Constant Bearing – Reviewing the Portfolio Goal and Investment Plan

Posted on January 5, 2023January 6, 2024 by The FI Explorer

Be what you were before;

Or weigh the great occasion, and be more.
Homer, Iliad, Bk.1.155

This recorded journey towards financial independence started six years ago, with an initial objective of building a passive income of $58,000 per annum by July 2021.

Since that time, goals have evolved and changed, with the most recent target actually being temporarily achieved through March 2021 to May 2022.

Each year in early January I spend time reviewing my investment goals and how I plan to reach them.

This longer post talks about reflections arising as part of this annual review, updates my portfolio goal and assumptions, and discusses how I will approach my financial independence journey through 2023 and beyond.

The aim, as always, is to have a clear written record of the objectives, approaches and reasoning underlying the plan, to serve as a reference point through the year to come. The process also enables the updating of plans and assumptions for changes in circumstances, thinking, as well as available data and evidence.

A reversal of course on the voyage to financial independence

For the past seven months, the total portfolio has been below the overall portfolio objective.

The previous reaching of the target was therefore a fleeting state of affairs, a function of temporarily surging Bitcoin prices.

Excluding Bitcoin, the portfolio only ever reached around 86 per cent of its target of $2,620,000. At the close of last year the equity portfolio sat at about 88 per cent of its intended final target amount of around $2,100,000.

The target for the year just past was based around a benchmark of the portfolio producing a real annual income of $91,600 in 2022 dollars. The level was chosen because it reflected an amount equal to Australian adult full-time ordinary earnings, and was close to my (then) estimated spending of around $84,000 per annum.

The target has been primarily a short-hand way to measure progress towards the goal of financial independence. It was never designed to act as a crude countdown clock or trigger to immediate early retirement once that dollar value was exceeded.

The target, for example, was notionally exceeded in the first five months of last year, but this did not result in retirement – and for the better as markets turned out, and in terms of reducing sequence risks.

A key benefit of the process of setting a specific target has been to help define what type of post-financial independence is actually envisaged and sought.

Year in Review and Monthly Portfolio Update – December 2022

Posted on January 1, 2023January 1, 2023 by The FI Explorer

I was waiting for something extraordinary to happen, but as the years wasted on nothing ever did unless I caused it.
Charles Bukowski

Year in Review

This year has represented a significant pause, or lacunae, in the journey to financial independence.

This is not unexpected, indeed many prior entries have meditated on exactly this potential – for a significant delay or reversal of progress.

The engine of this significant reversal is market volatility, combined with the growing size of the portfolio. This means the direction and pace of travel is less within one’s choosing than at any other time.

At the start of this year, the portfolio goal was notionally met. The focus of this year was intended to be:

maintaining the overall portfolio target of $2.62 million;

achieving a minimum equity portfolio target of around $2.1 million; and

building a cash reserve of at least one year of normal expenditure.

The original focus of this year was on the latter two objectives, but in fact, none of the objectives have survived contact with markets this year.

For the past half a year, the portfolio has slipped significantly below the target. The minimum equity portfolio has not been reached. Further investments to achieve the first two objectives has meant no meaningful progress on building a cash reserve.

In turn, this means that the three essential pre-conditions which were set for any movement from my current work arrangements are not within immediate reach.

The concerted negative movement against the financial independence benchmarks through this year is summarised below.

Progress against FI measures through 2022

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	113%→93%	144%→123%
Total average expenses (2013-present) – $84,700 pa	122%→101%	156%→133%
Target equity holding in portfolio – $2,100,000	88%→87%	N/A

2021 was an exceptional year of growth in the portfolio. This year was the reverse of this, an unprecendented period of major contraction in the portfolio.

The portfolio was reduced in value by around $500,000 this year, or around 17 per cent of its size on 1 January 2022. This is both the largest dollar loss – and proportional loss of portfolio value – in a single calendar year.

The only other year of loss over a calendar year period was in 2018, where around a 3 per cent (or around $40,000) loss was suffered.

Chart - Year in Review - Portfolio Level 2007-22

Sailing against the wind: the course of the voyage

This year has felt like sailing against a strong wind. Progress has not been apparent, and temporary periods of advances have invariably been succeeded by backward pushes.

Most starkly, despite regular investments and reinvestments of earnings, the overall equity portfolio remains below where it started the year, despite a modest recovery through the second part of this year.

Highlighting this point, 2022 has been the only calendar year in which there has been a overall reduction in value of equities on the journey to date.

Monthly Portfolio Report – November 2022

Posted on December 1, 2022November 30, 2022 by The FI Explorer

So foul a sky clears not without a storm.
Shakespeare, King John, Act IV.ii

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

Portfolio goal

My objective is to maintain a portfolio of at least $2,620,000 through 2022. This should be capable of producing an annual income from total portfolio returns of about $91,600 (in 2022 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.

A secondary focus through 2022 will be achieving the minimum equity target of $2,100,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$734,665
Vanguard Lifestrategy Growth Fund	$39,052
Vanguard Lifestrategy Balanced Fund	$70,528
Vanguard Diversified Bonds Fund	$87,212
Vanguard Australian Shares ETF (VAS)	$373,659
Vanguard International Shares ETF (VGS)	$440,759
Betashares Australia 200 ETF (A200)	$282,996
Telstra shares (TLS)	$2,121
Insurance Australia Group shares (IAG)	$6,056
NIB Holdings shares (NHF)	$8,760
Gold ETF (GOLD.ASX)	$118,146
Secured physical gold	$18,782
Bitcoin	$279,557
Raiz app (Aggressive portfolio)	$20,104
Spaceship Voyager app (Index portfolio)	$3,231
BrickX (P2P rental real estate)	$4,642
Total portfolio value	$2,490,270 (+$10,340)

Asset allocation

*Australian shares*	*39.4%*
Global shares	31.6%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	35.2%
Total shares	74.7% (-5.3%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.6%
International bonds	5.8%
Total bonds	8.4% (+3.4%)
Gold	5.5%
Bitcoin	11.2%
Gold and alternatives	16.7% (+1.7%)

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

Comments

This month has seen a small overall gain in the portfolio, of around $10,000. As a result, the portfolio grew by around 0.4 per cent, and ends the month quite close to the position it started.

A year ago, the portfolio briefly reached around $3.04 million, on the back of sharp gains in the value of Bitcoin. Today, a different story is in evidence, with Bitcoin holdings being a weak performer over the month, following the FTX collapse and bankruptcy.

As a result, the portfolio continues to track at a lower level than achieved in early 2021, and is still below the overall revised portfolio goal of $2.62 million.

The most visible movement this month was the fall – by around 22 per cent – in the price of Bitcoin, following relevations of the insolvency and use of customer funds of FTX and associated Alameda Research.

This brought further focus on other potential vulnerabilities in exchanges. This fall came after a period of relatively low volatility in the price of Bitcoin, and this lower volatility regime seemed to reinsert itself again following the falls, with trading ranges that are quite narrow in historical terms.

By contrast, most other elements of the portfolio showed growth.

Australian equities advanced around 6.4 per cent. Gold holdings increased by 2.1 per cent, and bonds reversed some previous losses, ending up around 1.8 per cent. International equities, however, slightly declined (by 0.2 per cent).

Monthly Portfolio Update – October 2022

Posted on November 1, 2022October 31, 2022 by The FI Explorer

Let’s withdraw; and meet the time as it seeks us
Shakespeare, Cymbeline Act 4, Scene 3

This is my seventy-first monthly portfolio update. I complete this regular update to check progress against my goal.

Portfolio goal

My objective is to maintain a portfolio of at least $2,620,000 through 2022. This should be capable of producing an annual income from total portfolio returns of about $91,600 (in 2022 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.

A secondary focus through 2022 will be achieving the minimum equity target of $2,100,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$711,405
Vanguard Lifestrategy Growth Fund	$37,922
Vanguard Lifestrategy Balanced Fund	$68,711
Vanguard Diversified Bonds Fund	$85,661
Vanguard Australian Shares ETF (VAS)	$351,153
Vanguard International Shares ETF (VGS)	$426,221
Betashares Australia 200 ETF (A200)	$265,971
Telstra shares (TLS)	$2,089
Insurance Australia Group shares (IAG)	$6,208
NIB Holdings shares (NHF)	$8,004
Gold ETF (GOLD.ASX)	$115,668
Secured physical gold	$18,351
Bitcoin	$356,030
Raiz app (Aggressive portfolio)	$18,735
Spaceship Voyager app (Index portfolio)	$3,162
BrickX (P2P rental real estate)	$4,639
Total portfolio value	$2,479,930 (+$138,908)

Asset allocation

*Australian shares*	*37.6%*
Global shares	30.7%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	34.2%
Total shares	71.8% (-8.2%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.5%
International bonds	5.7%
Total bonds	8.2% (+3.2%)
Gold	5.4%
Bitcoin	14.4%
Gold and alternatives	19.8% (+4.8%)

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

Comments

This month reversed two months of falling portfolio values, with a sharp increase of around $139,000. The portfolio grew nearly 6 per cent in this expansion, its highest rate of growth in more than six months.

Despite this positive movement, the portfolio still is at a lower absolute level than achieved in early 2021, and is more than $540,000 lower than at the same point a year ago.

Consequently, the portfolio continues to track below the overall revised portfolio goal of $2.62 million.

The major sources of portfolio growth are clear – a recovery in equity markets both globally, and domestically. Australian shares increased in value around 4.3 per cent over the past month. Globally, the largely unhedged equities portfolio grew in value by around 7.2 per cent.

Bonds were volatile in their movements this month, but overall were flat in total performance by month end.

During the past month, Bitcoin has been peculiarly stable, aside from a small increase over the last week or so. Through the last two months, the price of Bitcoin actually registered the remarkable achievement of being less volatile than the benchmark US S&P500 index.

Over the month, Bitcoin holdings increased around 6.8 per cent in value, while the value of gold held remained essentially flat.