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”

Monthly Portfolio Update – May 2020

Posted on June 1, 2020May 31, 2020 by The FI Explorer

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth

Robert Frost, The Road Not Taken

This is my forty-second portfolio update. I complete this update monthly to check my progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars).

This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent.

Portfolio summary

Vanguard Lifestrategy High Growth Fund – $727 917
Vanguard Lifestrategy Growth Fund – $42 128
Vanguard Lifestrategy Balanced Fund – $78 569
Vanguard Diversified Bonds Fund – $110 009
Vanguard Australian Shares ETF (VAS) – $187 003
Vanguard International Shares ETF (VGS) – $39 987
Betashares Australia 200 ETF (A200) – $225 540
Telstra shares (TLS) – $1 726
Insurance Australia Group shares (IAG) – $7 741
NIB Holdings shares (NHF) – $5 652
Gold ETF (GOLD.ASX) – $117 714
Secured physical gold – $18 982
Ratesetter (P2P lending) – $11 395
Bitcoin – $159 470
Raiz app (Aggressive portfolio) – $16 357
Spaceship Voyager app (Index portfolio) – $2 492
BrickX (P2P rental real estate) – $4 477

Total portfolio value: $1 757 159 (+$62 325 or 3.7%)

Asset allocation

Australian shares – 41.4% (3.6% under)
Global shares – 22.2%
Emerging markets shares – 2.3%
International small companies – 3.0%
Total international shares – 27.4% (2.6% under)
Total shares – 68.8% (6.2% under)
Total property securities – 0.3% (0.3% over)
Australian bonds – 4.4%
International bonds – 9.7%
Total bonds – 14.1% (0.9% under)
Gold – 7.8%
Bitcoin – 9.1%
Gold and alternatives – 16.9% (6.9% over)

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

May 20 Pie

Comments

This month featured a further recovery in the overall portfolio, continuing to effectively reduce the size of the large losses across the first quarter.

The portfolio has increased by around $62 000, leading to a portfolio growth of 3.7 per cent. This means that around half of the large recent falls have been made up, and the portfolio sits around levels last reached in October of last year.

May 20 - Mnthly Progress

Leading the portfolio growth has been increases in Australian shares – particularly those held through the Betashares A200 and Vanguard VAS exchange traded funds, with both gaining over four per cent. Most other holdings remained steady, or fell slightly.

Markets appear to be almost entirely disconnected from the daily announcements of the sharp effects of the global coronavirus pandemic and the resulting restrictions. Bond and equity markets seem to have different and competing expectations for the future, and equity markets – at best – are apparently intent on looking through the immediate recovery phase to a new period of strong expansion.

May 20 - Mnthly Chng

On some metrics, both major global and Australian equity markets can be viewed as quite expensive, especially as reduced dividends announced have largely yet to be delivered. Yet if historically low bond yields are considered, it can be argued that some heightening compared to historical equity market valuations may be sustainable.

Reflecting this moment of markets holding their breath before one of two possible futures plays out, gold and Bitcoin remain elevated, and consequently above their target weightings.

Continue reading “Monthly Portfolio Update – May 2020”

Time and Tide – Estimating Distance to the Portfolio Goal

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

Screenshot_20200503-150851_Photos (1)

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”