Men are slower to recognise blessings than misfortunes.

Livy

A year ago I set out on a voyage to build a passive income of around $58 000 by July 2021. As outlined in my recent year in review post, I have come quite close to the absolute portfolio target, and so have spent the past few days reviewing my plans and objectives. Resetting the compass for the future. The passive income update below also indicates that for this past year at least, I have achieved the income objective.

Setting a new course

To recognise this, I have decided to move to having two complementary objectives.

The first is to reach the original goal of $1 476 000 by 31 December 2018. This recognises that while measured in income terms, I have arguably met this goal, this has been from a portfolio level which is still below the target.

The second is a longer term goal of receiving a passive income equivalent to $80 000 in 2017 dollars. This is the approximate equivalent of average Australian full-time earnings, and my annual credit card liability. This will be derived from a new portfolio objective of $2 041 000 by 31 July 2023, keeping the long term real return assumption of 3.92 per cent.

The second goal is designed to reflect a more ‘business as usual’ lifestyle, rather than more of a ‘leanFIRE’ concept , at least in my current phase of life, of $58 000. After reflection, it is closer to the level of expenditure at which I personally would likely truly become indifferent to working or not. Looking back at all of my past investment plans, all have been couched in terms not of quitting work, but building a second passive income stream. No doubt partially this was because not much conscious thought went into what happened at ‘the end’. The closest the policy comes is a ‘review’ following completion.

I have taken a new approach of setting the timeframe of this goal on an average of my past portfolio’s growth over the past few years. In my first plans I would laboriously calculate out new contributions, expected returns, and the effect of compounding. Each method has its drawbacks, however, with a good record of past actual savings and portfolio growth, I have decided that past actual history, with its inexactitude, is likely to be a better guide than forecasts with average return assumptions.

In setting the second objective, one of the factors I’m conscious is that any number of important life and external economic events could intervene. The target is about 2030 days away, based on averages, and cannot reflect how circumstances could change. Nonetheless, I like the focus of a tangible goal.

Following the course

In actually carrying out the new plan, I have made some small refinements. The first is the adoption of specific asset allocation sub-targets, beyond the broad initial equity/bond and alternatives categories. These are:

• 65 per cent equity based investments
  • 30 per cent international shares
  • 35 per cent Australian shares
• 15 per cent bonds and fixed interest holdings
  • 5 per cent Australian bonds and fixed interest
  • 10 per cent international bonds and fixed interest
• 15 per cent gold and commodity securities and Bitcoin
  • 10 per cent physical gold holdings and securities
  • 5 per cent Bitcoin
• 5 per cent property securities
  • 1 per cent Australia residential holdings
  • 4 per cent general Australian and international property securities

Currently, the portfolio is some distance from this ideal allocation, as it will inevitably be at any given time. My plan is to use new contributions and distributions over time to dynamically target the desired allocations. Unfortunately, I have not been able to find much good data to support individual asset allocations in an Australian context. The split between Australian and international equities reflect a balance between international diversification and the tax-advantaged nature of Australian dividends. The role of Bitcoin is primarily as a non-correlated financial instrument.

Passive income summary

As noted my first goal is to to build up a passive income of around $58 000 by 31 December 2018 and $80 000 by July 2023.

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

• Vanguard Lifestrategy High Growth – $23 062
• Vanguard Lifestrategy Growth  – $1 370
• Vanguard Lifestrategy Balanced – $1 376
• Vanguard Diversified Bonds – $233
• Vanguard ETF Australian Shares (VAS) – $1 119
• Telstra shares – $118
• Insurance Australia Group shares – $371
• NIB shares – $180
• Ratesetter (P2P lending) – $1 964
• BrickX (P2P rental real estate) – $38
• Acorns – $68

Total passive income: $29 899

Comments

This half-year result was about double the level I expected, due to higher than expected distributions from Vanguard funds. I have tended to base my expectations on a rolling four year average, but this has broken above that forecast. December distributions tend to be systematically lower than June payouts, and so on a conservative basis, I have more than met my investment objective #1 this half-year.

As I await the distributions I have been considering the question of where to reinvest. Vanguard’s new diversified ETFs are strong contenders, as is increasing my holdings of Vanguard’s VAS Australian shares ETF. Mindful of my target allocations above and current allocations, I would also like to increase my international equity holdings, however, the level of the US share market, and valuations that approach those in September 1929 currently restrains my enthusiasm. The heavy exposure of Australian shares indices to banks and the continuing property slowdown, however, also makes selecting VAS potentially risky. The so-called ‘everything’ bubble makes it a challenging time for asset allocation decisions.