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Random thoughts and insights on the journey to financial independence, investing, portfolios and expenses.

Monthly Portfolio Update – September 2019

Posted on by The FI Explorer
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We may by care and skill be able to trim our ship, to steer our course, or to keep our reckoning; but we cannot control the winds, or subdue deceitful currents, or prevent disasters.
The Sailors’ Prayer Book: A Manual of Devotion for Sailors at Sea (1852)

This is my thirty-fourth 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 per cent, or a nominal return of 7.19 per cent, and are expressed in 2018 dollars.

Portfolio summary

  • Vanguard Lifestrategy High Growth Fund – $767 282
  • Vanguard Lifestrategy Growth Fund  – $43 936
  • Vanguard Lifestrategy Balanced Fund – $80 318
  • Vanguard Diversified Bonds Fund – $109 802
  • Vanguard Australian Shares ETF (VAS) – $124 643
  • Vanguard International Shares ETF (VGS) – $24 276
  • Betashares Australia 200 ETF (A200) – $263 829
  • Telstra shares (TLS) – $1 870
  • Insurance Australia Group shares (IAG) – $13 777
  • NIB Holdings shares (NHF) – $8 760
  • Gold ETF (GOLD.ASX)  – $101 214
  • Secured physical gold – $16 292
  • Ratesetter (P2P lending) – $19 140
  • Bitcoin – $131 280
  • Raiz app (Aggressive portfolio) – $16 657
  • Spaceship Voyager app (Index portfolio) – $2 184
  • BrickX (P2P rental real estate) – $4 402

Total value: $1 729 662 (+$17 325)

Asset allocation

  • Australian shares – 42.0% (3.0% under)
  • Global shares – 22.6%
  • Emerging markets shares – 2.5%
  • International small companies – 3.2%
  • Total international shares – 28.3% (1.7% under)
  • Total shares – 70.3% (4.7% under)
  • Total property securities – 0.3% (0.3% over)
  • Australian bonds – 5.0%
  • International bonds – 10.1%
  • Total bonds – 15.0% 
  • Gold – 6.8%
  • Bitcoin – 7.6%
  • Gold and alternatives – 14.4% (4.4% over)

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

Comments

This month the portfolio grew by just over $17 000 in total, following two consecutive months of small declines.Portfolio level Sep 19The total equity component of the portfolio has grown, including through new contributions and another part of the June distributions being ‘averaged into’ equity markets. The only major reductions in the portfolio has been the result of a sharp downward movement in the price of Bitcoin.

Monthly change port Sep 19

Lower credit card expenditure and the gradual increase of the trailing three year average of distributions paid has helped sustain a sense of momentum this month. Together they have continued to narrow the gap between distributions paid and credit card spending to less than $500 per month.

Three yr credit card Sept 19The complete closure of the remaining gap is within sight. Assuming no sustained reversals in the absolute level of distributions through time, this could happen in the next 12 months.

Some added progress towards this goal should come from pending quarterly distributions from the Betashares A200 ETF and Vanguard’s Australian shares ETF (VAS). These are currently being finalised. The draft distributions guidance indicates that for A200 and VAS these quarterly distribution should total around $4 700, approximately double the absolute level of the same quarterly distributions a year ago.

New investments this month have been higher than normal due to a work bonus and the staggered reinvestment of June distributions. They have been directed predominantly to Vanguard’s Australian Shares ETF (VAS) with a small recent allocation to Vanguard’s international shares ETF (VGS). Following the recent fee reduction in VAS, I have directed Australian purchases through to this ETF, preferring the (slightly) wider exposure it delivers through following the ASX300, compared to the Betashares A200’s slightly narrower holdings.

The end of ‘the big rebalance’ into Australian equities

The reason for the split between Australian and international equity purchases is that this month has seen the effective end of ‘the big rebalance’ – that is, the gradual movement to a 60/40 split between Australian and international shares.

This was first targeted in my January 2019 review of portfolio targets and allocations. Previously my Australian and international equity allocation was largely just an unconscious and purely mechanical outcome of the splits in various Vanguard retail funds, and a number of smaller side Australian shareholdings.

The last nine months – by contrast – has seen a concentrated direction of new funds and distributions into Australian shares to achieve the targeted balance. The shift has been significant, with the value of Australian shares only overtaking international holdings in the second half of 2018. International shares have fallen from more than a third of total portfolio assets at this start of this record to closer to a quarter.Port bar SeptAt the same time Australian equities now make up 42 per cent of total portfolio, and have just reached 60 per cent of the equity portfolio. All this has occurred as the total equity portfolio has grown from $630 000 at the start of this journey, to over $1.2 million this month.Changes port two barsThe main vehicles for this expansion over the past two years has been Betashares A200 and Vanguard’s VAS ETFs. More recently, as mentioned, I have added Vanguard’s global share ETF (VGS) to allow an avenue to keep within the targeted split with future contributions.

Measuring investment income from tax returns

This month also saw completion of my tax return, including explaining my tax position to a brand new tax agent. The tax assessment from this past financial year provides an additional data point about the taxable investment income being generated by the portfolio.

The graph set out below updates the series published last year on taxable investment income. It is taken from the return items for partnerships and trusts, foreign source income and franking credits (i.e. items 13, 20 and 24 on the return, and not including capital gains) over the past nine years.Sept 19 Tax LevelThis shows that taxable investment income has risen only around five per cent over the past financial year. This likely reflects the decline in higher interest payments from a slow rebalance away from Ratesetter towards equities. Taxable investment income is still well short of both the original objective, and even further short of Objective #2.Sept Tax 19 - 9yr

As previously outlined, there are a range of factors that likely account for the mismatch between tax return income and received distributions. These could include timing differences, capital gains realisations, and potentially even small errors in how I have added in individual return items in past years. I have also continued to seek to avoid double counting and so understatement is also a possibility, given the formats and labelling of tax returns are not always particularly clear.

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) 108.2% 147.5%
Objective #2 – $1 980 000 (or $83 000 pa) 87.4% 119.1%
Credit card purchases – $73 000 pa 99.3% 135.4%
Total expenses – $89 000 pa 81.5% 111.1%

Summary

Forward progress has resumed, with the growing warmth and life of spring. The last few months has been a continual reminder that the fickle direction of market winds may play a greater role than sheer saving and investing efforts at this point in the journey. Focusing on the process, rather than the short-term outcome is therefore almost forced upon one – which perhaps is no bad thing after all. Indeed, increasingly I have wondered whether these now ingrained habits and processes will themselves be difficult to break out of, even as I definitively pass some FI benchmarks in future months and years

The varying winds will also increasingly dictate where additional contributions are to be made. This is the automatic result of targeting an asset allocation with new contributions rather than active rebalancing through selling existing holdings. In fact, it probably constitutes one of the more difficult tests for a chosen risk allocation, as it will tend to result in buying unspectacular portfolio ‘laggards’, rather than assets that have recently moved up, without the consolation of taking these new funds from locked in profits elsewhere in the portfolio. This can lead to signals that are easier to follow in theory than in practice.

As an example, currently Australian government bond yields are close to historical lows, and potentially heading lower. This is highly relevant to FI planning, as there is some academic evidence that the ‘four percent rule’ has a higher failure rate in low bond rate environments.

There is also a strong possibility that bonds are close to the end of a forty year decline in yield – and have nowhere to go. The increasing spread of negative yielding government and corporate bonds around the world, however, also holds out equally plausible but very different possibilities, at least in the short term.

This is more than a hypothetical issue and uncertainty. Through the next 12 months it is possible that my target asset allocation will start signalling a need to buy bonds. This would involve a need to find the right investment vehicle to access this asset at least cost.

On the same topic, this month saw an excellent explainer piece from Aussie HiFIRE on bonds, and also a good discussion from Kurt at Pearler on how to put the modern portfolio theory to practical work in FI portfolio design. Youtube content on FI and portfolio issues seems to be improving all the time as well, including this short video on thinking about the role and value of dividends.

All such guidance represents a way of keeping a reckoning on the unfolding horizon, its dangers and subtle deceits.

Monthly Portfolio Update – August 2019

Posted on by The FI Explorer
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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.Pie Aug 19

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 19Once 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.

Tallying the Stores – Estimating Current and Future Expenditure

Posted on by The FI Explorer
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Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Charles Dickens, David Copperfield

At the centre of most definitions of financial independence is the ability to meet current expenditure through income generated from a portfolio of assets. Earlier this year I started monthly reporting of how close the FI portfolio was to being able to meet an estimate of total annual expenses of $96 000 per annum.

This expenses figure was a rough estimate of total current spending, and resulted from adding some known fixed expenses to my total average credit card expenditure. Yet this figure has seemed higher than anticipated, so this analysis examines what my record of actual past spending suggests for a reasonable estimate of current and future spending.

Just as provisioning a ship for a voyage should take into account actual journey time, my own FI measures need to be as accurate as feasible to make sure plans are set based on realistic estimates. This article – it should be emphasised – is focused on reaching the right estimate for my personal circumstances. Its focus is not offering advice on the process of budgeting or achieving a high savings rate, subjects better covered by others.

Drawing up the manifest – reviewing the initial estimate

The process for estimating total expenditure at around $96 000 was simple in principle. It involved adding a number of known individual fixed expenses to the past twelve months of actual credit card spending. Examples of these fixed expenses include: utilities, local government rates and insurances. They also include some irregular items, such as contributions to housing repairs and a sinking cash fund for car replacement over time.

These fixed expenses are not typically paid by credit card, and so the logic was that the sum of these and the annual credit card total would reach a total overall spending estimate.

In doing this calculation, however, I overlooked that for some large annual expenses that I set aside money for regularly and which I had counted as fixed expenses, I have actually used my credit card for some or all of final payments. This applied to health insurance and some car related costs, for example.

This had the effect of double counting a couple of large expenses, because I was counting both the cash set aside monthly to meet the future cost as an expense, and also the actual expense as incurred through the credit card.

Re-estimating the level of current expenses

Over the past month I have removed the double-counted items and re-estimated all fixed expenses based on the latest actual bills. Indeed, I have allowed some small headroom across the board to allow for modest price increases in the year ahead.

The impact of this is quite significant.

The effect of removing the double-counting is to reduce the monthly fixed expenses estimate from $2 025 to $1 414. This means fixed expenses are around 30 per cent below initial estimates. In turn, this permits some revised estimate of total expenses to be made. Using thus adjusted and corrected data, expenditure appears to be:

  • $7 420 per month or $89 000 per year if based on average credit card expenses of around $6000 per month since 2013; or
  • $7 000 per month or $84 000 per year if based on average credit card expenses of around $5 800 per month over the past year

Both of these figures are below the original $96 000 (or $8 000 per month) total expenditure estimate.

The chart below compares the revised figures against monthly income and expenditure estimates, including the income targets that are contained in both of my FI objectives as well as a historical average of portfolio distributions.

Monthly bar - Expenditure

The revised total expenditure estimate also makes it possibly to present a more accurate and less inflated picture of month to month expenditure compared to portfolio distributions received. Adjusted to account for the new estimate, the monthly progress is set out in the revised chart below.

Monthly exp with new figures - Aug 19

Implications for measures of progress and required FI portfolio

The new estimates for total spending show that I have been materially overestimating current expenditure.

A benefit of recognising this is that it immediately brings forward the progress I have made against the “total expenses” benchmark reported each month. Using last months portfolio value and the $89 000 per year spending estimate, for example, it brings progress to meeting this benchmark from 74.9 per cent to 80.8 per cent.

This is a more than five percent advance in apparent progress simply from a more accurate estimate. The revised spending figure also makes the chart below – the proportion of monthly total expenses met by current distributions, look more encouraging still.Revised total expendit Aug 19

Viewed in a different way, the revised spending figure reduces the total FI portfolio required by around $167 000. This represents months and years of saving and investment now not needed, and potentially returned in the form of free time.

A further implication is that the second estimate above which uses the past 12 month of credit card expenses is within a small margin of my Objective #2 target income (of $83 000 per annum). This gives some confidence that this target is set approximately at the level of my current expenses. That is, reaching this target my current standard of living could be maintained in the absence of any employment income.

Summary 

So far historical data from credit card and additional fixed costs have been drawn on to seek to answer the question: what level of provisioning for future spending is warranted?

The analysis shows that:

  • The total expenditure benchmark being targeted was set too high – When corrected for double counting and using history as a guide average total expenditure is closer to $89 000 rather than $96 000 per annum.
  • A new lower and more realistic benchmark is needed – Based on this, I intend to replace my total expenditure assumption from next month, reducing it from $96 000 to $89 000. This is a conservative figure which is based on the sum of the average credit card expenditure over more than five years and the more recent accurate individual fixed cost estimates.
  • The income target under Objective #2 is close to my current spending level – This lessens the chance that adjusting to the income it produces will be difficult when this this portfolio level is achieved.
  • The past years spending is significantly lower than the average since 2013 – with credit card expenses of around $67 000 annually or $5 800 per month.

Taking the time to carefully consider current and future expenses can be painstaking work. It will be critical, however, to ensure the avoidance of the second of Micawber’s income and expense scenarios, and the need to rest plans for the voyage on the hope that something will turn up.

 

Monthly Portfolio Update – July 2019

Posted on by The FI Explorer
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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.

July 19 pieComments

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.