Monthly Portfolio Update – August 2019

Posted on September 1, 2019March 24, 2022 by The FI Explorer

It is idle, having planted an acorn in the morning, to expect that afternoon to sit in the shade of the oak.

Antoine de Saint-Exupéry, Wind, Sand and Stars

This is my thirty-third portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My objectives are to reach a portfolio of:

$1 598 000 by 31 December 2020. This should produce a passive income of about $67 000 (Objective #1) – Achieved
$1 980 000 by 31 July 2023, to produce a passive income equivalent to $83 000 (Objective #2)

Both of these are based on an expected average real return of 4.19%, or a nominal return of 7.19%, and are expressed in 2018 dollars.

Portfolio summary

Vanguard Lifestrategy High Growth Fund – $750 246
Vanguard Lifestrategy Growth Fund – $43 194
Vanguard Lifestrategy Balanced Fund – $79 500
Vanguard Diversified Bonds Fund – $110 418
Vanguard Australian Shares ETF (VAS) – $102 977
Vanguard International Shares ETF (VGS) – $20 184
Betashares Australia 200 ETF (A200) – $258 984
Telstra shares (TLS) – $1 982
Insurance Australia Group shares (IAG) – $14 056
NIB Holdings shares (NHF) – $8 868
Gold ETF (GOLD.ASX) – $104 149
Secured physical gold – $16 759
Ratesetter (P2P lending) – $19 968
Bitcoin – $158 330
Raiz app (Aggressive portfolio) – $16 223
Spaceship Voyager app (Index portfolio) – $2 104
BrickX (P2P rental real estate) – $4 395

Total value: $1 712 337 (-$2 653)

Asset allocation

Australian shares – 40.5% (4.5% under)
Global shares – 22.2%
Emerging markets shares – 2.4%
International small companies – 3.1%
Total international shares – 27.7% (2.3% under)
Total shares – 68.3% (6.7% under)
Total property securities – 0.3% (0.3% over)
Australian bonds – 5.1%
International bonds – 10.1%
Total bonds – 15.1% (0.1% over)
Gold – 7.1%
Bitcoin – 9.2%
Gold and alternatives – 16.3% (6.3% over)

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

Comments

The portfolio experienced a small decline this month, with an overall decrease of $2 600. This movement comes after a strong period of expansion through the first half of the year in the value of the portfolio. Pie progress Aug 19

As with last month, the fall occurs despite some significant new investments being made, meaning the absolute size of the decline is somewhat obscured. Renewed concerns about global trade and a relative weakening in the outlook for future earnings played a significant role in the overall movement of the portfolio. Monthly chng - Aug 19 Once again movements this month within the portfolio have been relatively limited in terms of the size of the portfolio.

Equity holdings have declined by around $28 000 when contributions are accounted for, whilst appreciation in the price of gold has offset just over a third of that loss. In fact, despite no recent purchases, the gold component of the portfolio is currently at the highest nominal value it has ever held. On the topic of gold, this 2013 paper (pdf) provides a comprehensive and skeptical empirical analysis of the range of claims made to support holding gold, including tracing the real gold value of average soldiers pay across 2000 years.

This month has seen a continuing ‘averaging in’ of the capital from July distributions. These have been directed to purchases of Vanguard’s Australian shares ETF (VAS). This is to bring the allocation closer to my original targets – with my Australian shares allocation currently further underweight than the international shares allocation. Psychologically, a weakening Australian dollar has also made purchasing unhedged international shares more problematic.

Risk, volatility, markets and economies

There has been significant market volatility this month, and discussion around the future of Australian and global growth in the midst of trade tensions between US and China.

In such times, something to remember as this St Louis Federal Reserve piece points out, is that the economy and sharemarket are not the same thing. This means that bad (or good) news for one, does not necessarily imply anything about the other. Missing this has the potential to lead to overconfident investment actions predicated on assumptions of future national economic trends (which will themselves most likely be priced into equity markets well before any retail investor reading the news arrives).

The volatility in equity markets has brought out many well-intentioned injunctions to remain calm and fixed on the objective of contributing capital with a long-term view in mind.

At times, however, this wise advice can shade into a form of near complacency – for example, for people to invest confident in the knowledge that long-term returns are (almost) guaranteed. No doubt this is generally good advice, directed at easing particularly new investors’ concerns about investing at the “wrong” time, and reducing the potential damage from selling into falling markets due to panic.

Even as I continue to invest amidst volatility, it is important to reflect on Elroy Dimson’s definition that ‘risk means more things can happen than will happen’, and to consider that the history of equity markets available to us provides only a basis for sound conclusions around what has happened, not what could happen. This is the definition of the risk assumed in markets by investors.

None of this is to suggest that starting, saving and regular investing with a view to one’s individual risk tolerances are not the most important steps in the path to FI. There is a need to pause, however, and acknowledge that at times common financial independence investment precepts bear a disconcerting passing resemblance to the declaration and mathematical proof offered by famous stock promoter Jacob J Raskob in the well-known Ladies Home Journal (pdf) article exactly 90 years ago. This declaration was that with a steady investment in equities, based on the past patterns of returns, ‘everybody ought to be rich’.

Nearly 90 years happened to be just before the Great Depression devastated equity markets and employment prospects alike, and US equity investors were behind in nominal terms for around 25 years. Interestingly, however, this New York Times article argues that deflation, higher dividend yields and impacts from changes in the Dow index composition could theoretically have shortened the real losses of any investor to just 4.5 years, provided they possessed the resources and fortitude to hold on to average stocks.

Progress

Progress against the objectives, and the additional measures I have reached is set out below.

Measure	Portfolio	All Assets
Objective #1 – $1 598 000 (or $67 000 pa)	107.1%	145.4%
Objective #2 – $1 980 000 (or $83 000 pa)	86.5%	117.4%
Credit card purchases – $73 000 pa	98.3%	133.4%
Total expenses – $89 000 pa	80.7%	109.4%

Summary

Progress against my goals and benchmarks has been static this month, with the exception of the ‘total expenditure’ benchmark. My detailed review of expenditure last month identified that I could lower this to recognise some double-counting of fixed expenses, and this has meant a leap forward in progress in that aim of 5.8 per cent. This moves the clock forward appreciably for achieving that benchmark.

As a general rule, it is always later than we think. For example, on a recent lunch time walk it occurred to me that if my progress to my current FI target of $1.98 million is considered in terms of the length of an ordinary working day, it is currently approximately 3.50pm in the afternoon. Quite late, and just over an hour until heading home.

This perspective, of being further towards the tail end than expected, is explored fully and powerfully in the blog Wait but Why here. It helps frame the remaining journey. Viewed in this way, wishing time away seems less useful and fitting than seeking to fill the remaining time with as much meaning, learning, knowledge transmission and patience as feasible. Yet it also explains why in a FI context at this stage sharp changes in investing approach, or commencing new ‘side hustles’ have limited appeal.

Despite it being late afternoon from this one perspective, there are a couple of other considerations or viewpoints. One is the potentially deceptive role of compounding later in the journey, which means that – at least in a stylised world of ‘smooth returns’ – the end goal is actually likely closer than any purely linear measure would suggest.

The other counterpoint to this is that while in my case the absolute journey to FI has involved serious investments over around 18 years, this is not the whole story. Viewed in terms of the average ‘age’ of dollars actually contributed or invested, the journey of the average dollar in the portfolio has been shorter.

In fact, in terms of dollars contributed, around 50 per cent have been contributed since January 2016. So, in some ways, it is more akin to mid-morning for the portfolio as a whole, meaning perhaps that I should not reasonably expect to shade myself under the oak tree just yet.

Finally, this month also saw Pat the Shuffler emerge from a short hiatus and provide a honest and well-argued insight into his rethink on investment options between LICs and ETFs. I also enjoyed reading the start of another Australian FI voice at Fire for One.

The past few months has also had many interesting podcasts related to FI – from The Escape Artists’ Chris Reining on Equity Mates, to a really fascinating practical ChooseFI episode on David Sawyer’s on the UK Path to FI. On the slightly more technical and future focused side of finance, the outgoing address of the Bank of England’s Governor to the Jackson Hole central bankers gathering provides much food for thought on current and longer term monetary and currency issues, particularly as global bond rates continue to cross the ‘zero-bound’ into uncharted territory.

Monthly Portfolio Update – July 2019

Posted on August 1, 2019March 24, 2022 by The FI Explorer

If it not be now, yet it will come.

The readiness is all.

Shakespeare, Hamlet, Act V, Scene ii

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

Portfolio goals

My objectives are to reach a portfolio of:

$1 598 000 by 31 December 2020. This should produce a real income of about $67 000 (Objective #1) – Achieved
$1 980 000 by 31 July 2023, to produce a passive income equivalent to $83 000 (Objective #2)

Both of these are based on an expected average real return of 4.19%, or a nominal return of 7.19%, and are expressed in 2018 dollars.

Portfolio summary

Vanguard Lifestrategy High Growth Fund – $769 050
Vanguard Lifestrategy Growth Fund – $43 826
Vanguard Lifestrategy Balanced Fund – $79 826
Vanguard Diversified Bonds Fund – $108 036
Vanguard Australian Shares ETF (VAS) – $90 076
Vanguard International Shares ETF (VGS) – $20 250
Betashares Australia 200 ETF (A200) – $265 413
Telstra shares (TLS) – $2 116
Insurance Australia Group shares (IAG) – $15 051
NIB Holdings shares (NHF) – $9 588
Gold ETF (GOLD.ASX) – $95 251
Secured physical gold – $15 309
Ratesetter (P2P lending) – $21 070
Bitcoin – $157 290
Raiz app (Aggressive portfolio) – $16 358
Spaceship Voyager app (Index portfolio) – $2 092
BrickX (P2P rental real estate) – $4 388

Total value: $1 714 990 (-$1 713)

Asset allocation

Australian shares – 40.6% (4.4% under)
Global shares – 22.6%
Emerging markets shares – 2.5%
International small companies – 3.2%
Total international shares – 28.2% (1.8% under)
Total shares – 68.9% (6.1% under)
Total property securities – 0.3% (0.3% over)
Australian bonds – 5.1%
International bonds – 10.1%
Total bonds – 15.2% (0.2% over)
Gold – 6.4%
Bitcoin – 9.2%
Gold and alternatives – 15.6% (5.6% over)

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

Comments

The portfolio experienced a small decline this month, with a decrease of $1 700. This slight downward movement comes after six months of continuous increases in the value of the portfolio. Progress - Jul 19

The fall also comes at a time in which some significant new investments were made, masking the size of the fall somewhat. A substantial likely contributor to the decline, however, is the natural impact of distributions being paid from shares, as well as ETFs and retail index funds.

In short, around $30 000 of distributions were paid out across July, decreasing the value of portfolio securities by around the same amount. Not all of these distributions have been re-invested, creating a temporary illusion that this value has been removed. A comparable effect led to a similar reduction in July 2017. Monthly - Jul 19

Generally movements this month within the portfolio have been relatively limited. One of the larger movements has been an increase in Australian and international shares, with Australian share markets just reaching post Global Financial Crisis highs.

A fall in the price of Bitcoin, and a smaller countervailing increase in the value of gold holdings has provided a live example of some of the issues in my last post on the potential value of non-correlated alternatives. Having said this, the fall in the price of Bitcoin is the major factor in this months downward movement. Evidently following some real estate revaluations, my BrickX holdings have also decreased in value by nearly 6 per cent since the last month. This most recent research into the actual realised returns from real estate investing suggests I should not be surprised, and usefully highlight the specific risks facing individual property investments.

This month has also seen my first investment of July distributions. These were placed in Vanguard international shares ETF (VGS). The remainder of the distributions will be placed into either into VGS, or Australian shares (A200 or VAS) over the next four months, on a dollar cost averaging approach alongside new contributions.

Reviewing of insurance needs and adjustments

Following distributions last month I have also re-examined my insurance requirements, taking into account updated portfolio values, existing savings, insurance through superannuation, and future financial obligations. This has led me to continue to reduce both my life insurance sum insured (from $315 000 to $100 000) and my income protection insurance (from $3000 to $1000 per month).

I have taken a conservative approach, and based the adjusted coverage on the goals of providing of sufficient income, at an assumed safe withdrawal rate of 3.75 per cent, to still meet my Objective #2.

In other words the target has been offering full income replacement from all assets and insurance of at least $83 000 in perpetuity. Still, this adjustment has led to a substantial savings – nearly $1 000 per annum. An alternative way to think about this is that I have lowered my ongoing expenses by just under $20 per week, reducing the final portfolio sum required to support this cost by around $28 000.

Progress

Progress against the objectives, and the additional measures I have reached is set out below.

Measure	Portfolio	All Assets
Objective #1 – $1 598 000 (or $67 000 pa)	107.3%	145.3%
Objective #2 – $1 980 000 (or $83 000 pa)	86.6%	117.3%
Credit card purchases – $73 000 pa	98.5%	133.3%
Total expenses – $96 000 pa	74.9%	101.4%

Summary

The steady reinvestment of July distributions should give a small upward push to monthly results through to December. This is tempered by an effect of the growth in the overall size of the portfolio, and its exposure to equities.

As a simple example – a daily movement in equities of 0.5 per cent at the beginning of the journey meant a loss or gain of just over $3 000 in a day. The same movement now with the current portfolio would mean a gain or loss of nearly $6 000.

This makes the path less clear – as new contributions can more easily be swallowed into a daily market movement. The portfolio value effect has generally been – to borrow a phrase – a little akin to watching the movement of a yo-yo being used by someone walking up or down some stairs. Psychologically, it detaches effort from reward in a way that still feels relatively new in this journey.

An interesting post to think about in this context, is this from Collaborative Fund, which shows the sharp, volatile multi-year paths equities can take to reach a single destination. Usefully, it also points out the futility of many ‘fine adjustments’ to sectoral exposure, and unnecessary complexity in portfolio construction.

A further truth illustrated by the data in the piece is that general consumer sentiment, and economic growth, do not align with stock returns in any systematic way. In short, buying or selling shares because of a view that the economy or consumer confidence is strengthening, or weakening, is a futile guesswork, which has no historical basis in the past behaviour of returns.

These findings and new realities are reminders that taking the actions that support forward progress and continued regular investments are the immediate focus. This matters more than whether the portfolio sits above or below an arbitrary number on any given day. Planning and readiness for that day is the priority.

Portfolio Income Update – Half Year to June 30, 2019

Posted on July 7, 2019January 15, 2022 by The FI Explorer

IMG_20190117_144205_272

Set your course by the stars, not by the lights of every passing ship.

Omar Bradley

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

My goals are to build up a portfolio providing for a passive income of around $67 000 by 31 December 2020 (Objective #1) and $83 000 by July 2023 (Objective #2).

Passive income summary

Vanguard Lifestrategy High Growth – $25 606
Vanguard Lifestrategy Growth – $1 626
Vanguard Lifestrategy Balanced – $1 630
Vanguard Diversified Bonds – $53
Vanguard ETF Australian Shares ETF (VAS) – $1 761
Betashares Australia 200 ETF (A200) – $4 513
Telstra shares – $43
Insurance Australia Group shares – $209
NIB shares – $120
Ratesetter (P2P lending) – $1 373
Raiz app (Aggressive portfolio) – $107
Spaceship Voyager app (Index portfolio) – $0
BrickX (P2P rental real estate) – $36

Total passive income in half year to June 30, 2019: $37 077

The chart below sets out the passive income received on a half-yearly basis from the portfolio over the past three years. HY Jun19 Series Income

The following figure is a breakdown of the percentage contribution of each investment type to the total half year income.

HY-Jun19 Pie

Comments

The total half year passive income from the portfolio was $37 077, the equivalent of $6 180 per month, and above my recent expectations. This was a significant rise from the previous half year to the end of December, consistent with the usual pattern of June distributions being higher.

This June half year result is, however, significantly lower than the equivalent 2017 and 2018 figures. It is now apparent that these previous two results were outliers, as they included significant payments arising from realisations of capital gains and the re-balancing activities of the Vanguard diversified retail funds.

Stepping back and examining distributions over the full financial year presents another longer-term perspective. Full year distributions have recovered from the poor start in the half to December 2018, and the full financial year results are $52 524, or just under $4 400 per month. This is fairly close to my recent estimates of the likely income potential of the portfolio at current levels.

In the chart below of the history of total portfolio distributions, green indicates periods covered by this record. Total dis FY Jun19

From this chart it is apparent that annual distributions have fallen significantly – around 20 to 30 per cent – compared to the past two financial years. Yet it is also clear that they have moved structurally above the years previous to this due to the continued growth in the size of the portfolio.

A year-on-year fall in annual distributions such as experienced this financial year is relatively rare – having not occurred since 2012 – but not unprecedented in the history of the portfolio. It has occurred on three other occasions over the past two decades. To date, a consecutive yearly decline has never happened.

Journey to credit card FI – a steadily closing gap?

The full financial year data also makes it possible to recalculate comparative trends in distributions and monthly credit card costs as well as other expenses on a more representative basis than the previous unusually low December half-year income.

This chart below shows that from April 2019 and for the first time in about a year, credit card expenses have dipped temporarily below annual distributions. Credit card FI Jun19

This may not be sustained over time, as this series is naturally quite volatile. As expected, there is still a gap between estimated total expenses and distributions.

To provide a clearer picture of progress towards passive income meeting my ‘credit card FI’ goal, the following chart takes a three-year moving average of both distributions and credit card expenses. Closing gap 3 yr Jun19

This shows the gap continuing to close, to a remaining gap of less than $1 000 per month between credit card expenses and average distributions.

Changing composition of distributions and sources of variations

Over time the level of distributions will be affected by ongoing changes in portfolio composition.

The fall in the Ratesetter account balance and fixed income holdings overall will tend to reduce future distributions. Similarly, the large and growing investments in ETFs such as VAS and A200 will, at least in a relative sense, reduce the overall portfolio impact of the more volatile Vanguard fund distributions.

The reason for this can be seen in this new chart below, which tracks the major components of distributions through time. Dist by Type Jun19

This highlights the dominating influence of variations in the distribution payouts from the Vanguard High Growth Fund through time on overall distributions. It also shows that up until five years ago Ratesetter interest income represented one of the single largest components of distributions compared to just four per cent now.

The half year composition of distributions already given also reflects their cyclical payout pattern, with around 70 per cent being from the single largest Vanguard High Growth fund. Over time, the lower than average distributions from the Betashares A200 ETF – reflecting its market entry and rapid growth – should normalise, possibly representing a slight upward factor in its role in future distributions.

For a point of comparison against the half year result, the composition of the full financial year distributions is set out in the figure below. Comp FY dist Jun 19

From this it is apparent that collectively the distributions from the Vanguard High Growth fund, the A200 ETF and Vanguard’s VAS ETF decisively shape overall distributions currently, making up nearly 85 per cent of total payments.

The overall portfolio distribution rate (e.g. distributions as a percentage of the portfolio value) for this half year has been 3.5 per cent, one of the lowest rates recorded so far. This is likely due to falling fixed interest returns and the increased use of ETFs with lower payouts of capital gains than the Vanguard retail funds. The average (median) distribution rate over the past two decades remains steady at 4.4 per cent.

Av dist rate Jun19

Making course adjustments – putting distributions to work

The imminent payment of the July distributions from Vanguard funds, as well as the distributions from the Betashares A200 and VAS means that a total of around $30 000 will need to be reinvested or allocated in weeks ahead.

I will set aside around 25 per cent of this sum to meet the associated tax liabilities, and then expect to reinvest the remainder in even increments on a regular basis over the next six months. While market performance and history suggests a single lump sum investment would be financially optimal, my general practice is to use dollar cost averaging for large sums, to manage the risk of investing prior to a large market movement, and recognise the potential power of ‘decision regret’.

My current intention is to reinvest these distributions in Vanguard’s global shares ETF (VGS). This will be my first investment in this ETF, and flows from the fact that ‘the big rebalance’ to reach my intended 60/40 allocation split between Australian and international equities is now effectively complete.

Historically, I have been wary of this ETF’s high US equity market exposure, and its past returns have been strong (indicating the potential for a reversion to lower returns). However, I am seeking to follow my planned asset allocation, and have some expectation that any external events likely to reduce US and global returns will also likely impact on the Australian dollar, potentially partially offsetting some negative impacts. I am also attracted to the broad simple diversification it offers into areas not well covered by Australian equities.

A further step following from finalising the half year income estimate is to revise the level of my emergency fund. This is set at providing the equivalent of one year of expenses at a level equal to my Objective #2 target income – that is, $83 000. It has been primarily designed to cover expenses in any unexpected periods without employment income.

This most recent set of distributions takes the five-year average of distributions to just over $50 000. On that basis, I am reducing my emergency fund to $33 000, and using the additional capital this frees up as new contributions to the portfolio. Over time the growing average portfolio size should have the impact of tending to lower my emergency fund as the associated flow of distributions rises to replace it. Despite this, I always intend to keep a modest contingency cash allotment for liquidity and unanticipated cash requirements.

Observations

Around 251 years ago, Captain James Cook set sail for a journey across the entire Pacific Ocean to reach the island of Tahiti. His instructions were to witness and record the transit of Venus – that is, the journey of that planet against the disc of the Sun. Scientists and astronomers at that time hoped that by taking a range of measurements as the transit occurred, they might divine the distance between the Earth and Sun.

Similarly, this set of observations helps me understand some of the key measurements in my narrower universe – for example, my distance to a lifestyle funded by passive income, and the broad boundaries around the variability in that income that I might expect.

For much of the past six months, my curiosity about this particular result has been growing. While as a half year it is less spectacular than some past results, it feels like a firm foundation of what the portfolio might be expected to deliver on average over time. It also reasonably matches my previous analysis of the portfolio income potential.

On an annual basis, $52 000 of income represents a more than adequate level of basic financial security in my circumstances. The new figures also provide a cross-check on other measures of progress I use, reinforcing that I am now in a phase of consistently seeking to close the remaining gap between expenses and average total portfolio returns.

As global and domestic markets appear more ominous and finely poised, the relative stability of this income source compared to absolute capital values will also play a psychological role in allowing continued strong investments in equities ahead. Whether this be into storms or calms seas will soon enough be seen.

Explanatory Notes

Income distributions reported do not include franking credits. My current preference is to seek to track cash actually delivered into my bank account as a tangible and easy to calculate measure. In this past half year franking credits valued at just under $2200 were received from shares and ETFs (not including the Vanguard retail funds).
There has been a small downward revision to the half year to December 31, 2018 income estimate of $15 602 to $15 447. This reflects the availability of better data from the annual tax statement, and substituting that data for projections made in December 2018.

Monthly Portfolio Update – June 2019

Posted on June 30, 2019January 15, 2022 by The FI Explorer

I must go down to the seas again, to the lonely sea and the sky,
And all I ask is a tall ship and a star to steer her by;
And the wheel’s kick and the wind’s song and the white sail’s shaking,
And a grey mist on the sea’s face, and a grey dawn breaking.

John Masefield, Sea Fever

This is my thirty-first portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My objectives are to reach a portfolio of:

$1 598 000 by 31 December 2020. This should produce a real income of about $67 000 (Objective #1) – Achieved
$1 980 000 by 31 July 2023, to produce a passive income equivalent to $83 000 (Objective #2)

Both of these are based on an expected average real return of 4.19%, or a nominal return of 7.19%, and are expressed in 2018 dollars.

Portfolio summary

Vanguard Lifestrategy High Growth Fund – $772 490
Vanguard Lifestrategy Growth Fund – $44 487
Vanguard Lifestrategy Balanced Fund – $80 006
Vanguard Diversified Bonds Fund – $107 352
Vanguard Australian Shares ETF (VAS) – $88 322
Betashares Australia 200 ETF (A200) – $260 499
Telstra shares (TLS) – $2 052
Insurance Australia Group shares (IAG) – $14 405
NIB Holdings shares (NHF) – $9 204
Gold ETF (GOLD.ASX) – $92 340
Secured physical gold – $14 807
Ratesetter (P2P lending) – $22 011
Bitcoin – $186 350
Raiz app (Aggressive portfolio) – $15 744
Spaceship Voyager app (Index portfolio) – $1 991
BrickX (P2P rental real estate) – $4 643

Total value: $1 716 703 (+$118 079)

Asset allocation

Australian shares – 40.2% (4.8% under)
Global shares – 21.5%
Emerging markets shares – 2.5%
International small companies – 3.2%
Total international shares – 27.2% (2.8% under)
Total shares – 67.4% (7.6% under)
Total property securities – 0.3% (0.3% over)
Australian bonds – 5.2%
International bonds – 10.0%
Total bonds – 15.2% (0.2% over)
Gold – 6.2%
Bitcoin – 10.9%
Gold and alternatives – 17.1% (7.1% over)

Presented visually, below is a high-level view of the current asset allocation of the portfolio. Pie - June 19

Comments

The portfolio has experienced the strongest growth on record through this month, with a total increase of $118 000. This pushes the portfolio well beyond Objective #1 to over $1.7 million. Monthly prog - Jun 19

This has followed a period of unprecedented growth in the absolute value of the portfolio, with an increase of almost $400 000 since January. A remarkable consequence of this is that over 20 per cent of the entire value of the portfolio has come into existence in this short six month period.

Month change 2 - Jun 19

This unbroken record instinctively invites expectations of a sharp – and possibly a quite sustained – reversal. I am determined, however, to act in accordance with my asset allocation decisions, not on the basis of overconfidence in my own capacity to predict or time markets.

The key contributors to growth this month have been continued appreciation in the price of Bitcoin, and even more significantly, increases in the value of Australian equities and gold. Lower official cash rates have strongly supported equity value growth, and a sharp increase in the price of gold has occurred. Combined, the gains in equities and gold accounted for over half of the total monthly increase.

New investments this month were focused on Australian equities. Following the lowering of the management fee of the Vanguard ETF VAS – tracking the ASX300 index – to 0.10 per cent from 1 July, I also made my first new investment in VAS for eighteen months. This lowering leads to the VAS ETF becoming significantly more competitive in fees with the Betashares A200 (which charges 0.07 per cent). It also offers some (small) additional diversification benefit through tracking an additional 100 smaller listed companies.

Accounting for volatility and Bitcoin in asset allocation

The sharp increase Bitcoin’s value over the past month has brought the combination of alternatives (gold and Bitcoin) to just over 17 per cent of my portfolio, higher than sought. Bitcoin continues to serve a role providing portfolio diversification, but its recent increase has actually correlated with a rise in Australian equities. Recent price volatility leaves me conscious that the market value of these holdings could quite easily slip down to $50 000, its position a few short months ago.

If there is a star to steer by in such times, it is provided by the target asset allocation. Tracking back towards that in a time of intense volatility is the task at hand.

To ensure Bitcoin volatility is not unduly driving asset allocation decisions, however, I have started to test any new investment action I am considering taking on a ‘with’ and ‘without’ basis. This involves notionally backing Bitcoin completely out of the portfolio (or, more realistically, adopting a trailing average value) and assessing whether or not the asset allocation ‘signal’ for the direction of future investments changes.

The reason for doing this is to check that I am not undertaking hard to undo portfolio actions monthly merely as a response to Bitcoin’s unique price variations. At one extreme if I remove Bitcoin from allocation considerations (e.g. assume it has no value), I have actually already achieved my target equity allocation of 75 per cent. Taking a less extreme approach, however, of attributing just a lower trailing average value results in a continued signal to make new equity investments.

Waiting for the next set of distributions

This period prior to July distributions being finalised and paid always has a quality of uncertainty and contingency about it. Distributions have been quite volatile over time, principally due to different distribution levels from Vanguard retail funds. In turn, these are likely due to maintaining asset allocations, and irregular distributions of underlying capital gains.

My current July distribution estimates are for around $2600 from the Betashares A200 ETF, $800 from Vanguard’s VAS ETF, and around $16 000 to $23 000 from the Vanguard retail funds. These are based on median and average past distributions over the past 10 years for the funds and the already announced distributions in the case of the ETFs.

This could to mean that in early July I may have around $20 000 of newly available capital to re-invest in the market, however, these estimates are just that. In the past, distributions have at times been both dramatically less and more than anticipated. For example, the Vanguard High Growth fund has twice recently produced July distributions at levels above $30 000.

Following distributions being paid I will be looking to re-invest the capital in accordance with my target allocation. Two factors will likely drive these decisions. First, as discussed above the portfolio remains under its assigned equity allocation. Second, after a year of almost exclusive contributions to Australian equities, the target for that component is almost reached.

This means that a proportion of future contributions will be directed to international equities, to target the 60/40 per cent split I have set based on academic research on the historical record of the optimum balance of reducing volatility while maximising risk adjusted returns.

History of Australian equities research

This month the Reserve Bank of Australia issued a new research paper (pdf) on the history of Australian equities.

This draws on newly collected and analysed historical data on the past century of Australian share market returns, improving on previous incomplete or simplified data sets. Some of the key findings of this report have potential implications for my future portfolio planning. For example, the paper finds:

Dividend yields since the 1980s have averaged around 4.0 per cent, and prior to that have been 200 basis points lower than previously estimated
The historical geometric and arithmetic average equity risk premium (the equity return in excess of the 10 year bond rate) is between 4.0 and 5.2 per cent, lower than previous estimates
Australian and US equity returns are historically very similar
The overall composition of the Australian share market by sector is remarkably similar to a century ago
For several years leading up to 2018, the Australian equity market has tracked its historical valuation measures quite closely, with lower than historically average volatility

One implication of this is that in future investment policy reviews, I may need to lower my current estimate of long term real equity returns (currently 5.65 per cent).

Progress

Progress against the objectives, and the additional measures I have reached is set out below.

Measure	Portfolio	All Assets
Objective #1 – $1 598 000 (or $67 000 pa)	107.4%	144.5%
Objective #2 – $1 980 000 (or $83 000 pa)	86.7%	116.7%
Credit card purchases – $73 000 pa	98.6%	132.6%
Total expenses – $96 000pa	75.0%	100.9%

Summary

The rapid growth in the portfolio has been somewhat disorientating.

On an ‘All Assets’ basis, this has meant that all current expenses could theoretically be met from the portfolio and superannuation assets. Nonetheless, while this is pleasing, my focus remains on reaching my financial independence goals using just the portfolio assets.

The higher markets reach, the more interested I become in learning what I can from other periods of volatility. This has led to absorbing the book Wealth, War and Wisdom, a fascinating study of financial markets and returns through the convulsions of the twentieth century’s world wars and Cold War tensions. It examines the challenge of the protection of real wealth in extreme conditions, finding that a diversified portfolio of real and paper assets, including a large weighting to equities, generally performed well.

The Australian FIRE community has also been sinking its teeth into launches of the ‘Playing with FIRE’ documentary. For those not able to make one of the premieres, AussieFireBug’s most recent podcast provides a really enjoyable post-viewing conversation reflecting on its strengths and weaknesses. Also this month Big ERN has published an interesting guest post on safe withdrawal rates over 60 year periods. It makes the point that the ‘rule’ of 4 per cent can be risky and misleading over long time scales, with withdrawal rates of 3.5 per cent significantly decreasing the failure risk.

The passing of the winter solstice a week ago brings with it the promise of longer and lighter days ahead. The distributions to come also evoke a sense of a possible grey dawn breaking. In just a few days, the mists should lift and navigation of the portfolio towards my financial independence goals should be significantly clearer.