Not being able to govern events, I govern myself.

Montaigne

Year in review

Exactly a year ago, in the brief quiet phase around the end of the year and in front of a Lord of the Rings film, I set out on this personal exploration of financial independence, by starting this record.

At the time, I was exactly two-thirds of my way to my target of around $1.5 million, having made conscious steps to building an investment portfolio back to 1999. Now I am here at the same time, rather surprised at the progress that has been made. Reading Nassim Taleb’s best seller Fooled by Randomness years ago has thankfully inoculated me against attributing this to any particular skill. I expect that this year will prove a more challenging environment for closing on the final goal, and pushing beyond.

My main goals for 2017 were:

1. Continue to invest in low-cost passive index approaches (mostly…see goal 5) – Achieved
2. Contribute $75 000 to my existing portfolio regularly using dollar cost averaging – Achieved
3. Achieve total interest and distributions of $28 000 – Achieved
4. Maintain an emergency fund of around 12 months of expenses – Achieved
5. Keep on experimenting at the edges of finance technology and new products – particularly with passive index-based Exchange Traded Funds – Achieved

These results are pleasing, and give me confidence to seek to be ambitious for this years investment plans and goals. I am currently reviewing my investment policy and looking at possible new goals. Before finalising these, I want to understand the shape of distributions from the end of the year, so finalising this may be a week or so away.

Over the past year my major index-based investments with Vanguard have grown by over $170 000, I have explored and used ETFs, and expanded my exposure to peer to peer lending. It’s been a year of unprecedentedly rapid progress, significant enough that I go into 2018 surer of my financial footing than at any other time. It’s also been a year of discovering the community of FI, be it active Reddit discussions, fellow Australians on the FI journey, and motivating podcasts, such as ChooseFI and the Mad Fientist.

Portfolio update

This is my thirteen portfolio update. I complete this update monthly to check my progress against my original goals.

Portfolio goal

My current portfolio objective is to reach a portfolio of $1 476 000 by 1 July 2021. My plan is that this should produce a real income of about $58 000. This is based on a real return of 3.92%, or a nominal return of 7.17%. My plan, is, however, to review this goal over coming weeks.

Portfolio summary

• Vanguard Lifestrategy High Growth – $708 727
• Vanguard Lifestrategy Growth  – $43 543
• Vanguard Lifestrategy Balanced – $76 293
• Vanguard Diversified Bonds – $103 359
• Vanguard ETF Australia Shares (VAS) – $52 647
• Telstra shares – $4 839
• Insurance Australia Group shares – $18 806
• NIB Holdings – $8 112
• Gold ETF (GOLD.ASX)  – $76 477
• Secured physical gold – $9 411
• Ratesetter (P2P lending) – $54 264
• Bitcoin – $191 250
• Acorns app (Aggressive portfolio) – $8 297
• BrickX (P2P rental real estate) – $4 383

Total value: $1 359 688 (+$58 606)

Asset allocation

• Australian shares –  30%
• International shares – 18%
• Emerging markets shares – 2%
• International small companies – 3%
• Total shares – 52.9% (8.1% under)
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.1%
• Australian bonds – 10%
• International bonds – 9%
• Total bonds – 19.3% (0.3% over)
• Cash – 1.3%
• Gold – 6.3%
• Bitcoin – 14.1%
• Gold and alternatives – 20.4% (10.4% over)

Comments

The portfolio increased by over $58 000, and once again this gain was dominated by an increase in the value of my Bitcoin. Aside from the visceral experience of variations in value of $50 000 over a weekend, I don’t have much to say about this because in some senses it is distracting, uncorrelated noise in the context of my overall portfolio, and the last thing I want is to have this become a narrow record of cryptocurrency highs and lows.

Its variations have the unintended consequence of obscuring the progressive execution of my rebalancing towards shares and away from bonds, towards my goal of reaching a 65% allocation of equities over coming years. As an example, ignoring for a moment the Bitcoin component of my portfolio, my current allocation is actually 61.5%, pretty much exactly on target to reach the goal.

Progress

Progress to goal: 92.1% (+20.0% ahead of target) or $116 312 further to reach goal.

Summary

At this point, large market variations have the potential to wash me up on the shore of my target, or draw me back further. I am trying as best I can to remain dispassionate at the effect of these variations, and rather focus on the underlying mechanisms that brought me this close in the first place. That is, years of saving and investing, diversification of risk, and not permitting my lifestyle costs to expand to meet my income. At some point through these next few months, it’s perfectly possible I will achieve my goal. What lies beyond, then, is my current focus of thinking and reflection, of which I will share more soon.

Circumstances rule men; men do not rule circumstances.
Herodotus

This is my twelfth portfolio update. I complete this update monthly to check my progress against my original goals.

Portfolio goal

My current portfolio objective is to reach a portfolio of $1 476 000 by 1 July 2021. My plan is that this should produce a real income of about $58 000. This is based on a real return of 3.92%, or a nominal return of 7.17%.

Portfolio summary

• Vanguard Lifestrategy High Growth – $699 155
• Vanguard Lifestrategy Growth  – $43 408
• Vanguard Lifestrategy Balanced – $76 170
• Vanguard Diversified Bonds – $103 574
• Vanguard ETF Australia Shares (VAS) – $51 782
• Telstra shares – $4 559
• Insurance Australia Group shares – $18 023
• NIB Holdings – $8 136
• Gold ETF (GOLD.ASX)  – $77 847
• Secured physical gold – $8 777
• Ratesetter (P2P lending) – $56 166
• Bitcoin – $141 039
• Acorns app (Aggressive portfolio) – $8 046
• BrickX (P2P rental real estate) – $4 400

Total value: $1 301 082 (+$84 772)

Asset allocation

• Australian shares –  31%
• International shares – 19%
• Emerging markets shares – 3%
• International small companies – 3%
• Total shares – 54.5% (6.5% under)
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.3%
• Australian bonds – 11%
• International bonds – 10%
• Total bonds – 20.3% (1.3% over)
• Cash – 1.4%
• Gold – 6.7%
• Bitcoin – 10.8%
• Gold and alternatives – 17.5% (7.5% over)

Comments

This month the portfolio increased by over $84 000, with two-thirds of this gain being driven by the increase in the price of my small, experimental, holdings of Bitcoin. This was not really supposed to be so large a part of the journey, but has been an interesting phenomenon to witness. Bitcoin is ‘having a moment’, which means reading, listening to podcasts talk about it, and even now seeing its price quoted on the ABC new finance update some nights. It has meant a lot of thinking about where it fits into the portfolio (this Atlantic article gets to the heart of some of the different potential ways of viewing it).

As its price increased, a first instinct was to mentally discount the gains, record it an average smoothed longer-term price, or remove it from my portfolio considerations entirely. This would avoid it’s volatility driving anomalous rises and falls in apparent net worth driven only by its price movements. As an example, despite gains in the absolute level of equity holdings, including Bitcoin means mathematically that my apparent allocation to equities (and bonds for that matter) has fallen.  This in counterintuitive when my only regular investments at the moment are to equities.

This is not the approach I have taken yet, however. At the moment, my decision is to leave it in. The reason for this is because, planned or not, it would be unwise to ignore the mathematical reality that at current prices, around a tenth of my portfolio is made up of Bitcoin. Removing it from the portfolio and treating it as separate would be falling into a trap of viewing part of wealth in different in different ‘buckets’ in an artificial way. Bitcoin could fall to zero, in the future. It could continue to appreciate. The first possibility would eliminate the distorting effects, but the latter would be an important financial fact to consider, with implications for how exactly I reached my objective, and the risks taken to get there.

So for now, I wait, and try to resist asking my new Google Home too frequently what the price is on any given day. In fact, that has been the most interesting aspect of the whole episode – observing its effects on my own psychology, and considering issues such as ‘when would it make sense to sell’. Currently, my view is that it is as likely to go down as up, but that its critical valued characteristic for my purposes is its non-correlation with other assets, and so no action is warranted.

Chasing my target equity allocation continues to mean regularly contributing to Vanguard High Growth fund. An exciting development in the past month has been Vanguard releasing a series of new diversified ETFs, modelled on their existing retail funds, with low expense ratios of 0.27%, lower than on my current retail funds. This means that for large lump sums, they represent a simple alternative to holding individual sector Vanguard ETFs and rebalancing. This may well be an option when end of year distributions arrive.

Progress

Progress to goal: 88.1% (+17.6% ahead of target) or $174 918 further to reach goal.

Summary

This month reinforces that my journey can be affected by favourable winds, and currents, even as I anticipate and think about the potential for storms ahead. Dealing with luck, windfalls, and events outside of our control is an intriguing part of the journey that I had not fully considered in my conception of the journey as relatively slow and steady progress towards my target. While my recent holiday cruise did involve lots of reading and relaxing, I can’t say that I met my goal of thinking systematically about whether my current target is sufficiently ‘safe’ for potential market conditions, and how my current career and its trajectory could look over the next 2-3 years. Updating my investment policy over the summer break should provide the chance to do this.

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Winston Churchill (1942)

This is my eleventh portfolio update. I complete this update monthly to check my progress against my original goals.

Portfolio goal

My current portfolio objective is to reach a portfolio of $1 476 000 by 1 July 2021. My plan is that this should produce a real income of about $58 000. This is based on a real return of 3.92%, or a nominal return of 7.17%.

Portfolio summary

• Vanguard Lifestrategy High Growth – $675 810
• Vanguard Lifestrategy Growth  – $42 490
• Vanguard Lifestrategy Balanced – $76 253
• Vanguard Diversified Bonds – $102 734
• Vanguard ETF Australia Shares (VAS) – $50 768
• Telstra shares – $4 699
• Insurance Australia Group shares – $16 499
• NIB Holdings – $7 572
• Gold ETF (GOLD.ASX)  – $76 360
• Secured physical gold – $7 881
• Ratesetter (P2P lending) – $58 025
• Bitcoin – $85 113
• Acorns app (Aggressive portfolio) – $7 704
• BrickX (P2P rental real estate) – $4 402

Total value: $1 216 310  (+$75 648)

Asset allocation

• Australian shares –  32%
• International shares – 19%
• Emerging markets shares – 3%
• International small companies – 3%
• Total shares – 56.5% (4.5% under)
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.6%
• Australian bonds – 11%
• International bonds – 10%
• Total bonds – 21.6% (2.6% over)
• Cash – 1.5%
• Gold – 6.9%
• Bitcoin – 7.0%
• Gold and alternatives – 13.9% (3.9% over)

Comments

This month the portfolio increased by over $75 000. This increase reflects three primary factors. First, a further increment of investment in ETFs, second, an expansion in the valuation of Bitcoins, and third, regular ongoing investments in my Vanguard funds.

This results in my crossing the important threshold of my portfolio value being over 80% of the way to my target goal, compared to 66% when I started this blog, and around 50% in 2015. Progress has been much faster that I had any reason to expect at the time of starting recording my explorations. Preparing my tax return has provided an alternative even more objective marker of progress. Based on my 2016-17 tax return, investment income (distributions and realised capital gains) was $40 076, or around 70% of my final target.

In late October I put the last increment of my July distributions into the Vanguard Australian shares ETF (VAS), adding to that some of my recent distributions from shares and Vanguard’s diversified bond funds. Received my first set of VAS distributions as well, which felt like a minor landmark occasion given it was my first ETF purchase.  Another first is that I have started slowly withdrawing funds from the Ratesetter P2P account. This is not so because I fear how it will perform over coming years, as to seek to quicken my return to my preferred asset allocation between equities and fixed interest.

US markets continuing to hit record highs provided a strong discouragement to expanding my ETF exposure to international shares. I have continued to think about the issue of international diversification in equities, because as a proportion of the total portfolio, they have reached the lowest value since 2007.  Sometimes, this doesn’t seem wise, at others, like after watching this type of prediction, it is more of a comfort.

Bitcoin continues to increase in value, and introduce volatility into my portfolio. There is news of a second ‘forking’ event in the offing, which may result in another small windfall gain from conversion of a new digital currency back into Bitcoin. The extra non-correlated diversification this holding brings is welcome, and so far it represents a relatively low proportion of my overall portfolio, so I am happy to leave it to its sharp up and (just as possible) downward movements.

Progress

Progress to goal: 82.4% (+12.5% ahead of target) or $259 690 further to reach goal.

Summary

The progress over the past few months has reinforced that I am, at least while markets hold up, entering a different phase. That of drawing towards the end of a defined plan, and being closer to the end of the journey than the beginning.

With some holidays coming up, part of what I will be doing is reflecting on what coming to the ‘end’ of the plan means for my day to day life, including whether the target is sufficiently ‘safe’ for current market conditions, and how my current career and its trajectory could feasibly look over the next 2-3 years with my FI target behind me.

As others have commented the ‘one more year’ syndrome is a real concern, but, then, there is definite value in a feeling of personal assurance and a ‘margin of safety’.

I feel like one
Who treads alone
Some banquet-hall deserted,
Whose lights are fled,
Whose garlands dead,
And all but he departed!

Thomas Moore, Oft in the Stilly Night

This is my tenth portfolio update. I complete this update monthly to check my progress against my original goals.

Portfolio goal

My current portfolio objective is to reach a portfolio of $1 476 000 by 1 July 2021. My plan is that this should produce a real income of about $58 000. This is based on a real return of 3.92%, or a nominal return of 7.17%.

Portfolio summary

• Vanguard Lifestrategy High Growth – $644 714
• Vanguard Lifestrategy Growth  – $41 365
• Vanguard Lifestrategy Balanced – $73 383
• Vanguard Diversified Bonds – $104 757
• Vanguard ETF Australia Shares (VAS) – $34 978
• Telstra shares – $4 652
• Insurance Australia Group shares – $15 912
• NIB Holdings – $6 888
• Gold ETF (GOLD.ASX)  – $75 519
• Secured physical gold – $7 320
• Ratesetter (P2P lending) – $58 100
• Bitcoin – $61 417
• Acorns app (Aggressive portfolio) – $7 212
• BrickX (P2P rental real estate) – $4 445

Total value: $1 140 662 (+$26 502)

Asset allocation

• Australian shares –  31%
• International shares – 20%
• Emerging markets shares – 3%
• International small companies – 3%
• Total shares – 56.3% (4.7% under)
• Australian property securities – 4%
• International property securities 3%
• Total property – 6.7%
• Australian bonds – 12%
• International bonds – 11%
• Total bonds – 23.2% (3.8% over)
• Cash – 1.5%
• Gold – 7.3%
• Bitcoin – 5.3%
• Gold and alternatives – 12.6% (2.6% over)

Comments

This month the portfolio increased by over $26 000. This includes a yearly bonus, which I chose to add as another contribution to my Vanguard Australian Shares ETF holdings. This was after a little vacillating between a few different ETF options. As ‘bonus’ money I felt a little more entitled than usual to allocate it as I wished, and considered Vanguard’s global share ETF, and some other fundamental indexing based ETFs. Unusually, buying into a fundamental index ETF of Australian shares would – at least on cursory inspection – have increased exposure to Australian banks compared to a standard ETF, which was not something that was attractive. In the end, simplicity prevailed, together with low fees and avoiding lifting exposure to US share markets.

The exercise (and some interesting Reddit discussions on ETFs) did make me think more consciously than I have for some time about my attitude to global share exposure. This has largely been driven more by accident than design. That is, it’s the result of the default allocations of Vanguard managed funds I have purchased so far, but I will likely consider this more in future investment policy reviews. Much of the literature available on what level of foreign diversification is optimum  is based around US audiences, which is of limited use. On the one hand my future liabilities are likely to be in Australia dollars, on the other, it makes little sense to assume country-specific risk.

The most unusual and unsought source of paper gains this months arose from the ‘forking’ of Bitcoin, which left me with an amount of Bitcoin Cash (the new forked coin). My wallet service allowed a transfer of these back to Bitcoin original. This transaction, carried out entirely on a smart phone over breakfasts, had the effect of adding around $5000 to my original Bitcoin holdings. Hard to categorise that gain, or draw many conclusions from it.

The only other significant move I have made is to mildly increase my regular purchases of physical stored gold from Goldmoney, to seek to bring it closer to my target allocation of 10 per cent. In between times, have been listening to some excellent FI podcasts, including ChooseFI and Aussie Firebug’s interview with Pat the Shuffler.

Progress

Progress to goal: 77.3% (+7.9% ahead of target) or $335 338 further to reach goal.

Summary

With equity, bond and property markets poised as they are, sequence of return risks are looming larger. Sometimes it feels more likely that I face a ‘Sliding Doors’ scenario than an unremarkable mathematical progression to my goal. One option, in which I meet my target shortly, even more quickly than my projections, and another alternative reality  in which some type of capital market event puts my progress back 2-5 years, or even longer. This is making me think more about portfolio allocation, however, there are no obvious steps at this stage.