The wind has risen; we must try to live

Paul Valery, The Graveyard by the Sea

This is my ninety-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 $3,000,000. This should be capable of producing an annual income from total portfolio returns of about $103,500 (in 2025 dollars).

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

A secondary focus will be maintaining the minimum equity target of $2,400,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$930,271
Vanguard Lifestrategy Growth Fund	$47,055
Vanguard Lifestrategy Balanced Fund	$81,639
Vanguard Diversified Bonds Fund	$91,293
Vanguard Australian Shares ETF (VAS)	$570,410
Vanguard International Shares ETF (VGS)	$834,689
Betashares Australia 200 ETF (A200)	$330,508
Telstra shares (TLS)	$2,110
Insurance Australia Group shares (IAG)	$11,656
NIB Holdings shares (NHF)	$6,948
Gold ETF (GOLD.ASX)	$201,058
Secured physical gold	$31,595
Bitcoin	$1,857,719
Raiz app (Aggressive portfolio)	$26,452
Spaceship Voyager app (Index portfolio)	$4,540
BrickX (P2P rental real estate)	$4,684
Plenti Capital Note and Flex Market	$89,039
Total portfolio value	$5,121,666 (+$300,142)

Asset allocation

Australian shares	25.6%
Global shares	24.8%
Emerging market shares	1.0%
International small companies	1.2%
Total international shares	27.0%
Total shares	52.6% (-27.4%)
Total property securities	0.1% (+0.1%)
Australian bonds	3.2%
International bonds	3.3%
Total bonds	6.4% (+1.4%)
Gold	4.5%
Bitcoin	36.3%
Gold and alternatives	40.8% (+25.8%)

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

Comments

This month the portfolio saw strong growth – of $300,000 – or 6.2 per cent.

This is the third largest monthly increase ever registered across the journey. The last 12 months has been the most significant period of expansion in the portfolio ever experienced.

The growth was substantially due to further increases in the value of Bitcoin holdings, which increased around 12 per cent across the month, combined with further gains in equities.

This has pushed the headline portfolio above $5.0 million for the first time in the journey.

At a headline level, the portfolio has therefore doubled since the end of 2022, again, largely due to the impact of Bitcoin. Looking just to the traditional financial portfolio, this has expanded by around 50 per cent over the same period, despite an absence of regular new investments across the last year.

Australian equity holdings provided gains of about 3.5 per cent in price terms, with distributions adding another 1.3 per cent to this. International shares also produced capital appreciation of 3.2 per cent, for a total monthly return of 3.7 per cent when distributions are accounted for.

Bond holdings produced a small capital gain of 0.2 per cent.

Gold continued its strong performance with an increase of just over 7 per cent for the month. Interestingly, this means that with the recent gold price increases, gold holdings are quite close to their target level of holdings. The value of gold holdings has doubled in nominal terms since mid-2019.

This month distributions from the fourth quarter of 2024 of around $20,000 were received.

Around one-third of these were set aside for PAYG tax liabilities. The remainder went to a high interest savings account, set aside for potential re-injection into equities in the event of a substantial market fall which pushed the equity holdings below the target outlined above.

Bitcoin and the financial portfolio: analysing risk and volatility

The significantly increased weight of Bitcoin in the portfolio over recent months poses with new urgency a question: how is Bitcoin impacting the portfolio?

A key issue of interest is, how is Bitcoin behaving as an asset compared to the rest of the portfolio – and beyond adding to the level of the portfolio, how are its risks and volatility manifesting themselves over time?

This question was examined in a preliminary way in a post over five years ago, on the role of Bitcoin and gold in my financial independence portfolio here. At the time, Bitcoin represented about 10 per cent of the portfolio. It was also briefly touched on three years ago, in relation to US equities.

Clearly, Bitcoin is now a much more significant element in the portfolio – even if this situation is (unforecastably) temporary, and does vary through time.

The graph below shows the steady growth of the traditional financial portfolio (in blue), with the full portfolio including Bitcoin (red) performing even more favourably.

Casual inspection suggests that the full portfolio moves broadly in line with the financial portfolio, but with greater volatility. This is consistent with the view that Bitcoin may be a ‘high beta’ asset. In other words, it has a tendency to move in the same general direction as other risk assets, but with an even stronger force.

As the previous post discussed, having assets which are diversified, and whose returns are uncorrelated, is a sound objective for a portfolio which seeks to maximise risk adjusted returns within a fixed risk envelope.

Looked at in this way, the critical issue becomes: are Bitcoin’s returns correlated to the portfolio, or is it playing a role in reducing volatility in the portfolio? Put simply, does Bitcoin just lead to ‘higher highs’ at the cost of ‘lower lows’?

If this were the case, there would be an in-principle argument, for example, that the impacts of owning Bitcoin could be replicated by a highly leveraged, speculative equity holding.

If it is not the case, then it might be held that despite its volatility, Bitcoin was playing a risk-reducing role in the same conceptual way as bonds or gold might in more traditional portfolios over time.

Examining the record of evidence: initial observations on correlations and movements

One starting point for looking at this issue is to look at and compare the ‘raw’ record of changes in the level of the financial portfolio and changes in the value of Bitcoin holdings over time.

This illustrates in a simple way the degree to which falls in one asset may coincide with falls in the other – that is, whether the overall risk in the financial portfolio is ‘amplified’ or moderated by Bitcoin holdings.

What can be seen here, albeit on a relatively short timeline, is a mixed picture.

At times, losses occur in Bitcoin where none are occurring in the financial portfolio (which is predominantly equity-based). At other times, there are large gains in Bitcoin where market movements affecting the portfolio are negative, or much smaller.

A way to draw out some of the statistical ‘noise’ in this monthly data is to look at the rolling 12 month correlation of the financial portfolio and Bitcoin holdings over the past 7 years.

This tracks the degree to which the two move in sync, again, providing some insight into the question of whether Bitcoin holdings provide any diversification benefits. Note that this correlation picks up only information on the direction of movement, telling us less about the magnitude of the co-movements.

This chart provides an intriguing picture of variation.

Bitcoin tracks movement in the equity dominated traditional financial portfolio quite closely at times, but with substantial periods in 2018 to 2019 where there was a negative correlation. In other words, during these times, on average Bitcoin holdings and financial assets held moved in opposite directions. Correlation also dropped for short periods across mid-2020, as well as both early 2022 and 2023.

Since around June 2023, however, the financial portfolio have generally been quite highly correlated, at around 0.8 or higher.

Generally, measured just through a simple linear trendline across the entire period, correlation has risen over the period.

Given the limited number of data points, however, it would be unwise to conclude that this was an irreversible or fixed trend. Rather, it may be a function of the existing ‘regime’ of pricing of financial assets and Bitcoin in the last 18 months. Or, indeed, a function of chance.

How volatile is the portfolio ‘with and without’ Bitcoin?

Another window into the impact of Bitcoin on the portfolio is to look at the standard deviation of portfolio growth, with and without Bitcoin.

The chart below sets out the rolling 12 month standard deviation of movements in the full portfolio (blue), and just the traditional financial portfolio (red), from the end of 2017 to currently.

The volatility of the financial portfolio is lower across the period than the full portfolio including Bitcoin holdings.

What can be seen, however, is that the volatility of movements are quite closely related until early 2021, with the movements in the full portfolio and the financial portfolio tending to occur together, and be of comparable magnitude. During the market shocks around March 2020, the volatility of all assets increased.

As the Bitcoin holdings grow in relative size compared to the financial portfolio from March 2021 onwards, however, there is a divergence.

In this phase from June 2021 to June 2023, Bitcoin contributes significantly to increasing monthly movements, compared to smaller movements in the underlying traditional financial portfolio.

From January 2024, Bitcoin again starts contributing to portfolio volatility, although it should be noted this is a phase of substantial and sustained growth in the value of Bitcoin holdings.

This particular data indicates that while generally the full portfolio has experienced greater swings in monthly movements due to Bitcoin, there is not one single consistent pattern over the period of 2018-2025 for how this occurs.

Rather, at times Bitcoin can add volatility to the overall performance of the portfolio, whilst at other times, it has not contributed materially. Whilst Bitcoin holdings make up a substantial proportion of the portfolio, however, it may be expected that it will continue to contribute to volatility in a significant way.

Estimating the ‘beta’ of Bitcoin holdings and the financial portfolio

A further insight into the risk characteristics of the Bitcoin holdings and the financial portfolio can be gained by comparing the covariance of the Bitcoin holdings, adjusted for the variance of the financial portfolio (i.e. the portfolio of traditional assets).

This, in essence, measures the sensitivity of Bitcoin holdings to the rest of portfolio.

This is expressed in the form of the ‘beta’ of Bitcoin, where a beta of 1 would mean a 10 per cent fall in the financial portfolio might be expected to lead to a 10 per cent fall in the value of Bitcoin holdings. A beta of 2, in this case, would lead to a fall of 20 per cent, if the financial portfolio fell 10 per cent, and so on.

What is being measured by the estimate is how much more volatile are the Bitcoin holdings, compared to the rest of the financial portfolio – whereas the previous correlation-based graph only indicates if the two move directionally together.

The chart above provides the 12 month rolling average ‘beta’ for the Bitcoin holdings in relation to the all the other traditional elements financial portfolio.

This shows that Bitcoin has been a negative beta asset for 2018 and 2019, but has had extended phases of being a very positive beta asset at other times, for example, across 2020 and 2022.

In 2022, the increased beta was due to the coinciding losses in financial and Bitcoin holding across the preceding 12 month period. The more recent increases from September 2024 onwards cover periods of strong equity market growth, and the substantial increase in the Bitcoin price since late 2023.

Once again, as with average correlation, there is a gradual increase in the ‘beta’ of Bitcoin in relation to the financial portfolio over the period.

Here, however, the same caveats apply, as generally would during the establishing phase of any new asset class. One might expect fluctuations in the estimate and ‘regime changes’ due to evolving perceptions, wider adoption, and the particular market circumstances it encounters. Future months and markets could easily see a reversal or disappearance of this trend.

Looking at the co-movement on an inter-asset class basis

A further point to note is that I have conducted this analysis by comparing correlations and covariances with the financial portfolio – that is, the entire financial independence portfolio excluding Bitcoin.

This appears the most sensible choice to assess the relative contribution Bitcoin makes to risk and overall volatility in the full financial independence portfolio. It is, in essence, akin to conducting a ‘with and without’ thought experiment or analysis.

Yet it is correct to note that the financial portfolio is itself a mixture of assets, even while generally these were dominantly equities over the period. Gold and bonds are also present as minor parts of the financial portfolio.

This made me curious as to the level of correlation between the value of Bitcoin and some of the other individual asset classes that go to make up the financial portfolio. The chart below is an illustration of one such correlation, measuring the correlation between A200 (as a proxy for Australian equities) and Bitcoin across the last five and a half years.

Weekly data from 2019 to 2025 suggests a relatively weak correlation of 0.2-0.3 in the case of Australian equities, and an even lower correlation between movements in gold and Bitcoin of around 0.05 across the 9 years on a weekly basis between early 2016 and 2025.

Bitcoin and the financial portfolio: quartering winds across the deck?

Five years ago the nature of Bitcoin as an asset in relation to other traditional financial assets was unclear. It is still, ultimately, unclear today.

Major institutions have moved from dismissal of it as an asset class, to launching retail focused ETFs offering exposure to Bitcoin, and increasingly there is discussion of its inclusion as a small part of future diversified portfolios or as central bank reserve assets.

A single sharp downward movement could plausibly reverse and reset this position. Respected Nobel Prize winning economists, such as the father of asset pricing theory Eugene Fama, mount entirely plausible arguments about the value going to zero. The historical record of premature memorials to the death of Bitcoin highlight, however, that this is not a given.

Academic studies on the diversification and hedging properties of Bitcoin are still emerging, and some have so far identified that this may be time horizon-specific, and it may exhibit different performance across different equity markets, performing well in Asia-Pacific markets in some periods.

The overall picture for Bitcoin as part of my full financial independence portfolio is mixed. The five principles set out in the 2019 post still reflect my current position.

The evidence, albeit limited in the case of some of the data above to a short period of Bitcoin’s interaction with broader asset markets, indicates a few things.

• First, that while more recently Bitcoin’s direction of movement has correlated with movements in the rest of the portfolio, this has not been consistently the case. The degree of correlation has varied substantially over the last seven years. Bitcoin has also shown low correlation with Australian equity holdings, and gold.

• Second, that while generally Bitcoin has amplified the magnitude of volatility, again, this is not consistently the case. In at least two out of the seven years measured Bitcoin has acted as a ‘negative’ beta asset, actively offsetting losses in other elements of the portfolio.

• Tentatively, then, it appears possible that Bitcoin has been operating, and will operate again, as a distinct non-correlated, low or negative beta asset that – despite its own specific volatility – serves to mitigate volatility in overall portfolio terms.

These findings can only be tentative, as the nature of Bitcoin as an asset may itself be evolving in response to greater investor participation through direct ETFs, and some superannuation and funds management firms. This might mean its performance characteristics and reactions to market events is very different in 5 years than presently.

It would be a clinical academic eliding of the obvious to not highlight something else – which is that while statistical measures of volatility and co-variance are helpful, it is also a plain fact that most volatility in Bitcoin’s history has been upward.

It would be a peculiar investor, indeed, who showed as strong a distaste for upward volatility as for downward. This upward volatility means that almost any plausible suggested rule for ‘rebalancing’ of the Bitcoin portfolio would have had incurred massive opportunity costs, resulting in substantial exits from ownership across 2016 and 2017, at a fraction of current prices.

So, for the moment, though the winds across the deck may seem chaotic at times, waiting until they show a clearer direction, and taking advantage of their variability, seems the ultimately wiser course.

Trends in average distributions and expenses

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

This graph has been updated since the last update in two important ways.

• First, the average total monthly expenses has been re-estimated using record of actual expenses that are added to actual credit card expenses to reach the ‘total expenses’ estimate. This has moved the total expenses measure upwards, largely due to inflation.

• Second, the finalisation of distributions has enabled actuals to replace projections for the second half of 2024, and will slightly adjusted forward projections that are used in place of actuals until June this year.

This month average total expenses (red line) has continued to rise. These expenses currently are around $8,500 per month.

The three year moving average of distributions (the blue line) has continued its slight recovery in the past month, to reach around $7,400.

This leaves the deficit between expenses and average distributions at around $1,100.

Progress

Measure	Progress
Portfolio objective – $3,000,000	171%
Financial portfolio income as % of total average expenses (3 yr average) – $99,600	113%
Target equity holding in portfolio – $2,400,000	112%
Financial portfolio income as % of target income – $103,500 pa	109%

Summary

This month, as is evident from the analysis above, has been one of greater focus on Bitcoin and its impacts on the portfolio. In a sense this is natural, considering it makes up 36 per cent of the portfolio, rather than the 10 per cent it averaged five years ago in 2020, for example.

Over time, the changes in its value have shifted a number of portfolio metrics well outside of their usual bounds. Most obviously, the total portfolio value has reached – perhaps temporarily – above $5.0 million.

Another is that for the past several months, Bitcoin has assumed a greater allocation in the portfolio than the separate Australian and global equity holdings, being the largest single asset class. This has also meant that total equities as a proportion of the portfolio is now only 52 per cent – a bare majority. If Bitcoin is removed from this analysis, the figure is above 80 per cent.

The rise in the value of holdings has also meant that, unusually, foreign denominated assets now consitute around 65 per cent of the portfolio, meaning that the portfolio in price terms at least is a net beneficiary of any further falls in the value of the Australian dollar, and disadvantaged by the reverse.

My default case is that another fall in value of 80-90 per cent may well occur over the next several years. Looking at the history of Bitcoin, there is ample historical precedent. Should this occur, a lot of the metrics discussed above will return to more normal levels.

The persistence of Bitcoin’s performance across years, however, points to other possibilities and insights.

As an asset that cannot be debased, it, and gold, are arguably acting not as separate individually resolved pricing bubbles. It is possible, at least, that in their growth they are pointing to the appetite of individuals and increasing institutional bodies to seek to offset the impacts of sustained growth in the monetary base, the unit of account of asset holdings.

Any belief of the capacity of either gold or Bitcoin to achieve this might turn out to be ill-founded,but it is difficult to entirely dismiss. In one sense, the current allocation might be said to put an implicit 36 per cent probability to this potential.

Overall, broad money – or M2 – has grown at about 6-7 per cent over past decades, meaning that even strongly positive equity returns need to be adjusted against this or other comparable monetary base benchmarks, to establish any change in value to claims to assets or income in real terms.

These calculations might become still grimmer if, with US equity valuations close to historic highs, the nominal prices of Australian or global equities should fall. Such a fall is, again, well within the historical record of these asset classes, potentially leading to the significant breaching of the minimum equity target.

With geopolitical forces shifting visibly across the United States, China, Russia, and Europe, and high yield credit spreads in some developed markets approaching levels last seen in 2007, a benign playing out of current pressures might be the less probable scenario, when compared against more disruptive potentialities.

In any case, the wind has risen, and either way fortune smiles, we must try to live.

Note for readers

Over the last few months, there has been a noticeable degradation in the useability of my standard blogging interface. As an alternative, and because I am not interested in becoming a coder, plug-in or website management expert, I have created a rough and ready backup Substack and imported past posts. The formatting of past posts may not be as tidy as here, but should the blog ever seem to ‘disappear’ or cease, it will likely just be a signal that I have switched entirely to Substack and started posting there.

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.

Image credit

Knud Baade The Ship, Fortuna (1870)