Finding the Skies – Reviewing the Portfolio Goal and Investment Plan

Posted on January 6, 2025January 5, 2025 by The FI Explorer

Through hardships and waves,
We find the skies;
The gods watch over the brave.
Virgil, Aeneid, Book III.192-195

This recorded journey towards financial independence started eight years ago, with an initial objective of building a passive income of $58,000 per annum by July 2021.

Since that time, goals have evolved and changed, with the most recent target being achieved from January 2024 onwards, as well as temporarily before that.

Each year in early January I spend time reviewing my investment goals and how I plan to reach them.

This post talks about reflections arising from this annual review, updates my portfolio goal, and reviews the measures and assumptions I will use. It also discusses how I will approach management of the portfolio and associated finances given the current achievement of each of my past portfolio goals.

The aim each year is to have a clear written record of the objectives, approaches and reasoning underlying the plan, to serve as a reference point through the year to come. The process also enables the updating of plans and assumptions for changes in circumstances, thinking, as well as available data and evidence.

The finding of the sky – a post-journey agenda

This year represents a markedly different period to contemplate than any since my journey begin, either in 2017, when this record began, or 1999, when the first investments were made, depending on how one counts.

It is the first year from which at the outset at least, it appears all of my past goals lay behind, achieved.

This could change overnight, with sharp and potentially extended movements in equity markets in particular.

From late 2021 to late 2023, for example, the portfolio went through phase of losses that meant it did not recover at its headline level for 23 continuous months. In the early months of the pandemic, market losses to the financial portfolio totalled around 16 per cent.

Similar losses occurring now would take the equity portfolio below its nominated target, and require further investments, or a strong recovery to reach it.

It is important to remember that other elements within the goal setting process take these possibilities into account. In particular, when a safe withdrawal rate is estimated, within its assumptions and tolerances is a historically observed pattern of drawdowns, which may include, sometimes, extreme periods of losses.

As an example, where a safe withdrawal is estimated over the last century, it will include consideration of outcomes where full retirement was taken in October 1929 (albeit, this may be included in the small ‘failure’ tolerance accepted).

This means that if one is to have full confidence in the concept of safe withdrawal rates, and one is satisfied that the historical run of experienced returns in the sample used to calculate the rate is an approximation of the worst that might ever be plausibly encountered, and one truly accepts the specified (if small) risk of ‘failure’ implied in a choice of a withdrawal rate, one might entirely ignore the risk of large portfolio losses the day or week of full retirement.

With this in mind, the immediate tasks are evolutions of the two set out last year, recognising that both have been currently achieved.

First, to provide for a reasonably assured passive income which is consistent in real after-inflation terms with the target chosen.

Second, to maintain reserves of cash that will be essential to future movement to entire reliance on investment returns and the application of the safe withdrawal rate to the portfolio over an extended multi-decade period.

Should financial markets fall substantially, it is possible I will use reserves in excess of the above requirement, as well as any regular distributions, to purchase new investment assets to restore in particular the targetted level of equity holdings.

Constant Bearing – Reviewing the Portfolio Goal and Investment Plan

Posted on January 5, 2023January 6, 2024 by The FI Explorer

Be what you were before;

Or weigh the great occasion, and be more.
Homer, Iliad, Bk.1.155

This recorded journey towards financial independence started six years ago, with an initial objective of building a passive income of $58,000 per annum by July 2021.

Since that time, goals have evolved and changed, with the most recent target actually being temporarily achieved through March 2021 to May 2022.

Each year in early January I spend time reviewing my investment goals and how I plan to reach them.

This longer post talks about reflections arising as part of this annual review, updates my portfolio goal and assumptions, and discusses how I will approach my financial independence journey through 2023 and beyond.

The aim, as always, is to have a clear written record of the objectives, approaches and reasoning underlying the plan, to serve as a reference point through the year to come. The process also enables the updating of plans and assumptions for changes in circumstances, thinking, as well as available data and evidence.

A reversal of course on the voyage to financial independence

For the past seven months, the total portfolio has been below the overall portfolio objective.

The previous reaching of the target was therefore a fleeting state of affairs, a function of temporarily surging Bitcoin prices.

Excluding Bitcoin, the portfolio only ever reached around 86 per cent of its target of $2,620,000. At the close of last year the equity portfolio sat at about 88 per cent of its intended final target amount of around $2,100,000.

The target for the year just past was based around a benchmark of the portfolio producing a real annual income of $91,600 in 2022 dollars. The level was chosen because it reflected an amount equal to Australian adult full-time ordinary earnings, and was close to my (then) estimated spending of around $84,000 per annum.

The target has been primarily a short-hand way to measure progress towards the goal of financial independence. It was never designed to act as a crude countdown clock or trigger to immediate early retirement once that dollar value was exceeded.

The target, for example, was notionally exceeded in the first five months of last year, but this did not result in retirement – and for the better as markets turned out, and in terms of reducing sequence risks.

A key benefit of the process of setting a specific target has been to help define what type of post-financial independence is actually envisaged and sought.

Year in Review and Monthly Portfolio Update – December 2021

Posted on January 1, 2022March 24, 2022 by The FI Explorer

We will not from the helm to sit and weep,
But keep our course, though the rough wind say no,
From shelves and rocks that threaten us with wreck.
As good to chide the waves as speak them fair
Shakespeare, Henry IV, Part III.v.4

Year in Review

A year, after all, is simply a collection of days. And therefore the story of this year is largely told in the record of past twelve months.

At the beginning of the year the portfolio goal was reset to provide a target goal for passive income equivalent to $90,500 per year.

At the same time, three essential pre-conditions were set for any movement from my current work arrangements.

These were:

reaching the overall portfolio target of $2.58 million;

achieving a minimum equity portfolio target of $1.93 million; and

a cash reserve of at least one year of normal expenditure.

Rapidly, in fact by March, the first of these conditions were met.

The second remains a little distance away – perhaps 2 to 18 months away should equity markets remain positive, perhaps much longer if any significant equity drawdowns occur.

The cash reserve has been started, but it is not yet near completion. At present, it sits at around $17,000 compared to the average annual spending of about $84,000 since 2013.

The broad progress made against the financial benchmarks through this year is summarised below.

Progress against FI measures through 2021

Measure	Portfolio	All Assets
Portfolio objective – $2,585,000 (or $90,500 pa)	88%→114%	105%→146%
Total average expenses (2013-present) – $83,800 pa	93%→123%	112%→157%
Target equity holding in portfolio	75%→95%	N/A

Stepping back to look at the overall portfolio performance, this year has been unlike any other on the journey.

The overall portfolio has increased by $680,000 – making the year just passed the most significant expansion in dollar terms of the entire record.

Chart - Year in Review - Portfolio Level 2007-22

Studying the course of the voyage

The pattern of this fifth year of the voyage has been distinctly different to any other. Looking back, there is a dual sense of consistency, and radical discontinuity.

The sense of consistency has come from the continued strong growth in equity markets and the continued regular investment into equity-based exchange traded funds. Strong equity returns have contributed to the equity component of the portfolio increasing by over $385,000.

In turn, this has made it the strongest year on record for the expansion of the equity portfolio.

In Way of Harbour – An End of the Journey?

Posted on December 20, 2020March 29, 2021 by The FI Explorer

Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears.
Confusion de confusions, Joseph de la Vega (1688)

Around 1500 days ago this journey began with the objective of determining if it was possible for me to achieve the goal of financial independence.

Over time the precise objectives and targets have evolved, but this post is written to mark and record the – perhaps temporary – meeting of the portfolio goal of $2.18 million this week.

Consistent with much of the journey so far – it was unpredicted and happened in an unexpected way.

A recent surge in the value of Bitcoin, together with some equity market gains, has currently pushed the overall portfolio to just above the its target level. As Aussie HiFIRE remarked, this has resulted in the achievement of a novel kind of ‘BitFIRE’. This does not exactly sit comfortably within the mainstream vision of financial independence pathways. It is certainly not the way I would have ever contemplated reaching the end objective.

Tempting the fates

As someone with a classical history background just writing this post, in fact marking this occasion in any way, appears to be an open invitation for an urgent house call from Nemesis – the balancer of life, and punisher of hubris.

A sudden downward gust, an eddy in markets, or a repetition of previous long retreats from highs would be enough to make this a temporary aberration. Another year, or more, could easily stretch out before the portfolio objective is reached again in this kind of scenario. To be clear and precise, it is my current expectation that something like that scenario will occur.

Yet it is also a stubborn fact that previous milestones, once passed, have generally stayed passed from the momentum of the journey. Part of the purpose of this record is to set out my contemporaneous thoughts and perspectives on each part of the journey as it is being made, rather than withholding to appear falsely wise after the event about the course of progress. A time capsule, rather than a finished product.

The FI Explorer

Journeys in financial independence

Goals