Resetting the Compass – New Goals and Portfolio Income Update – Half Year to December 31, 2017

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Men are slower to recognise blessings than misfortunes.

Livy

A year ago I set out on a voyage to build a passive income of around $58 000 by July 2021. As outlined in my recent year in review post, I have come quite close to the absolute portfolio target, and so have spent the past few days reviewing my plans and objectives. Resetting the compass for the future. The passive income update below also indicates that for this past year at least, I have achieved the income objective.

Setting a new course

To recognise this, I have decided to move to having two complementary objectives.

The first is to reach the original goal of $1 476 000 by 31 December 2018. This recognises that while measured in income terms, I have arguably met this goal, this has been from a portfolio level which is still below the target.

The second is a longer term goal of receiving a passive income equivalent to $80 000 in 2017 dollars. This is the approximate equivalent of average Australian full-time earnings, and my annual credit card liability. This will be derived from a new portfolio objective of $2 041 000 by 31 July 2023, keeping the long term real return assumption of 3.92 per cent.

The second goal is designed to reflect a more ‘business as usual’ lifestyle, rather than more of a ‘leanFIRE’ concept , at least in my current phase of life, of $58 000. After reflection, it is closer to the level of expenditure at which I personally would likely truly become indifferent to working or not. Looking back at all of my past investment plans, all have been couched in terms not of quitting work, but building a second passive income stream. No doubt partially this was because not much conscious thought went into what happened at ‘the end’. The closest the policy comes is a ‘review’ following completion.

I have taken a new approach of setting the timeframe of this goal on an average of my past portfolio’s growth over the past few years. In my first plans I would laboriously calculate out new contributions, expected returns, and the effect of compounding. Each method has its drawbacks, however, with a good record of past actual savings and portfolio growth, I have decided that past actual history, with its inexactitude, is likely to be a better guide than forecasts with average return assumptions.

In setting the second objective, one of the factors I’m conscious is that any number of important life and external economic events could intervene. The target is about 2030 days away, based on averages, and cannot reflect how circumstances could change. Nonetheless, I like the focus of a tangible goal.

Following the course

In actually carrying out the new plan, I have made some small refinements. The first is the adoption of specific asset allocation sub-targets, beyond the broad initial equity/bond and alternatives categories. These are:

  • 65 per cent equity based investments
    • 30 per cent international shares
    • 35 per cent Australian shares
  • 15 per cent bonds and fixed interest holdings
    • 5 per cent Australian bonds and fixed interest
    • 10 per cent international bonds and fixed interest
  • 15 per cent gold and commodity securities and Bitcoin
    • 10 per cent physical gold holdings and securities
    • 5 per cent Bitcoin
  • 5 per cent property securities
    • 1 per cent Australia residential holdings
    • 4 per cent general Australian and international property securities

Currently, the portfolio is some distance from this ideal allocation, as it will inevitably be at any given time. My plan is to use new contributions and distributions over time to dynamically target the desired allocations. Unfortunately, I have not been able to find much good data to support individual asset allocations in an Australian context. The split between Australian and international equities reflect a balance between international diversification and the tax-advantaged nature of Australian dividends. The role of Bitcoin is primarily as a non-correlated financial instrument.

Passive income summary

As noted my first goal is to to build up a passive income of around $58 000 by 31 December 2018 and $80 000 by July 2023.

Twice a year I prepare a summary of the total income from my portfolio income. This is my third passive income update since starting this blog. As part of the transparency and accountability of this journey, I regularly report this income.

  • Vanguard Lifestrategy High Growth – $23 062
  • Vanguard Lifestrategy Growth  – $1 370
  • Vanguard Lifestrategy Balanced – $1 376
  • Vanguard Diversified Bonds – $233
  • Vanguard ETF Australian Shares (VAS) – $1 119
  • Telstra shares – $118
  • Insurance Australia Group shares – $371
  • NIB shares – $180
  • Ratesetter (P2P lending) – $1 964
  • BrickX (P2P rental real estate) – $38
  • Acorns – $68

Total passive income: $29 899

Distributions 2 - Jan 18

Comments

This half-year result was about double the level I expected, due to higher than expected distributions from Vanguard funds. I have tended to base my expectations on a rolling four year average, but this has broken above that forecast. December distributions tend to be systematically lower than June payouts, and so on a conservative basis, I have more than met my investment objective #1 this half-year.

As I await the distributions I have been considering the question of where to reinvest. Vanguard’s new diversified ETFs are strong contenders, as is increasing my holdings of Vanguard’s VAS Australian shares ETF. Mindful of my target allocations above and current allocations, I would also like to increase my international equity holdings, however, the level of the US share market, and valuations that approach those in September 1929 currently restrains my enthusiasm. The heavy exposure of Australian shares indices to banks and the continuing property slowdown, however, also makes selecting VAS potentially risky. The so-called ‘everything’ bubble makes it a challenging time for asset allocation decisions.

13 comments

  1. Interesting! Thanks for sharing mate 🙂

    Just want to throw it out there – are you sure this isn’t a slight variation of ‘one more year’ syndrome?

    Also, those distributions – are they dividends, interest etc. or does it include capital gains paid out/rebalancing of the funds?

    Doesn’t this become less efficient, because if you receive large payouts due to rebalancing, you then need to pay CGT, but also reinvest some of the distribution?

    Keen to hear how you manage that, especially in retirement.

    1. Thanks SMA!

      I have thought a bit about the ‘one more year’ point, after you raised it before. I don’t think it is, for reasons I tried to cover in the post. My objective has been building a passive income sufficient for FI, not RE. There’s a quite good discussion of this distinction in recent Choose FI podcast episodes.

      Likewise, I have thought about that capital appreciation v distributions point you raised. The figures as reported do include a capital gains component returned by Vanguard, for example, in distributions.

      The efficiency question is interesting. I can understand the attraction of your ‘dividends’ only approach. My preference is to more widely diversify my portfolio risks, beyond Australian specific equity market risks, take the further risk reducing benefits of rebalancing, and accept the trade-off of the lower tax ‘efficiency’. Longer term, there’s always the possibility of changes to or removal of dividend imputation as well from a government needing revenue, so I’m a little loathe to base my strategy around current arrangements.

      1. I see. Sorry mate, shouldn’t have assumed you were aiming to quit work!

        Totally understand your diversification goals. I just wanted to understand the underlying cashflows coming from those investments. But I guess that’s where our approaches differ – in that you’re more interested in the total return and not so much the underlying cashflow/income.

        So I was querying whether the distribution was dividends, because depending on the amount of capital gains/rebalancing that was triggered/paid out- it may be unreliable to base the ‘passive income’ off those numbers as in your chart? Some years would have large rebalancing or cap gains paid out and others minimal, is that right?

        Not having a dig, just want to understand how it works. Cheers!

        1. Thanks SMA! I understand, no problem. I do see your point, I have started looking at the break out between realised capital gains and dividends. You’re correct that it’s uneven. That’s part of the reason I average it across a few years when projecting payments into the future and target a total portfolio level. Unfortunately the other issue is the that break down is only given in annual tax statements, typically.

  2. I will just say I wish I had the balls to throw numbers like you are. The scare of being judged and found by my piers are too great IMO to divulge these info. But thanks for doing this anyways, it helps for others.
    Great plan BTW and quite sure you’re going to meet it.

    1. Thanks very much for the encouragement and feedback Grogounet. I’m pleased to help – and now slightly more nervous! 🙂

  3. I get your compass reset, particularly in regards to lean vs. full FIRE. That’s one of the reasons I want to reduce our spending – because in 2016, we would have needed the full $2 million to reach that level of passive income as well. With a 15 year timeframe, starting from zero on the average wage, it isn’t possible.

    It sounds like it might be time to begin researching all of the non-financial aspects of retirement, so you are as prepared as you can be if you choose to pull the plug in 2023. If you aren’t in a big rush to leave work, then five years isn’t that far away.

    1. Thanks Mrs ETT, I agree. I have taken steps to reduce my spending, but have not tracked categories of spending (feeling like this may get me banned from FI club for life).

      Five years feels a long time, and yet, as you say, it can be deceptively close. Especially if I cast myself back five years and think how quickly that time has passed. Part of the not thinking about the ‘after’ time is a kind of superstitious desire not to tempt fate, if I’m honest. But you’re right, not having thought about it is also tempting fate.

  4. Excellent work FIExplorer in building your wealth and income to the stage that it’s currently at. We’d have to agree that we don’t want to live ‘lean’ in FIRE, we want to be able to do whatever we want to do..not just retire at the earliest possible.

    Mr DDU

    1. Thanks DDU for the comment and read! I continue to admire your dedicated approach to Australian dividend stocks, its a nice contrast to keep track of. I actually just read in the Weekend Australian yesterday that a median wage for a Australian male in 40s is around $77 000, which happily made me feel that my objective #2 was not overly excessive in lifestyle terms!

  5. It’s great to read you’re leaning more toward a plump FIRE – and well on your way. You’re at a stage I’d love to reach by my forties and the idea of FIRE being enticing rather than ultra frugal is important. btw, how hard is it to find good asset allocation info for Australia! I’ve been looking on and off for years and everything I read is based on the US or like you mention, revolves around taxation and franking credits!

    1. Thanks for the comment! I agree, for me, retiring on what would feel like a constrained amount would be doable, but not enticing as you say. On allocation, it’s a real issue. I’ll keep my eyes out and link to any resources I find. Have you ever read about Fundamentals Indexing, promoted by Robert Arnott? That’s an intriguing alternative where asset allocation follows not market capitalisation, but the company ‘footprint’ as measured by other benchmarks. There is an Australian fund that does it, but so far, higher fees has put me off.

      1. I’ve heard the idea of indexing based on factors other than market cap but never read Robert’s work directly – so thanks – I’ll check it out. Likewise if I come across anything for allocation in Australia I’ll link to it and drop you a line. There is a push in the UK to really reduce management fees so with a bit of luck in time the trend will reach our shores too!

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