reason for a lower correlation could be the substantial focus of recent new investments on lower dividend paying international equities, at least compared to historical Australian equity dividend yields of around 4 per cent.

This would tend to have the effect of increasing the level of the overall portfolio, but not resulting in the equivalent rise in measured distributions to that seen in the past.

What it does mean, clearly, is that compounding may be less evident in the metric of portfolio distributions than previously suggested.

Even so, it remains true that around 70 per cent of the real inflation-adjusted value of all distributions received have been received in the past 7 years of a 24 year investing journey.

By contrast, the past supposition that a phase change in the level of distributions occurred in 2016-17, up to a level of around around $64,000, remains in place and defensible.

While discussing real and nominal values, it is worth noting that for simplicity the chart above only tracks nominal dollars through time, ignoring the impact of inflation.

This presentation means it mildly overstates the ‘real’ value of recent distributions and portfolio values, or put another way, understates the purchasing power of those distributions received earlier in the journey.

An alternative perspective on portfolio income from 2000 to 2023

Another way to view the same data is to consider the portfolio distributions as the equivalent of an hourly ‘wage’.

The chart below sets out the amount of portfolio distributions received per hour, spread across every hour of the night and day of a full year. In essence, it reflects portfolio distributions received regardless of whether I slept or worked.

This shows that even with this most recent lower than expected set of distributions, the portfolio continued to produce distributions of $7.66 per hour, regardless, every hour of the night and day across the past 12 months.

Or to conceptualise it slightly differently, the silent and uncomplaining portfolio ‘worker’ has earned around $34 per normal working hour through the last year, very close to the median pre-tax Australian hourly earnings rate.

Continuing changes in the composition of portfolio distributions: 2017-2023

From 2018 the major focus of new investments have been three exchange-traded funds – A200, VAS and, more recently, VGS. This has led to a trend of a slow change in the relative composition of portfolio distributions away from the Vanguard retail funds, and towards distributions from these ETFs.

As an example, at the start of this record, the largest of these funds, the Vanguard High Growth fund, made up over 60 per cent of all financial assets held. That figure is now around 31 per cent of financial assets.

In other words, it is slowly moving off centre stage as the single critical determinant of the level and nature of distributions.

This half-year to June 30, 49 per cent of distributions were generated by the exchange traded funds, a higher percentage than any half year to date.

The chart below sets out the different level and components of half-year to June 30 period over the last six years.

The data highlights an interesting point – that investment vehicles matter, but they do not allow for the suspension of gravity, as it were, when it comes to distributions.

That is, one of the objectives in moving to a greater use of exchange traded funds was to reduce the absolute level of volatility in portfolio distributions arising from the sometimes lumpy nature of distributions from the Vanguard retail funds.

To some extent, this has been achieved, however, it can also be seen that there is simply no panacea for natural variations in payout levels, given the identity in many cases of the underlying assets.

So it can be seen that both the A200 and VAS exchange traded funds half-yearly distributions have been more than halved this half year to June 30, from unusually high payouts in the same period in 2022.

For a comparison to the make up of these half-year results, and a broader picture, the composition of the full 2022-23 financial year distributions is provided in the charts below.

The first chart above shows the strong growth across the past six years in annual distributions from the exchange traded funds, reaching over $36,000 in the past financial year, down from around $47,000 in FY2021-20. In contrast, the Vanguard funds delivered outsized distributions a year earlier, in FY2020-21.

The pie chart above highlights the same shift, with 56 per cent of distributions over the last financial year flowing from the exchange traded funds, and only 44 per cent originating in the Vanguard retail funds.

The long view on the changing composition of portfolio distributions

For a longer view on the performance and pattern of distribution components over time, the chart below sets out the level of, and changes in, major components of portfolio distributions over the past two decades.

The key element of this chart continues to be the high and variable distributions from the Vanguard High Growth fund (teal).

It is important to note that these distributions often contain significant paid out capital gains that occur due to fund rebalancing or fund redemptions, and so do not represent pure passive ‘income’ on invested capital. These paid out capital gains are especially present in some of its recent peaks in distributions.

For this Vanguard High Growth fund, half-year payments generally fall between lower December payments of around $10,000, and higher June payments in the $25,000 to $35,000 range – highlighting the particularly low distributions this year. No new contributions are being made to this fund. This means its pattern and level of payments is likely to be sustained or even slightly decline through time, due to the capital payouts mentioned.

This half-year, the falls in distributions from the VAS (purple) and A200 (blue) exchange traded funds from past highs are also visible.

Finally, a further notable item is the growth in VGS (grey) distributions. For the first time this exceeds the distributions of both the Australian equity exchange-traded funds.

This reflects its recent growing role in the portfolio. Distributions from VGS represented fully 20 per cent, or 1 in 5 dollars of distributions received since January, despite global equities typically having lower dividends.

Portfolio distributions and expenses: a crashing wave?

One common metric for tracking the achievement of, or progress towards, financial independence is the level of portfolio income compared to normal actual expenses.

The chart below sets out the proportion of estimated total expenses (recorded credit card expenses plus estimated additional annual fixed expenses) that have been met by portfolio distributions through time.

To filter out volatility of month-to-month variations, rolling three-year averages of both distributions and expenses are used in the chart.

This chart has been recalculated since last month using the latest distributions data and looks dramatically different than versions in the past – which have shown an apparently relentless upwards progress.

A combination of substitutions of past actual distributions in place of higher projected distributions for this period, and moderate increases in expenditure, has delivered a sharp downward slope.

This might be expected to fall for some time and could, unchecked, result in falling below the 100 per cent line.

The same forces are in evidence in measures of the absolute dollar levels of distributions and total expenses. This is shown in the following chart, which takes a three-year moving average of both distributions and total expenses up to the end of June.

Gone is the pleasing ‘scissors’ pattern of closing on the cross-over point, and then exceeding it. Now, the question is rather, will this notional signal of achieved financial independence dissipate over coming months?

In my current view, this is unlikely, but possible, and if it occurs is likely to be only a temporary anomalous result, rather than a harbinger of things to come.

Distributing the portfolio distributions

The June quarter distributions will provide around $30,100 of capital for potential reinvestment over the month.

This total is less than the full half-year total reported because March quarter distributions (of around $6,200) from a number of the funds and ETFs have been paid and were immediately re-invested across April.

Following my recent practice, I will set aside 25 per cent of these distributions to meet associated future tax liabilities, and quarantine these funds in a high interest saving account.

The other $22,000 will be split between two different purposes.

• First, a cash reserve for unexpected events that was recently drawn on for a new car will be replenished;

• Second, around $15,000 will be set aside for regular reinvestment across the next six months.

These increments will continue to be directed based on my current asset allocation plan.

Given this, there are likely be future investments approximately equally directed to the Vanguard international shares ETF (VGS) and the Australian shares ETF (VAS).

Reviewing the emergency fund: a resumption in reductions

Each half-year I review the level of the emergency fund, which is a cash reserve sitting outside of the portfolio.

It is designed to cover expenses in any unexpected periods without employment income or to help meet any other major unanticipated expenses.

The level of this fund is set to provide the equivalent of one year of expenses equal to my Portfolio Goal target income of $94,800.

To set the level of the emergency fund, I estimate the gap between the target income and an estimate of average distributions (i.e the emergency fund is set equal to the portfolio target income minus expected full year distributions).

In this case, the expected distributions estimate is reached by averaging three different estimation approaches.

The first is the average of the last five years of actual distributions. The second is the current method of projecting distributions from average per unit payouts, and the third is by applying the lowest payout as a percentage of total financial assets to the current balance of financial assets.

Applying this indicates likely forward distributions of around $79,000 per year that could be used in an emergency. This implies a target or required cash reserve of around $16,000, compared to the current level of $18,000.

Last year a similar calculation also implied an ability to lower the emergency fund, however, I kept the same level, out of a desire to build up cash reserves ahead of potential early retirement.

This was consistent with a July 2021 goal of reaching a full year equivalent in cash reserves, to provide a basis for smoothing out distribution income volatility, and providing a ‘buffer’ for an early retirement decision.

At this time, however, with the equity portfolio still around $170,000 below its final target, my priority is to continue to reinvest to close that gap.

In addition, some further detailed modelling around cash flows and some accrued work entitlements, together with expected distributions indicates that with conservative assumptions, even after a three year period of entirely average distributions and expenditure, and no work-related income, I would be left with more than 6 months cash reserves.

This leads me to a position that I will reduce the held emergency reserve to $16,000 (noting that I have a small additional contingency fund for unexpected ‘one-off’ expenses at a similar level).

This continues a pattern of progressive reductions in the target value of the emergency fund, for example, it is less than half the target of $33,000 set in July 2019.

Observations

This half-year the flow of distributions has undoubtedly been below expectations and projections.

Yet this is to be expected at some point in any investment journey, which is inevitably subject to vagaries, uncertainty and occassional surprises.

Some perspective is appropriate. Over the last financial year the portfolio has generated distributions just under the median Australian salary of around $66,000.

Each night I have slept, income of around $60 has flowed into my possession. It is impossible to be unhappy with this situation, even as observing that it represents one of the lowest distributions as a percentagle of portfolio size along the whole journey.

What the result mostly illustrates is both the certainty, and fallacies, of change.

That is, it is a fallacy to believe we can capture a completely accurate glimpse of the future by looking to the past – as the various distributions estimations methods I rely on do. And the certainty of change means that often our expectations of what is irrevocably true are subverted.

In these results, there is also evident change arising from longer-term trends, driven by accumulated past actions.

One of these this half-year is the increasing prominence of international equity distributions, making up at least 20 per cent of portfolio income in the case of the Vanguard exchange traded fund VGS.

Yet the general fall, and some noticeable volatility, in distributions from the exchange traded funds highlights that they are not perfect solution to the issue of instability in the Vanguard retail fund distributions that is apparent from the records.

They are subject to many of the same forces of variation and risk, despite their simpler structure. This is an important learning for the future.

As observed a year ago, only time will reveal the limits of volatility.

In that June 2022 reflection, I also noted that the questions arising around future distributions might be different than in the past. Questions of how much needed to be reinvested, or kept aside as a cash buffer may increasingly hove into view.

For the moment, however, these questions have receded a little, with the objective still to be met of building an equity portfolio of $2.2 million. As the time of writing there is still around $170,000 to go to meet this goal, prior to the subsequent questions of cash needs for a transition to a different stage being so relevant.

Yet this gap itself is dynamic and contingent. This is, after all, a voyage on a boundless sea, even as one seeks to fix ones position in time, and nothing seen now will forever keep its form.

Explanatory Notes

Income distributions reported above do not include associated franking credits. My current preference is to seek to track cash actually delivered to my bank account as a tangible and easy to calculate measure. Last financial year franking credits valued at approximately $18,000 were received from all shares, ETFs and Vanguard retail funds, bringing the total half year distributions on a notional ‘pre-tax’ basis to approximately $46,000.

The income assumed for funds in the Plenti peer-to-peer lending platform is based on historical averages of the applicable lending rates used, together with the average balance over the periods. For analytical simplicity some composition of distributions graphs exclude the small amount income from smaller holdings such as IAG, NHF and Telstra, as well as Raiz, and Spaceship. The total income excluded by this approach ($547) constitutes less than 1.5 per cent of the total income received over the period.

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.