Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.

Tacitus

This is my thirtieth 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)
• $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 – $745 158
• Vanguard Lifestrategy Growth Fund  – $43 119
• Vanguard Lifestrategy Balanced Fund – $77 915
• Vanguard Diversified Bonds Fund – $105 821
• Vanguard Australian Shares ETF (VAS) – $80 408
• Betashares Australia 200 ETF (A200) – $246 012
• Telstra shares (TLS) – $1 937
• Insurance Australia Group shares (IAG) – $13 376
• NIB Holdings shares (NHF) – $8 178
• Gold ETF (GOLD.ASX)  – $85 424
• Secured physical gold – $13 652
• Ratesetter (P2P lending) – $23 262
• Bitcoin – $132 720
• Raiz app (Aggressive portfolio) – $15 130
• Spaceship Voyager app (Index portfolio) – $1 883
• BrickX (P2P rental real estate) – $4 629

Total value: $1 598 624 (+$57 037)

Asset allocation

• Australian shares – 40.9% (4.1% under)
• Global shares – 22.3%
• Emerging markets shares – 2.6%
• International small companies – 3.3%
• Total international shares – 28.2% (1.8% under)
• Total shares – 69.1% (5.9% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 5.5%
• International bonds – 10.5%
• Total bonds – 16.0% (1.0% over)
• Gold – 6.2%
• Bitcoin – 8.3%
• Gold and alternatives – 14.5% (4.5% over)

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

Comments

The portfolio has experienced strong growth through the month, with a total increase of around $57 000.

This fifth month of continuous growth has seen an important event occur ahead of schedule. Portfolio Objective #1 – which is the ‘median income’ FIRE target that was the goal set at the start of this record in December 2016 – has been narrowly achieved.

My expectation at the beginning of this year was to reach this particular goal only at the end of 2020. This itself was shifted forward from the original goal of passing a slightly lower median income objective by July 2021. The net result of all of this is that a higher absolute portfolio objective has been reached more than two years early.

This achievement may be temporary, as it comes following the equal second longest run of monthly gains in this record. Just an average monthly fall could easily see the portfolio dip well below the objective again, and a prolonged downturn in share markets could easily lead to major declines which would take some time to recover from. At this stage, given that my final Objective #2 is still some distance away and further accumulation is planned, this prospect does not overly concern me.

The portfolio performance this month largely reflects the same drivers that have dominated performance since the journey began. These drivers have been new contributions and increases in Australian shares (through Betashares A200), particularly since the Federal election. In addition, there has been a significant increase in the price of Bitcoin. This led to a portfolio growth which was the sixth highest in the record to date.

Credit card spending has been significantly lower than average over the past month. It has been the lowest level in six years in fact. As the series below indicates, however, it is a volatile measure.Once financial year 2018-19 figures on distributions are finalised early next month, it’s likely the the red line of distributions, which currently is an estimate based on low December half year figures, will be revised up. This in turn could mean a return to distributions on average coming close to meeting credit card expenses.

Progress

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

Summary

Progress over the last few months has been swift and surprising. Timelines set less than six months ago have been met, and the portfolio has entered into the ‘between’ phase of being above my minimum objective, but some distance from my ultimate goal (Objective #2).

Part of the process of adapting to this phase is understanding its true nature – its permanence or otherwise, and looking through short-term movements to try to discern the underlying picture. In short, inspection and delay.

This what lies behind recent posts seeking to analyse the income potential of the portfolio, and longer term trends in distributions and expenses. Seeking the additional data point of what this portfolio delivers currently is the reason I am straining forward to see the size and shape of the end of June distributions.

The advice commonly offered in the financial independence community at this point is crystal clear. Pay less attention to the numbers, and start exploring and building the life you desire now. The advice is so universal, and so intuitively sensible that I do not ignore it. With Australian and global equity markets poised as they are, however, I feel a resisting force going too far down this path. This is mostly stemming from a suspicion that prior to the goal being reached there might be one or more unavoidable challenges to come.

This may be linked to an increased probability of Australian interest rate reductions, and even the entry by Australian monetary authorities into some form of quantitative easing. As inflation stalls, and housing markets decline, the macroeconomic conditions appear less predictable than at any time since 2009. Some of the global financial trends and developments that are of most concern are well discussed in the most recent Incrementum AG In Gold We Trust report, which has as its theme declining trust across the global financial system.

While that outlook might suggest protective action, overall I am comfortable with the extent of my diversification across less-correlated assets. It should be remembered that I felt similar unease two years ago – and that indulging in market timing at that point would have had high opportunity costs.

In any case, more and more it is evident that the performance of the portfolio is not something that can be materially altered by one or two monthly investment decisions. Rather, it is a function of the interaction of unstable markets with the compound effect of hundreds of smaller individual investment contribution decisions taken over the past decade or so across a range of different market conditions.

Following on from my quick Bitcoin and gold correlation analysis last month, I was interested to see this ‘portfolio optimisation’ based analysis on the role of Bitcoin in a portfolio, using just seven years of historical data. Also, this What’s Up Next podcast on finding the right time to retire is a fascinating discussion of the issue of knowing when it is time to put into action FIRE plans. Finally, Aussie HIFIRE has recently pulled together a post highlighting the different voices in the Australian FIRE blogging community for readers.

As winter takes hold, the portfolio is prepared for as yet undefined challenges and storms that may emerge, and I remain intensely curious at what the coming set of distributions will disclose about the distance I still have to travel. One port gained, the next leg of the journey beckons.

Consider anything that is humanly possible and appropriate to lie within your own reach too.

Marcus Aurelius, Meditations VI.19

This is my twenty-ninth 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)
• $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 – $756 860
• Vanguard Lifestrategy Growth Fund  – $43 529
• Vanguard Lifestrategy Balanced Fund – $78 182
• Vanguard Diversified Bonds Fund – $104 579
• Vanguard Australian Shares ETF (VAS) – $79 067
• Betashares Australia 200 ETF (A200) – $231 216
• Telstra shares (TLS) – $1 801
• Insurance Australia Group shares (IAG) – $13 742
• NIB Holdings shares (NHF) – $6 900
• Gold ETF (GOLD.ASX)  – $83 465
• Secured physical gold – $13 438
• Ratesetter (P2P lending) – $25 278
• Bitcoin – $81 867
• Raiz app (Aggressive portfolio) – $15 154
• Spaceship Voyager app (Index portfolio) – $1 880
• BrickX (P2P rental real estate) – $4 629

Total value: $1 541 587 (+$61 677)

Asset allocation

• Australian shares – 41.6% (3.4% under)
• Global shares – 23.4%
• Emerging markets shares – 2.7%
• International small companies – 3.5%
• Total international shares – 29.7% (0.3% under)
• Total shares – 71.3% (3.7% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 5.9%
• International bonds – 10.9%
• Total bonds – 16.8% (1.8% over)
• Cash – 1.2%
• Gold – 6.3%
• Bitcoin – 5.3%
• Gold and alternatives – 11.6% (1.6% over)

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

Comments

The portfolio has experienced a positive month, with a total growth of $61 677. This places the portfolio well above its previous highs and potentially within two to three average months of reaching Objective #1.

The portfolio grew by the third highest absolute monthly amount since start of this record. Growth in the value of both Australian and international equities was a major part of this increase. This was assisted by the final dividends from Australian equities ETFs Vanguard VAS ($903) and Betashares A200  ($1894) that were received this month. These were reinvested in the A200 ETF with a small proportion being set aside to meet future associated tax liabilities.

Nearing the end of ‘the big rebalance’?

As the end of the financial year draws closer, choices around where to allocate future contributions and reinvestments may become slightly less clear cut than they have been for much of the journey.

This is because barring any major market movements, the portfolio is nearing the end of what could be called ‘the big rebalance’ that commenced at the start of this record. This has involved consistently targeting higher equity allocations (first 65 per cent, then 75 per cent) and lower bond holdings.

The movements involved in this rebalancing phase have been significant. Contributions and capital growth have lifted the portfolio’s overall equity allocation from around 60 per cent over 2017 to around 71 per cent currently.

The value of total equity holdings has increased from around $630 000 to close to $1.1 million since January 2017. Within this expanded equity portfolio, a significant change in composition has also occurred, as the chart above shows. Gradually, Australian shares have moved from representing a minority of total equity holdings – around 40 per cent of all shares – to now approaching 60 per cent. In pure value terms, Australian share holdings have increased from $277 000 to around $641 000 since the start of this record. The split between Australian and international shares is now close to my selected optimal position.

Over the same period portfolio bond holdings have fallen from around 25 per cent, to just 16.8 per cent. This has occurred by total bond and fixed interest holdings remaining at approximately $250 000.

This all means that future contributions, reinvestments or portfolio decisions may over time become less singularly focused on the purchase of Australian shares ETFs such as A200. The focus may shift to more a diverse and dynamic re-balancing approach, in which the objective is to gently and directionally ‘nudge’ the portfolio into alignment with its target allocations using a mix of new contributions and reinvested distributions. This will not happen all at once, as the equity portfolio is still just short of the target of 75 per cent, and market movements can have their own unpredictable impacts.

Role of Bitcoin: uncorrelated manoeuvres in the dark

An unusual source of around one-third of the portfolio growth this month has been an appreciation in the value of Bitcoin holdings. This increased by around $18 000 this month.

Over the past year or so Bitcoin has more frequently made a negative contribution, reducing the overall portfolio. I still regard it as a highly speculative element of the portfolio included not because I recommend its purchase by an investor, but simply by virtue of not wishing to ignore its current value and its contribution to net portfolio value.

It also remains in the portfolio as an asset under an assumption that it is uncorrelated to other similar defensive holdings, whilst sharing some of the characteristics of gold (for example, it does not represent another party’s liability). Over this month reflecting on these issues, I had time to undertake a brief analysis of whether it had actually delivered on this goal or promise of being a non-correlated asset, and whether it moved in a distinct way compared to the existing gold holdings in the portfolio.

The chart below sets out the measured correlation between the main portfolio gold holdings (GOLD.ASX) and Bitcoin, over the past three or so years.

From the chart it can be seen that the correlations are highly unstable, and do average close to zero over the period. This means that compared to the gold holdings, Bitcoin is likely to be delivering some diversification benefit – and adding to overall portfolio stability.

Progress

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

Summary

The past month has brought the portfolio to within a short distance of Objective #1. Indeed, it could be only around 2 to 3 months away using the average monthly trend of the past three years.

This is causing further reflection on the exact psychological meaning of reaching that first target. It is most definitely not a trigger point to retire early. The existence of the second portfolio objective is clear recognition of that. Rather, it feels more like a minimum threshold, that once crossed, is some assurance of a minimum future living standard set around the Australian average, regardless of employment or common life events.

Each step beyond this point will, I think, feel like an additional protection, building towards Objective #2. Therefore the gap between Objective #1 and #2 feels like a large ‘safety zone’ in which life events can be viewed with a greater detachment and objectivity. That is, they can be viewed as simply opportunities and inevitable change, rather than as threats or obstacles to achieving the security of financial independence.

This need to be tempered always with the caveat that, viewed over the long term, no simple ‘rule’ of 4 per cent or otherwise will offer a complete guarantee. Simply put, over long periods nothing is safe from adverse events. This recent podcast of some of the most well-known US financial independence bloggers – including those with a quantitative and analytical bent such as Big ERN – provided some excellent insights into assessing the risks of FI in a balanced way.

A point emerging from the discussion is agreement that over period above 30 years, financial independence plans that rely on amortisation – consumption or a drawdown of capital – are not amenable to simple set and forget ‘4 per cent rule’ style approaches often promoted. Rather, they require a more nuanced approach, and an appreciation that even ‘successful’ outcomes can feel indistinguishable from failures, potentially for years or a decade or more. Flexibility is recommended, yet as BigERN’s analysis shows, this is no panacea.

The Australian FI community continues its pleasing growth, with Snowball Journey recently joining the community. Through the Easter holidays I also listened to an intriguing  ChooseFI podcast on dividend investing and read through an interesting report from the Grattan Institute on retirement incomes (pdf).

As Autumn begins to fade, I cannot help but wonder if a period of strong market gains will themselves fade and transform themselves in coming months. Even amidst such movements, however, I will be looking down the path towards the June distributions with curiosity and anticipation at what could lay within reach.

Everyone complains of his memory, none of his judgement.

La Rochefoucauld, Maxims

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

Portfolio goals

My recently revised 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)
• $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 – $732 134
• Vanguard Lifestrategy Growth Fund  – $42 428
• Vanguard Lifestrategy Balanced Fund – $76 692
• Vanguard Diversified Bonds Fund – $104 802
• Vanguard Australia Shares ETF (VAS) – $78 091
• Betashares Australia 200 ETF (A200) – $216 609
• Telstra shares (TLS) – $1 769
• Insurance Australia Group shares (IAG) – $13 393
• NIB Holdings shares (NHF) – $6 288
• Gold ETF (GOLD.ASX)  – $83 212
• Secured physical gold – $13 437
• Ratesetter (P2P lending) – $26 147
• Bitcoin – $63 947
• Raiz app (Aggressive portfolio) – $14 491
• Spaceship Voyager app (Index portfolio) – $1 751
• BrickX (P2P rental real estate) – $4 621

Total value: $1 479 910 (+$40 302)

Asset allocation

• Australian shares – 41.6% (3.4% under)
• Global shares – 23.6%
• Emerging markets shares – 2.7%
• International small companies – 3.5%
• Total international shares – 29.9% (0.1% under)
• Total shares – 71.5% (3.5% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 6.1%
• International bonds – 11.2%
• Total bonds – 17.3% (2.3% over)
• Cash – 1.2%
• Gold – 6.5%
• Bitcoin – 4.3%
• Gold and alternatives – 10.9% (0.9% over)

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

Comments

This month saw the total portfolio reach and exceed the original portfolio objective set at the commencement of this journey of $1 476 000.

Since that time, portfolio goals have been updated, but nonetheless it feels as though a significant milestone has passed. Measured over the past twelve months, strong progress has resumed, that being in part a function of the dull echoes of ‘Bitcoin bubble’ of late 2017 falling out of the time period.

The portfolio increased by a significant $40 000 this month. Part of this was new investments in Betashares A200, and a majority of this gain is attributable to the second instalment from the lowering of my emergency fund discussed here being invested. In the end, averaging two parts of this lump sum into the equity market around three months apart did not make much difference, except perhaps a mild psychological benefit. Together these moves made up the majority of the total portfolio gains. The value of the small Bitcoin holding has also increased slightly, despite its volatility having substantially reduced over the past year.

Another milestone this month has been the finalisation of my first significant March quarter dividend from A200, which will total around $1900. This is lower than expected, being equivalent to around 0.9% for the quarter, and lower than the expected distribution rate of the broadly equivalent Vanguard VAS ETF. It is quite possible that the end of financial year results will be better, however, and on a total returns basis the A200 ETF has still tracked its benchmark closely.

With Australian equities continuing to stay close to their long term price-earnings ratio of 15, Australian equity ETFs will likely remain the primary focus of investment over the next few months. This has been one of the most dominant trends of the journey so far, with total Australian equity holdings growing from around $277 000 in January 2017, and 28 per cent of the portfolio, to around $600 000 this month, and over 40 per cent.

A small action this month has been passing up the option of further investment in Australian real estate through BrickX. Distributions had built up to a level to allow a further small fractional investment. The Australian residential debate continues in full force, however, I cannot justify even small further incremental investments at current low yields, especially given my view of the likelihood of further capital losses.

Overall, expenses continue to track at steady levels. The low red distributions line from July 2018 onwards is a product of low December half distributions, and may be able to be revised upwards once June distributions are known. This would be a welcome revision, as ‘credit card’ FI seemed to come into view through the last two years, and then disappear in a discouraging way with the December 2018 distributions.

Progress

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

Summary

This month has brought the portfolio to approximately three-quarters of the way to my Objective #2, and Objective #1 also draws appreciably closer.

Over the past month, as progress has accumulated, I have found myself meditating more fully on the nature and value of time and freedom. What has surprised is the powerful but gradual feeling of decompression that knowledge of the increasing proximity to the goals has brought. Fewer external events, daily stresses, impinge on my daily outlook.

This recent podcast from the Econtalk series, crystallised some of these thoughts, the first 10 minutes contains the best economic and empirical analysis I have encountered on the intersection of time, money, leisure and work. One of its key points – relevant for seekers of FI – is that our growing wealth over time affects how we see and value leisure time itself, and it also has some useful reflections on the concept of ‘busyness’.

This month has seen some of this more valuable leisure time used looking at the summary version of the Credit Suisse Global Investment Returns Yearbook, released last month. This provides updated data from the single best long-term series on equity and bond returns across the world. One interesting aspect of this years updated estimate of long-term historical global equity returns (of 5 per cent) is that it includes for the first time markets that suffered total losses (Russia and China following revolutions in 1917 and 1949) – addressing the issue of survivorship bias. The report argues for significant modesty in expectations of future returns.

A practical implication of this is that my conservative long-term return assumption for global equities (of 4.5 per cent) may be marginally less conservative than when it was made at the start of the year. This podcast from Bloomberg, interviewing Yale Professor of Finance Roger Ibbotson – a key figure in the collection and analysis of historical financial market returns – will provide more related food for thought.

A further intriguing crossover from recent economic literature to FI issues is the release last week of this paper The Power of Working Longer by the National Bureau of Economic Research, which studies the relationship between the decision to work for longer, compared to investing more, prior to retirement. The intriguing summary finding is that delaying retirement by 3-6 months is equivalent to the effect of one percentage point of higher wages over a 30 year working life.

The Australian FI community has also been full of interesting content this month, with Aussie Firebug laying out the basics of FI in an excellent introductory podcast, and Strong Money Australia doing a short summary of his current progress in transitioning from property investment dominated portfolio to equities. Australian investor’s benefits  from higher dividend rates also got a mention in Big ERN’s comprehensive safe withdrawal rates series. It was also great to see the appearance and progress of other new Australian FI bloggers, such a AFamilyOnFire.

With the month closed, the focus will now be shifting to awaiting and re-investing the quarterly dividends due, and contemplating that a further three months comparable to the last three – an unlikely but possible scenario – could see Objective #1 reached much earlier than my judgement had anticipated.