On the Wind – Reviewing the Record of Distributions and Expenses

Posted on April 17, 2019February 14, 2021 by The FI Explorer

But no new findings will ever be made if we rest content with the findings of the past.

Seneca, Letters XXXVII

Measuring distributions and expenses

Over the last three years the investment portfolio has delivered substantial distributions, leading to a brief period in which it appeared that an accidental goal of ‘Credit card FI’ might have been met. Subsequently that prospect receded, due to a sharply lower set of distributions for the half year to December 2018.

Over six months ago Reviewing the Log examined the issue of how my current passive income from distributions compared against both my credit card expenditure and total spending.

This article seeks to update that previous analysis, but also to go further and reach a fuller and more robust picture of overall trends in how distributions and expenses compare over time.

In particular, this article seeks to identify the likely current ‘gap’ between distributions and monthly expenses. This represents a different and arguably more empirical way of viewing and measuring actual day-to-day progress to FI, compared to simply tracking progress to a numerical portfolio goal.

Even so, they are in some senses also different sides of the same coin. This is because the portfolio goals I am aiming for are reverse engineered from target FI income levels, which are translated into lump sum targets, using an assumed average return (currently 4.19 per cent). Each month I report a percentage progress towards these goals. Currently, by this simple lump sum measure, the portfolio is around 90 per cent of the way to Objective #1 and just under 75 per cent of the way to Objective #2.

Re-examining the logs and records

When the monthly record of credit card expenses, total expenses and distributions is examined it is clear that credit card expenditure is volatile, but has a comparatively stable average of around $6000 per month, or around $72 000 per annum. The distributions, on the other hand, have been either stable or growing for most of the past six years, with the exception of the large reduction in the half year to December 2018. During this last half year to December, distributions averaged at around $2 600 a month.

The chart below sets out a ‘credit card only’ (blue) and a ‘total expenses’ series against an averaged measure of monthly portfolio distributions (in red). The green line represents actual credit card expenses, added to an equal monthly contribution of other non-credit card expenses. Total expenses here just includes items such as rates, energy and utility costs, day to day cash, as well as contributions to irregular major expenses such as holidays, house and car repairs, as well as eventual car replacement. Fig 1 - monthly

Note that all segments of the red line reflect annual distributions, except the last period from July 2018 onwards. The red line from July 2018 to the present will need to be revised once the June 2019 half year distributions are known.

This revision is highly likely to lift the currently assumed average distribution for 2018-19 of about $2600 per month. This lift is likely because currently the red line from July 2018 onwards is based on a simple extrapolation or continuation of the traditionally lower December figures. The true underlying level of distributions this financial year may well be higher. In fact, June half year distributions have usually been well above the interim dividend amounts of the December half year.

Depending on the estimation method used, the June 2019 half year distribution could be in the range of $23 000 to $51 000, with an average estimate of around $42 000. This in turn could lead to total annual distributions for financial year 2018-19 being in the range of $39 000 to $66 000 (or between $3 250 to $5 500 per month respectively). For comparison, the five year average of distribution is around $45 000 (or $3 750 per month). The final figure will simply be an unknown factor until early July.

Off-course or temporary shallows?

The same considerations are relevant for examining a second measure of progress. The below figure charts the proportion of total expenses met by annual distributions. Fig 2 - Total Ex Dist Since the last update of this graph more than six months ago, the proportion of expenses met by portfolio distributions has fallen, and for the same reason – the low distributions in the half year to December 2018.

Even with this significant fall, from July 2018 to the present, these lower distributions have generally been sufficient to meet between 30 to 40 per cent of total expenses. In overall trend terms, it also suggests the true underlying distributions potential of the portfolio is likely to be sitting at around 60 to 70 per cent (see dotted trend line).

Looking through the weather – adjusting the view

These two ways of viewing progress each have their advantages, but suffer the same disadvantage of being volatile measures of progress. This volatility arises from both monthly variations in expenses, and large variations in distributions between and within years. These variations occur due to a range of factors, such as realisations of capital gains related to rebalancing within some pre-mixed Vanguard retail funds, as well as changes in bond yields or interest rates.

To address this the following chart seeks to account for these multiple sources of variation by adopting a three year moving average for both credit card expenses and distributions. The trade-offs in using this approach is that a three year moving average reduces the time period able to be covered, and can also mute broader emerging trends that should be of concern. Additionally, three years is not close to a complete economic cycle. Thus it is quite possible, for example, for distributions that are abnormally high for two consecutive years to impact this moving average measure.

The advantages of an averaged approach are obvious, however. By reducing the variations and monthly ‘noise’, and taking a relatively conservative assumption (in an increasing portfolio) that the last three years may provide an approximate guide to the true underlying level of distributions, a clearer and more stable picture of overall progress can be gained. Fig 3 no outline From this particular view, a few points emerge:

Credit card expenses have remained very stable at around $6 000 across the past three years with no systematic movements up or down
From January 2017 onwards distributions increased steadily until they reached around $5 000 per month in the middle of 2018
Since that time they have levelled off, and even slightly reduced, as the lower recent distributions form a greater part of the average

The data in the chart suggests a remaining gap of approximately $1 000 per month between distributions and credit card expenses, or distributions being sufficient to meet approximately 80 per cent of credit card expenses or 60 per cent of total expenses. In turn, this means that viewed as a multi-year average, ‘credit card FI’ has not been receding as sharply as volatile month to month figures suggest. It remains, in short, in view if not yet in range. The true average gap measured in these term is likely to continue to gently increase in the lead up to June 2019 distributions, but then potentially either level off or continue to close.

Overall this measure better reflects how the journey has felt so far. A beginning from a firm basis, constant steady progress over the time of the journey, but some significant distance to close yet.

Taking new bearings – an alternative approach

To reach the best view of where one is, it is sometimes useful to use cross-checks that relies on slightly different data.

An alternative approach to reaching a sound estimate which takes into account more stable annual data is to use tax assessment data. The chart below is based on assessed taxable investment income. It is taken from the tax return items of income from partnerships and trusts, foreign source income, and franking credits (i.e. items 13, 20 and 24, excluding capital gains) over the past ten years. This taxable income then given as a proportion of my portfolio objective #1, of $67 000 per year.

Fig 4 - Taxable From this chart some observations can be made:

For the past three years the equivalent of around 50 to 60 per cent of my first financial independence objective of $67 000 has been met by investment income
The past two years have been materially higher than other years – this could perhaps represent an anomaly, however, the overall portfolio that was producing distributions also grew by around 70 per cent since 2015-16, which would tend to support the higher later figures being sustainable
Annual variations do occur – with two out of 10 years registering some backward movement

The picture from taxable investment income then seems to support a gradual movement over the past three financial years materially closer to Objective #1, and some confidence that this is more likely than not to be maintained in the current financial year. Taking a three year average it suggests in investment income terms that around 55 to 60 per cent of Objective #1 income is likely to be covered by current distributions.

Summary – on the wind or a voyage becalmed?

Looking at the data highlights a few different points. Progress is not always linear, or exponential, even with compounding effects and well into the FI journey. Yet equally it shows it is possible over the course of several years to go from distributions making a small supporting contribution to ongoing expenses, to the equivalent of paying off the majority of a monthly credit card bill.

From reviewing the records and expanded data it is apparent that ‘credit card FI’ – not exactly a universally recognised stage of FI – is not yet achieved. Longer term progress on the goal will be clearer when June distributions are finalised in the next three months.

Depending on their final levels, between 55 and 90 per cent of annual credit card expenses will be covered by annual distributions. Reviewing past averages of card expenditures and distributions indicates that about 80 per cent of journey may be complete already, leaving a gap of only $1 000 per month.

Moving beyond credit card expenses – the lower distributions over the past six months have been equivalent to only 30 to 40 per cent of total expenses. Using independent tax assessment data indicates that the portfolio is currently generating between 50 and 60 per cent of the total yearly expenditure target under Portfolio Objective #1, with recent portfolio growth meaning the higher end of this range is a more probable guide than the lower.

In the first examination of these trends more than six months ago I observed the inevitable issue of volatility and noted that is was not impossible for future periods of higher expenditure to coincide with lower portfolio income. This could still occur, and clear precedents exist for it. Averages and forecasts have the power to mislead as well as guide.

Yet overall, looking back at the record puts some firm underpinnings to the progress already made – and leads me to strain forward for the next set of bearings.

Monthly Portfolio Update – March 2019

Posted on April 1, 2019January 15, 2022 by The FI Explorer

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. Mar 19 alloc

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.

Mar 19 Monthly value 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.

Mar 19 mnth chnge

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. Mar 19 - Card

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)	92.6%	128.8%
Objective #2 – $1 980 000 (or $83 000 pa)	74.8%	104.0%
Credit card purchases – $73 000 pa	85.0%	118.2%
Total expenses – $96 000pa	64.6%	89.9%

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.

Monthly Portfolio Update – February 2019

Posted on March 2, 2019March 24, 2022 by The FI Explorer

I have never thought, for my part, that man’s freedom consists in his being able to do whatever he wills, but that he should not, by any human power, be forced to do what is against his will.

Rousseau, Reveries of the Solitary Walker

This is my twenty-seventh 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 – $725 361
Vanguard Lifestrategy Growth Fund – $41 957
Vanguard Lifestrategy Balanced Fund – $75 692
Vanguard Diversified Bonds Fund – $102 924
Vanguard Australia Shares ETF (VAS) – $77 420
Betashares Australia 200 ETF (A200) – $188 899
Telstra shares (TLS) – $1 658
Insurance Australia Group shares (IAG) – $12 818
NIB Holdings shares (NHF) – $6 924
Gold ETF (GOLD.ASX) – $84 534
Secured physical gold – $13 659
Ratesetter (P2P lending) – $27 576
Bitcoin – $59 488
Raiz app (Aggressive portfolio) – $14 277
Spaceship Voyager app (Index portfolio) – $1 658
BrickX (P2P rental real estate) – $4 653

Total value: $1 439 608 (+$65 077)

Asset allocation

Australian shares – 40.6% (4.4% under)
Global shares – 24.1%
Emerging markets shares – 2.8%
International small companies – 3.6%
Total international shares – 30.5% (0.5% over)
Total shares – 71.0% (4.0% under)
Total property securities – 0.3% (0.3% over)
Australian bonds – 6.3%
International bonds – 11.4%
Total bonds – 17.7% (2.7% over)
Cash – 1.2%
Gold – 6.8%
Bitcoin – 4.1%
Gold and alternatives – 11.0% (1.0% over)

Presented visually, below is a high-level view of the current asset allocation of the portfolio. Feb 2019 - allocation

Comments

The past month has seen the largest single increase of the past year, and the third largest of the two year journey. This has been mostly caused by simultaneous increases in the value of equities, as well as gold and Bitcoin holdings. This synchronous performance is not what would be normally expected in a diversified portfolio, in which it is more usual to have portfolio components moving in different directions.

The result of this is that the portfolio is at the highest point in the journey so far, having regained levels not seen since September last year. This recovery from losses at the end of 2018 has occurred rapidly. As well as the largest single increase on a monthly basis in the past year, the past two month period has been the most significant period of growth experienced since the short-lived increase in Bitcoin in late 2017.

Port monthly chng Feb 2019

New contributions continue to be made through the Betashares A200 ETF, and there is still some way to go yet before the Australian shares component of the portfolio reaches its target. So contributions to the A200 ETF will likely continue, though this recent paper from Vanguard has raised the interesting possibility that the optimum level of international exposure to reduce portfolio volatility may actually be higher than my current target. This month the total share component of the portfolio reached just over $1 000 000. At about the same time last year, the total portfolio was just crossing this threshold. Port hist - Feb 2019

The coming month will see two significant milestones, the investment of an additional $15 900 from the reduction of my emergency fund to recognise the role of the growing stream of distributions, and the release of first quarter dividends from A200 and some Vanguard funds. Receiving significant sums to reinvest outside of the half-yearly Vanguard distributions cycle will be a relatively new and welcome experience.

In coming months I may increasingly be facing a need to invest beyond A200 to maintain my target allocations – most likely in global shares. Continuously purchasing exclusively Australian shares over the past nine months to meet a higher equity allocation has felt challenging at times, however, Australian share market valuations have at least generally been close to long-term averages through this time.

Though this is not primarily a spending or an unsparing frugality blog, below is an updated version of my somewhat winding path towards ‘credit card’ FI over the past six years, including the most recent months and factoring in the lower distributions in the last six months.

Credit card - Feb 2019 It’s apparent that the half year portfolio income to July 2019 will need to rise substantially if I am to re-close the gap that has emerged since the high distributions across 2017-18. Over the past six months, distributions have on average totalled just under 50 per cent of credit card expenditure. In a small step towards addressing this gap, I recently re-contracted my mobile phone plan to achieve around a $500 annual savings.

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)	90.1%	126.0%
Objective #2 – $1 980 000 (or $83 000 pa)	72.7%	101.7%
Credit card purchases – $73 000 pa	82.7%	115.6%
Total expenses – $96 000pa	62.9%	87.9%

Summary

The strong portfolio growth over the past month means that on an ‘All Assets’ basis, I have theoretically just met my portfolio objective #2. In a few short months I may actually pass my old original portfolio objective (of $1 476 000). Looking just at the ‘Portfolio only’ measures, six months or so of further progress could potentially see the new objective #1 in sight, having just reached the 90 per cent of the way this month.

Currently my conscious focus remains on the ‘Portfolio’ measures, where there is some distance to go. Nonetheless, the progress made this month has caused frequent reflection on the subtle psychological impacts of being at this advanced stage of the journey.

Independence is not yet secured in quite in the way I want, yet feels within tangible grasp. Whether this is correct or not will only be known in time, but it is a source of daily thought. The feeling of an accumulating power over one’s circumstances – particularly the shift to a position of a type of ‘quiet power’ in relation to future work – represents a remarkable calming change from a decade ago. That was a time in which, even though I had a substantial emergency fund, any period without employment income led to a restless and anxious search for a replacement income.

Putting such philosophical thoughts aside this month, and spurred by a reader comment, I have been re-reading (or rather listening to) The Big Short. This feels timely given current Australian real estate markets. What is striking from absorbing the book again is how much conviction, research and character it takes to take a different view from the crowd, and how difficult this is in current investment markets. It is a healthy warning to be wary of easy consensus, and that even that most elusive of beasts in markets – ‘being right’ – can be less satisfying than imagined in crisis conditions.

In the something of the same theme as breaking consensus, Early Retirement Now has also recently released an excellent post on ‘yield illusion’. This is interesting to think about in terms of frequent Australian FI Reddit discussions about dividend investment approaches, as well as the potential for some Australian companies and listed investment companies to shift dividend policies in response to any changes in franking credit refund arrangements.

This recent paper also discusses an interesting finding that investors need to firmly guard against what it terms the ‘free dividends fallacy’. It shows empirical evidence from real investors that failure to dispassionately appreciate total returns and the real impact of dividend payments on an assets value and price can result in poor decision-making harmful to long-term returns.

Finally, an article on Kitces recently highlighted a sometimes under-appreciated aspect of sequence of returns risks: the fact that in many cases positive market returns mean that the 4% rule and similar approaches can lead to significant unanticipated growth in the portfolio, even through the withdrawal phase. Following the past two months, considering these ‘upside risks’ too closely feels perilously close to tempting fate, and so I choose to look ahead only cautiously.

Waypoints of the Passage – A History of Portfolio Progress

Posted on February 16, 2019March 24, 2022 by The FI Explorer

Day by day, what you choose, what you think and what you do is who you become.

Heraclitus

When I started this record of my journey to financial independence, the voyage had already commenced. In fact, based on the measures used, it was already around two-thirds complete. This article seeks to fill in the blank pages in the log and answer the questions: what happened before this? How did the portfolio progress and grow since it started? How was it built and how did it evolve over time?

Looking back, much of the journey and portfolio progress seemed to take place at a slow but steady pace, likely because of a reliance on automated regular investments in various funds. This piece will seek to chart the progress and describe the main investment vehicles used, to help answer what the early years of voyage looked like.

Outward bound and initial bearings

While in some senses the portfolio commenced as far back as 1999, with a first purchase of Telstra shares and some expensive actively managed share funds, this article focuses on the period from 2007 onwards.

Prior to 2007 I was regularly investing, however I was also saving for, and subsequently reducing, a home mortgage. Probably the single most significant starting investment I made in this period before 2007 was commencing in March 2001 sizeable regular monthly investments in Vanguard’s Diversified High Growth retail fund, which has continued to form part of the portfolio ever since.

It was only from early 2007 that a single focus was on building the portfolio for the purpose of any kind of financial independence. This goal itself was a slowly evolving journey, with revisions and adaptations.

For example, in July 2007 I set a target of $750 000, with the over ambitious view that that might produce around $50 000 in annual portfolio income. The goal of providing for a stream of passive income of $58 000 I can trace back to at least July 2009. Back then, my return assumptions were optimistic, and I envisaged the goal being achievable around 2020. By 2010 I had estimated that a portfolio of around $1.1 million would be required, a target which I updated to reflect more realistic information and evidence on likely sustainable returns in 2016, first setting my previous target of $1.47 million.

Progress of the voyage – movement in the portfolio

The overall pattern of growth in the portfolio since this time is shown below (with green denoting the period covered by the blog).

Figure 1 - Waypoints

It contains three main phases.

Initial progress – 2007-2012

During the first phase, and first few years progress was slow, despite a growing savings rate. Part of this was the impact of the global financial crisis. This did not cause an absolute decline in the portfolio, but was a major contributor to the small increase over January 2008 to January 2009.

To give a sense of what happened in this period in total, the portfolio went from around $152 000 in July 2007, to $228 000 in July 2009, and probably the worst of it was reflected in the portfolio only increasing around $10 000 from January 2008 to January 2009. That means that without new contributions it would have gone backwards over that year. Regardless, I did continue to invest. The portfolio was around 60 per cent equities during that period. On reflection, I’m glad that the global financial crisis happened while I still had a relatively low portfolio level compared to today.

During this first phase, there was little compounding of returns, and the slow rate of progress here is captured very effectively in recent infographics and discussions from Four Pillars. The first $100 000 of the portfolio was achieved in 2007, and portfolio passed $300 000 through 2010, three years into the journey.

Expanding horizons – 2013-2017

The second period was one of significant yearly growth between 2013 and 2017. During this phase distributions started making an appreciable and sustained contribution to portfolio growth around $20 000 per year.

During this period the portfolio approximately doubled in size, and started approaching the psychological point of $1 000 000.

The journey as logged – 2017 onwards

The third period, since the commencement of regular writing in early 2017, has been dominated by a a break in the otherwise smooth and slightly exponential portfolio growth pattern from early years.

The increased in the value of bitcoin in late 2017 and then subsequent fall through 2018 has been responsible for this one-off blip in the chart, but absent any further significant increases, its capacity to introduce volatility into the overall portfolio has been reduced

Contributions over the voyage

Over the journey so far, most investment has taken place in Vanguard retail funds (High Growth, Growth, Balanced, and Diversified Bonds), with these funds receiving just over 66 per cent by value of total contributions. Around 90 per cent of total contributions by value been made into passive index funds, or passive ETFs.

The graph below illustrates the investment vehicles that contributions were made to on an annual basis. It is designed to answer the question, where did new investment get directed each year?

Figure 2 - Waypoints

From 2007 to 2015 contributions to Vanguard retail fund made up 90 per cent of yearly investments made, with the exception of a large single investment in a gold ETF in 2009.

The actual investment allocation between the various Vanguard funds differed from year to year, with a focus on building up each individual fund to a minimum size, assisted by inertia from many of these being automatic deductions left unchanged for a year or more. Achieving a notional target allocation set in investment plans also provided some guidance for which Vanguard fund was contributed to at any given time.

At one stage, as well, I sought risk management from an ‘bucket’ approach to splitting investments between different funds with different allocations, with the thought that over time this would achieve a greater margin of safety.

Over time, however, absorbing investment and finance theory led me to see that this was a wasteful, duplicative, and overly complex way of constructing an asset allocation, which had the potential to distract from critical whole of portfolio decisions about risk tolerance and capacity. This led to eventually to ceasing to contribute to some of the smaller and more conservative Vanguard retail fund holdings.

Before 2015, the only exceptions to this pattern of shifting Vanguard retail fund investments were some investments in gold ETFs, and a small exploratory investment in an early retail index fund associated with Bankwest, which had relatively high fees.

In 2015, this stability changed, with three significant non-Vanguard investments. This included a continued investment in gold ETFs, a small exploration into Bitcoin, and a substantial investment in the peer to peer lender Ratesetter. This period coincided with an increased focus on investments, and some free time to explore this interest more closely.

This increased in 2016, with my first small contributions to BrickX, Goldmoney, and Raiz (then Acorns). 2017 saw the first investments made in Australian equity ETFs, with direction of major re-investment of distributions into Vanguard’s VAS ETF, rather than back into the Vanguard retail funds, which had been my practice previously.

Last year I halted any reinvestment in the Vanguard retail funds that had made up the bulk of my previous investment focus, moving from May onwards to regular investments in Betashares A200 Australian equities ETF. This has been driven by a two main reasons.

First, low cost purchases of ETFs now make it possible to buy small portions of A200 more economically. This means accessing a low MER of 0.07%, rather than 0.35% for the Vanguard fund I was contributing too.

Second, the Vanguard High Growth Fund still contains a 10 per cent bond allocation, meaning with each investment movement to my desired asset allocation was being slowed.

Shifting loads – tracking the movement in assets

Having seen how the level of the portfolio and the contributions shifted over time, this section discusses how the composition and asset allocation of the portfolio itself changed.

At the broadest level, the asset allocation of the portfolio has been relatively stable through time. The chart below sets out the allocation for major asset classes over the period 2007-2019. Figure 3 - Waypoint The major influences on asset allocation have been the original targets set, new contributions which have typically been directed to re-balancing towards a target allocation, and in places, major market movements (most notably the short-lived Bitcoin price appreciation in 2017-18).

The average actual share allocation across the period is around 67 per cent, which is relatively close to my previous target of 65 per cent. This target has recently been increased to 75 per cent. Average exposure to fixed interests and bonds has been around 23 per cent. The only significant divergences from movement around these levels arose from:

a gradual increase in share and bond holdings due to a deliberate reduction in conservative funds holding any cash from 2007-2010;
an increase in bond holdings to 29 per cent of portfolio assets in 2015; and
a one-off drop in share and bond allocations as Bitcoin briefly rose to make up 14 per cent of the portfolio in 2018

Recently, the share allocation has been rising towards and over 70 per cent, reflecting consistent contributions to Australian equities (mainly in ETFs) through the past two years.

Distributions over the voyage

One of the most satisfying elements of the journey so far has been the growth in distributions over time. These I have tracked in detail since the first half of 2000, with a good continuous record of dividends and fund distributions.

The record of portfolio distributions is set out below. In my earlier post Wind in the Sails – A History of Portfolio Distributions I set out some similar data on a financial year basis, however this figure below is on a calendar year basis in 2017 dollars, to enable the incorporation of the most recent half year data (with again green denoting the period covered by the blog). Figure 4 - Dist

Trends in portfolio distributions

Measured on a monthly basis these distributions started at less than $100 per month, and grew steadily until 2007, where they declined substantially due to some large cash funds receiving interest which were used in a house purchase. The global financial crisis in 2008 affected distributions across into 2009 , but some of that effect was also attributable to falling interest rates during that time, and it was a temporary reduction.

Portfolio distributions, aside from some variations flowing from irregular capital distributions, were largely fairly stable through 2011 to 2015, averaging a between $20 000 and $25 000. After this, in 2016, portfolio distributions began to become extremely significant in their own right.

The distributions in 2017, and part of 2018, have contained significant realised capital gains from Vanguard funds, and like the results in 2006 and 2011, may not be repeated for some time. At the time, these high distributions led me to ponder whether I had actually already achieved ‘Credit Card FI’.

Overall distributions have made a significant contribution to my journey to date. In real inflation adjusted terms these past returns constitute around 30 per cent of the current portfolio value. In nominal terms, they have added over $375 000 to the portfolio total.

Consistent with the growth in the size of the portfolio and impacts of compounding, this contribution has been highest in the last few years. Over half of the total distributions the portfolio has ever generated over the past 19 years has occurred in just the past 4 years, and over 75 per cent within the past eight years.

Changing mix of distributions

The changing portfolio has also led to marked shifts in what makes up the distributions. Prior to 2007, high interest savings account (such as ING Direct, Bankwest) made up the most significant part of the level of distributions recorded, often over two-thirds. Over the period since 2007, falling interest rates, a shift towards more equity investments, and lower invested amounts in fixed interest and cash have led to a decline in this area. Even as recently as 2014, however, these sometimes made up as much as one third of total distributions. With the slow withdrawal from Ratesetter to meet asset allocation goals, this can be expected to keep falling.

The current constituents of the most recent half yearly distributions are set out below.

PIPieChartDec18

From this it can be seen that Ratesetter interest make up only 10 per cent of total portfolio distributions, while passive Vanguard funds and ETFs, overwhelmingly weighted towards equity assets, now make up over 80 per cent of net distributions.

Reflections on the waypoints

The conscious journey to financial independence has stretched back at least a decade. Progress has mostly been achieved by increasing my spending by less than my income, and investing the difference.

Knowledge, and a willingness to try out different assets and vehicles and continue to learn were also markers in the journey. They pushed me beyond simple and unrealistic savings targets, to find the habits and open mind that allowed embarkation on this exploration. They also left me with a more complicated portfolio than I would recommend for others, but which nonetheless is quite diversified.

Much of the journey was quiet and not memorable, although a weekly habit of tracking my net worth since 1998 provided a regular focal point to account for progress and lay future plans to take the next step. Much of the time I allowed automatic deductions to slowly average into the market.

The waypoints continue to mark down a diminishing distance towards the destination of my first FI goal. More time has passed than lays ahead for the portfolio in growth terms, but of course history continues to happen. As the distance counts down, I strain forward to see the shape of this undiscovered country.