Line of Position – Superannuation and the Financial Independence Portfolio

Posted on September 14, 2021September 14, 2021 by The FI Explorer

A ship should not ride on a single anchor, nor life on a single hope.
Epictetus, Golden Sayings, Fragment xvi

Setting out: looking beyond the horizon

In sea navigation, lines of position allow the fixing of the true position of a ship by helping to account for drift from wind or currents.

Each month this record regularly assesses the position reached with a relatively narrow focus on changes and trends affecting the financial independence portfolio. This is consistent with the intention of documenting a journey towards financial independence, and retirement well before the traditional age.

The primary focus on financial independence has meant that until the beginning of 2019, I did not regularly record the impact of superannuation on the achievement of the portfolio’s objectives.

From that time, I recorded a simple ‘All Assets’ measure of progress, which effectively counted the impact of superannuation on the measures. Typically, super has recently represented around 30 per cent of additional ‘buffer’ on progress against the goals set.

In this longer post, the aim is to look beyond the FI portfolio which is reported on, and provide more detail on what the whole financial asset picture looks like – taking into account both superannuation and the FI portfolio.

Measuring the changing position across the journey so far

The goal and plan has always been to target financial independence through my private investment portfolio alone, with superannuation perhaps providing an additional margin of safety.

Reflecting this, superannuation – the approximate Australian equivalent to 401K accounts in the US – has been a quietly evolving part of this financial journey in the background, since the earliest phases.

Over time, I have generally sought to contribute beyond the minimum guarantee amounts, making voluntary contributions with the approximate target of reaching an average 15 per cent of earnings in overall contributions.

This has resulted in a steady growth in the superannuation across time, as can be seen in Figure 1 below.

Clearly evident above are the impact of some market declines – in the second half of 2018, and the most recent March 2020 market falls. Yet also as apparent is the overall trend of steadily compounding returns across time.

Lines of Navigation – A History of Portfolio Change

Posted on June 14, 2021March 24, 2022 by The FI Explorer

No man ever steps into the same river twice.
Heraclitus

The achievement of financial independence is often, correctly, framed as getting a few key principles and habits in place, and then repeating these consistently through time. This history of portfolio change steps beyond this valuable and instructive perspective.

This is because an exclusive focus on consistency of action conceals another fact of the journey – that constant principles and habits do not avoid change through the experience. In fact, change has been a continuous marker through the financial independence journey so far.

As the portfolio and its characteristics change, different experiences, issues and challenges emerge.

This post examines some of the major areas of change. It particularly focuses on changes since the commencement of this record in 2017, which covers the second half of the journey.

While each financial independence journey and portfolio is different, this is intended to highlight a few of the key changes I have experienced in building and managing the portfolio, for any interest and insights it offers others.

History of change in the composition of the portfolio

The most significant change – aside from the growth in the overall portfolio level – has been to the composition of the portfolio. That is, balance of actual investments held in different investment vehicles.

For most of the early part of the journey, the set of Vanguard retail funds (mainly the High Growth, Growth, Balanced funds) formed the core of the portfolio. In 2007, for example, Vanguard retail funds made up no less than 95 per cent of the total portfolio.

As the recorded journey started in January 2017, this legacy was still apparent. At this time Vanguard funds made up around 80 per cent of the portfolio, as can be seen below.

Some small gold, Bitcoin, and peer-to-peer lending had been added to the portfolio by 2017. Yet these were minor elements compared to the legacy retail funds that also received regular new investments.

The equivalent chart of the composition of the portfolio today is below.

Peril of Waters – Mapping the Equity Portfolio

Posted on June 16, 2020June 16, 2020 by The FI Explorer

Ships are but boards, sailors but men.

There be land-rats and water-rats, water

thieves and land thieves, I mean pirates,

and then there is the peril of waters, winds and rocks.

Shakespeare, The Merchant of Venice

Equities have historically been the most reliable and effective wealth-generating asset class, and provide the main impetus – or centre of effort – for my current journey to financial independence.

The success of this journey relies heavily on equities continuing to provide, over the years and decades ahead, consistently high market returns on a risk-adjusted basis.

The financial independence portfolio is built on a passive index approach to Australian and global equities. This means investments in equity market index funds automatically occur in proportion to the market capitalisation of each company, sector and market.

Until recently, this led to benign neglect in the details of just what structurally made up the equity component of my portfolio. This neglect can no longer be justified – especially as the equities investments continue to make up around 70 per cent of the overall portfolio.

The exploration of the bond portfolio late last year has provided both an impetus and a model to better understand both the individual components and overall shape of the equity portfolio.

This longer read article explores the make up of Australian and global equities within the financial independence portfolio. It looks beneath the individual investment vehicles and analyses exactly how and where it is currently invested.

Here, in the equities area, the goal is to simply observe, rather than to identify areas for changes for future investment. In short, to understand broadly where the dollars in the equity portfolio are actually invested.

Continue reading “Peril of Waters – Mapping the Equity Portfolio”

Time and Tide – Estimating Distance to the Portfolio Goal

Posted on May 17, 2020February 14, 2021 by The FI Explorer

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All models are wrong, but some are useful.

George E. P. Box

Knowing a time of arrival is key to arranging any complicated journey. An estimated timeline for reaching financial independence is no different.

It is important psychologically because knowing provides a different perspective on choices and work life into the future. Understanding potential timing is also important at a practical level as there are a range of actions it makes sense to take prior to reaching financial independence, and potentially choosing to retire early.

This exploration began over three years ago, with an initial objective of building portfolio of $1 476 000 by July 2021. Since that time progress has occurred and goals have evolved, enabling bringing forward the achievement of this first goal.

Part of the function of this record is to have a history of this evolution, to serve as a reference point through the journey. Another, more outward-facing, purpose is to discuss the specific issues encountered in the middle and later stages of the journey – which can be different from those encountered in the earlier stages.

Since the significant equity market falls across the early part of this year it has been increasingly clear that my original timeline for reaching my financial independence goal may need adjustment.

This post discusses the significant impacts of market movements, how I am approaching reviewing the expected remaining length of the journey, and shows some early results of this approach.

Continue reading “Time and Tide – Estimating Distance to the Portfolio Goal”

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