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.

 

The truth is, we know so little about life, we don’t really know what the good news is and what the bad news is.

Kurt Vonnegut

This is my ninth 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 – $630 261
• Vanguard Lifestrategy Growth  – $40 998
• Vanguard Lifestrategy Balanced – $73 030
• Vanguard Diversified Bonds – $105 335
• Vanguard ETF Australia Shares (VAS) – $24 325
• Telstra shares – $4 892
• Insurance Australia Group shares – $16 187
• NIB Holdings – $7 200
• Gold ETF (GOLD.ASX)  – $76 559
• Secured physical gold – $6 781
• Ratesetter (P2P lending) – $57 655
• Bitcoin – $59 549
• Acorns app (Aggressive portfolio) – $6 901
• BrickX (P2P rental real estate) – $4 487

Total value: $1 114 160 (+$54 131)

Asset allocation

• Australian shares – 31%
• International shares – 20%
• Emerging markets shares – 3%
• International small companies – 3%
• Total shares – 55.7% (5.3% under)
• Australian property securities – 4%
• International property securities 3%
• Total property – 6.7%
• Australian bonds – 12%
• International bonds – 11%
• Total bonds – 23.2% (4.2% over)
• Cash – 1.5%
• Gold – 7.5%
• Bitcoin – 5.3%
• Gold and alternatives – 12.8% (2.8% over)

Comments

This month the portfolio increased by over $54 000. This in part is inflated by my ‘averaging’ in another contribution to Vanguard’s Australian Shares ETF, after strong distributions in July.

A significant component of the increase also comes from appreciation of Bitcoin holdings, which now quite unexpectedly makes up more than five per cent of the portfolio. Originally, because the amounts were small I folded this allocation into a ‘gold and alternatives’ category, but I have broken it out this update, so that I have better visibility on what is happening to both the gold and Bitcoin components. This reveals that my gold allocation remains under my benchmark of 10 per cent. An issue I have to think about is how much these two assets move together, or actually ‘covary’ (i.e. move in different directions, dampening volatility). Psychologically, I’m not sure if I really regard the Bitcoin gains as real.

This month I moved to a less costly online broker (directshares), which has halved the cost of buying ETFs. It’s not the least cost provider, but due to my banking set up, was a good compromise for ease of access and speed of moving funds. As a portfolio monitoring  device, I have also stumbled onto Sharesight, which I have yet to explore fully. It’s free for small simple portfolios and seems a really smooth and polished way to understand portfolio returns, and their capital and dividend parts.

Equity markets continue to hold up, which means that even if I take account of a further Vanguard Australian shares increment still to be fed into the portfolio, my equity allocation is still sitting below my target, at market highs. This is not a comfortable position to be. To date I have always relied on new contributions to slowly readjust my allocations back to target. At some point, though, this becomes mathematically problematic, because the new contributions simply won’t ‘shift the dial’ enough.

This uncomfortable truth is currently meekly sitting alongside another, my dislike of transaction costs and triggering tax events. Increasingly, equity market conditions – especially in the United States, has made me consciously start playing out in my mind what a sharp turnaround might practically look like in my portfolio. My base case is a potential halving of equity markets (in the short term), knocking out around $300 000 of equity value.  The difficult question – would this be good news or bad news at this point in portfolio accumulation?

Finally, the Brickx real estate platform has recently expanded to offer an Adelaide property for investment, so to maintain and enhance diversification I have made a small expansion in holdings. So far the portfolio has produced total returns of 5.5 per cent and delivered total distributions of $39.

Progress

Progress to goal: 75.5% (+4.2% ahead of target) or $361 840 further to reach goal.

Summary

Passing the 75 per cent milestone has been a significant surprise, and focused attention on just how definable and potentially close is my investment target. Four years ago, if I had been measuring, this figure would have been 33 per cent. Barring a major external market event, reaching my goal within two, three or four years is beginning to sink in as a concept.