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.

If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.

Antoine de Saint-Exupery

Every exploration begins with a leaving of the familiar. This post provides some details of ‘early navigations’ towards building a portfolio of investments to provide a passive income.

There are multiple points at which this exploration could be said to have begun. Finance and investments had interested me ever since income from my first casual job, even if my early financial literacy was low. My first investments were term deposits from Advance Bank (now St George), involving the investment of $500, $1000 or $1500 for now unheard of rates of between 4-6 per cent.

First charting of a course

Rather than give a comprehensive history of explorations, however, it may be best to focus on the process of my planning and developing of my goals in writing. My first written ‘Investment Policy’ was in 2007. Twice a year I check progress against my Investment Policy, and, sometimes, make adjustments to it.

The prompt that made me set fingers to keyboard that particular March 20 is obscure to me. Certainly in the past five years I had absorbed out of interest many personal finance and investing books, including Bernstein’s Four Pillars of Investment, Burton Malkiel’s A Random Walk Down Wall St, Your Money or Your Life, and the delightfully named Bodo Schaeffer’s The Road to Financial Freedom.

This last was a gift from my father. Each of these books I highly recommend, and I see most of them appear regularly on FI blogs recommendations lists. Across these these works, the concept of a written plan, a stable Investment Policy was recommended (in Four Pillars I believe most explicitly).

My first Investment Policy simply stated that the purpose was to build a source of passive income, and had a 15-year term horizon. The asset allocation was likewise simple – a 70 per cent allocation to equities, and 30 per cent allocation to bonds. This was to be achieved through variations in four Vanguard Lifestrategy funds, and two small direct share holdings.

Staying on course

In many ways, this first two-page document was a model of clarity. For example, the principles of management were confined to:

1. To the extent possible the policy should be carried out through as few investment vehicles as feasible
2. Emphasis should be given to maximising after-tax returns through low cost tax efficient vehicles
3. Passive index-based management should be applied due to a lack of evidence that active management can reliably produce above-average returns
4. The target allocation is to be achieved with as much diversification across time, markets and assets as consistent with efficient portfolio management

These still form the key principles of my investment approach today, and have been the least changed, fiddled with, and edited components of my plan. Principle (1) has probably seen the worst weather of any of the principles, due to my curiosity about new products.

Principle (2) is designed to keep a focus on the final objective, total returns. This is important, given some investments can offer superficially attractive yield that either is highly taxed, or which comes at the cost of better overall opportunities when both income and capital growth is considered.

The third principle is one I have applied most consistently. I exited my last actively based investment product in 2004, excluding small BrickX purchases which can be considered small active ‘bets’ on residential property.

The final principle is allocation across time, markets and assets, and this has been carried out by regular investments, accessing different asset markets, and wide portfolio diversification.

Filling in the chart

Over time the Investment Policy I have charted has expanded in detail and complexity. Most of the expansion has been to set out the assumptions underpinning the plan more clearly, for example, by including explicit long-term return assumptions for portfolio components, which feed into the overall portfolio return estimate. Currently this assumes a 5.5 per cent after tax real return on equity and a 2.0 per cent return on debt.

The second area of greater detail has been the explicit description of a range of portfolio risks, and approaches to addressing these risks. Examples of these types of risks include: liquidity risk, counterparty risk and operational risk. This forces a regular consideration of whether there are other less obvious risks that my portfolio is vulnerable to, aside from traditional market-based risk and volatility.

Making course adjustments

The discipline of reviewing my portfolio against the Investment Policy twice a year has been useful in developing my portfolio over time. It forces focused attention on portfolio choices around defined points, and acts as a brake to drifting away from the core intent of the investment plan.

It also helps provide a framework in which new investment options are assessed against the critical question – does this proposed investment help meet the portfolio’s objective. Each ‘course adjustment’ made is there in marked up form, as a documented change. The Investment Policy also provides a structured way in which to think about questions such as: what is the goal? How it will be achieved? Is progress towards the goal is being achieved?

Sometimes this has resulted in significant changes. In 2009 the goal was an unrealistically ‘lean’ one, to reach a portfolio target of $750 000, to produce an income of $50 000 annually. Over time, the goal has evolved in steps to a more realistic level of around $1.5 million to produce a passive income of around $58 000 per annum (close to the common FI ‘four per cent rule’).  This income level was set to reflect a benchmark of the ‘average’ or median income of an Australian employee.

As I progress closer to the goal the looming question is: what does it mean to achieve the goal? Is it a milestone to a longer objective? What might paid work look like after that point? Would I be satisfied with the standard of living which that would represent – or would I seek an additional ‘margin of safety’ or buffer either to reduce sequence of return risk, improve the level of passive income, or because working at that point would still interest me?

Like the familiar sights of home port, the mathematical elements of FI recede at that point, and hard thinking is needed on the direction of next voyage.