…if any maintain their independence, it is because they are strong.Thucydides The Pelopponesian War, Book V.84
This is my twenty-sixth 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 – $694 784
- Vanguard Lifestrategy Growth Fund – $ 40 522
- Vanguard Lifestrategy Balanced Fund – $73 808
- Vanguard Diversified Bonds Fund – $102 364
- Vanguard Australia Shares ETF (VAS) – $73 249
- Betashares Australia 200 ETF (A200) – $168 727
- Telstra shares – $4 145
- Insurance Australia Group shares – $12 364
- NIB Holdings shares – $6 408
- Gold ETF (GOLD.ASX) – $83 188
- Secured physical gold – $13 399
- Ratesetter (P2P lending) – $28 926
- Bitcoin – $53 006
- Raiz app (Aggressive portfolio) – $ 13 461
- Spaceship Voyager app (Index portfolio) – $1 534
- BrickX (P2P rental real estate) – $4 646
Total value: $1 374 531 (+$55 768)
Asset allocation
- Australian shares – 39.9% (5.1% under)
- Global shares – 24.2%
- Emerging markets shares – 2.8%
- International small companies – 3.6%
- Total international shares – 30.6% (0.6% over)
- Total shares – 70.5% (4.5% under)
- Total property securities – 0.3% (0.3% over)
- Australian bonds – 6.6%
- International bonds – 11.7%
- Total bonds – 18.2% (3.2% over)
- Cash – 1.2%
- Gold – 7.0%
- Bitcoin – 3.9%
- Gold and alternatives – 10.9% (0.9% over)
Presented visually, below is a high-level view of the current asset allocation of the portfolio.
Comments
The delivery of half-year distributions from the Vanguard funds and ETFs, as well a recovery in equity markets has led to the strongest monthly growth in the portfolio in the past year. This comes immediately after the weakest period of performance in the previous three months.
The portfolio increased in value by over $55 000 through January, with Australian and international equity, newly invested capital, as well as gold, accounting for the increase.
With the payment of half yearly distributions across early January, the pressing question has been re-investment priorities At this stage, to achieve my new target share allocation, further investment in Australian shares (through the A200 ETF) are required. I have split this investment into two parts, with one half invested already, and the other half due to be invested at the end of the first quarter. Whilst not reflecting the average superior performance of immediate ‘lump sum’ investment versus dollar cost averaging, it nonetheless helps to minimise the risk of a single ill-timed purchase.
One of the regular steps of my annual investment review process is to look at the level of my required emergency fund. This year I put in place a new estimate of the required amount: a target of $83 000, equal to the income target of Objective #2. Previously, I have typically based this amount purely on 12 months of average full-time earnings, with no adjustments.
Over the past two years, however, as portfolio distributions became a more significant factor, I have resolved to factor an annual estimate of these distributions into the required emergency fund level. That is, I now reduce the required emergency fund level, by an estimate of average distributions that could be expected to be delivered by the portfolio over a year. To ensure this adjustment is conservative and stable, I have based the estimate on an average of the past 5 years of distributions (which came to around $45 000 per year).
For 2019, applying this approach has lowered my emergency fund requirement from around $60 000 to $38 000. The cash surplus arising from this reduction has been invested with the same timing as re-investment of recent distributions. As distributions from the portfolio grow, the emergency fund requirements will therefore automatically decrease from year to year. The emergency fund is kept in a liquid high interest savings account.
Overall, the portfolio in absolute value terms has ended the last rolling twelve-month period well above where it began. Through the last two years the portfolio has grown by almost 40 per cent, despite some challenging months in equity markets.
Through this period I have continued to invest new savings and maturing Ratesetter funds into Australian equities through the Betashares A200 ETF.
The holiday period has provided lots of opportunity for looking over the journey so far. A particular focus has been consciously prioritising a greater balance between Australian and international shares. One reason for doing this is to diversify away from the risks of the Australian equity market, and ensure that progress towards FI is not unduly relying on an assumption that Australian equity will forever continue it’s positive history performance. A study in 2010 by Professor Wade Pfau highlighted that internationally markets that permit a safe withdrawal rate of 4 per cent are the exception, not the rule. In fact, only in 4 out of 17 equity markets studied, would such an approach have been safe, with many developed market equity markets supporting far lower safe withdrawal rates of between 1-3%.
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) | 86.0% | 120.7% |
| Objective #2 – $1 980 000 (or $83 000 pa) | 69.4% | 97.4% |
| Credit card purchases – $73 000 pa | 78.9% | 110.7% |
| Total expenses – $96 000pa | 60.0% | 84.2% |
Summary
The portfolio moved perceptibly towards my first objective this month. Interestingly, it is also closing in on Objective #2 on an ‘All Assets’ basis (which includes superannuation).
The recent downdrafts from the market, and lower portfolio distributions than expected in January has, however, tempered any perception that progress towards the goal will be either smooth or inevitable. Risk inevitably exists in the market, as is covered in a quite clever and comprehensive way here by high profile US finance academic Aswath Damodaran in a recent fascinating note on the many faces of risk.
This month, as well as taking my chances discussing some of the weaknesses in the implicit claims for Listed Investment Company focused investment, I have been absorbing a few new pieces of research, this one about the ‘buckets’ approach to investment, and also caught up with pieces from new Australian bloggers HisHerMoneyguide and Late starter FIRE. For a different perspective on buckets, this article from Laurence Siegel is also thought-provoking. Finally, this analysis of the futility of market timing provided welcome reassurance as I set in place my plan for dollar cost averaging previous distributions into the market on a staggered basis, and this podcast from Mad Fientist was a thoughtful discussion of the real goals, and some challenges of the retire early part of FIRE.
Great update, always nice to see an uptick in the portfolio. Keep it up!
Thanks very much easypeasyfire! 🙂
Hi FI Explorer,
Re your gold holding, is the GOLD ETF the best option for gold exposure? Is this primarily for diversification?
Also interested in how the physical gold is secured -? Perth Mint?
cheers
Hi Tom
Good questions! The answer is it’s possibly not now, but was the only one I was aware of when I made the investments.
PMGOLD, the Perth Mint secured ETF, came along later, and I would certainly intend to use it in the future due to lower fees (0.15% vs 0.39%).
When I looked at it in the Gold.asx ETF PDS I believe its in secure vaults in London. So if things ever turn bad enough for me to need to physically collect, I hope the boat there accepts Bitcoin! 🙂
Thanks for this insightful reply!
Great update. I’ve added a few more things to my reading list!
Thanks J.D! 🙂
Great to see the portfolio going up again FI Explorer, and lots of thought provoking links! Hence plenty of questions!
At some stage your yearly income from dividends will cover expenditure, at that point would you eliminate your emergency fund altogether or keep some cash readily available?
Given A200 is currently expanding rapidly and the distributions from this are less than they would be if it was holding steady, are you factoring this into your income calculations or at least keeping it in mind?
I’ll have to do some more reading up on the bucket strategy, it’s always appeared to me to be a way of increasing the likely longevity of your account and minimising downside risk in the first 5 years or so. I also wonder how this would interact with the assets test for the age pension and the increased age pension income retirees would get from a decrease in the value of their assets to some covering their income needs despite lower asset values?
You’re pretty much at the stage now where your total assets including super cover your targeted portfolio size, have you considered a two phase retirement where you draw down on the investments in your name first and then use your super once you can access it?
And thanks for the links to the new bloggers, I’d already seen HisHerMoneyGuide (who make you and I look like absolute misers with their target!) and will have to check out LateStarterFIRE.
Thanks for the careful read and feedback! 🙂
Yes, the idea is the emergency fund would drift down to a much lower level. I would probably keep some unallocated contingency fund, just for unexpected events, but that could be a lot lower.
I’ve seen that debate on A200 distributions. I haven’t actually observed them being lower, and to be honest, my thinking is that any effect is likely to be short-term, and small in the scheme of other variations in portfolio income, so I haven’t factored it it. If it is a multiyear significant event, you would expect trading and arbitrage to equalise expected yields across VAS and A200.
I have, and I have a messy Excel sheet to prove it! 🙂 That’s been on my mind as the ‘All Assets’ measure creeps up. At this stage, though, my thinking is similar to the logic that you discussed in your recent ‘how long might it take to reach a 3% SWR’ post. I would prefer to primarily rely on a portfolio completely within my control, and not subject to the same legislative risk as Super is over the next 20 years. At this stage, while I can build an independent margin of safety in my own FI portfolio, I prefer to do that. But you are right, at some point, the margin might be enough to seriously consider that step.
No problem for the links! I know, right? But still, there’s their current spending. I went to bed haunted by the thought that HisHerMoneyGuide could apparently survive day to day on my emergency fund approximately until the Sun runs out.
I think most people advocate 3 to 6 months of living expenses for an emergency fund which would still give you a fair amount of safety net to play with.
I haven’t really looked into the A200/VAS situation apart from a bit of stuff on reddit, as you say whatever differences there are should normalise over time, either naturally or through arb desks doing the work.
Legislative risk with Super is huge. I don’t know what the future changes will be, but I would bet against them making it easier to access it or making it more favourable. I think it is probably reasonably safe to assume accessibility won’t change if you’re 5 years or less out from being able to get your hands on it. Anything longer than that, yeah good luck!
The most amazing part of their spending to me was how little went on food and eating out. We spend more on eating out about once a week than they do for a whole week’s worth of meals!
Can i ask the thinking behind going into VLHGF, then VLGF, VLBF, VDBF? And not say going into VAS, VGS or (VEU/ VTS). These fund has overlap with exception of %.
Are you starting to rebalance the portfolio and looking into the retirement phase?
Hi FIRE 360
Sure thing. I have been asked this a lot, and so have written a specific FAQ response to it: https://www.thefiexplorer.com/faqs/
Essentially, I started investing before some of these ETFs were around, and the retail funds suited my contribution styles at the time. Relevantly for some of the links in today’s post, I also had a misconceived go at a ‘buckets’ strategy. 🙂
Yes, certainly I plan to ‘tidy’ up the portfolio a bit in any drawdown, lower tax rate phase in the future, to not pay unnecessary capital gain tax.
Very nicely done, I have recently added you to my Dividend Blog Feed on my site. Hopefully that means you can start to see a little traffic from my site come to yours, although, your site is probably bigger than mine anyway. Thanks for sharing! Love the FIRE and Dividend community.
Thanks BHL, appreciate that!
You have a fair chunk of bonds in the portfolio, interested as to why you have international bonds, have they done better than AUS?
Also whats your thoughts on corporate bonds?
Hi Baz
Thanks for stopping by, and commenting.
The international bond exposure if purely just function of the ‘pre-mixed’ splits in some of the Vanguard Retail funds. It’s not something I’ve ever really had developed views around. I would prefer to mix international and domestic for volatility reduction, and diversification though. 🙂
Thanks for the shout out! Truly impressive figures in the eyes of a newbie investor (me!) – thank you for sharing your progess. Definitely inspire me to keep plugging on …
Thanks for reading, and it’s great seeing your pieces from a Gen X perspective also!