There lies the port; the vessel puffs her sail:

There gloom the dark, broad seas.

Tennyson, Ulysses 

Year in Review

This year began with a review of my portfolio goals, designed to update the financial independence targets to reflect the median and mean average of annual full-time earnings.

The review also introduced a number of personal financial independence benchmarks, such as meeting credit card expenses or an estimate of actual expenditure through assumed average portfolio earnings. In addition, this year introduced reporting progress on an ‘All Assets’ basis (taking into account superannuation holdings), as well as an immediately accessible portfolio basis.

Destinations closing – The long day wanes

These changes left no less than eight metrics to track and report on. At the beginning of 2019, I had met only two of these eight financial independence measures (Objective #1 and ‘Credit card purchases’ on an all assets basis).

As 2019 closes, six of the eight measures have been met or exceeded, and by contrast only two remaining outstanding.

These two measures remaining to be met are reaching Objective #2 and a portfolio total that would allow the funding of current expenses from the FI portfolio alone. For both, I close out the year within fairly clear sight of these unmet goals. Progress through the year is summarised below.

Progress against FI measures through 2019

Every hour a bringer of new things

This calendar year portfolio has experienced the largest expansion to date, significantly outstripping progress through 2017. The overall portfolio has grown around 35 per cent, with the equity component rising from around just over $900 000 to $1.28 million. This has reflected market growth and a focus on purchasing Australian equities through the year.

These sizeable increases in the FI portfolio have meant that significant gaps to my targets at the start of the year have shrunk dramatically. As an example, a year ago when the year started, Objective #2 was in the far distance, with the portfolio around $660 000 away from the target. Currently, it sits within $200 000 of that ambitious goal – a gap which while significant, does not necessary seem unbridgeable given progress so far.

Yet the progress has not been linear, or a smooth course across calm waters. Rather, it has been a year of broadly two different halves. A rapid increase in portfolio value through to June or July, followed by choppy waters and only grudging and halting progress.

The drivers for this overall performance have largely been Australian and global equities, as well as Bitcoin.

Strong equity markets through the first half of the year helped pushed the portfolio equity holdings up by almost 30 per cent, as markets recovered from the volatility and falls of late 2018. From July, however, the movement has been more sideways, despite contributions and an ongoing reinvestment of past distributions. Markets have tested and retested highs with some regularity.

Despite its generally uncorrelated profile of returns, Bitcoin actually exacerbated this dual character of the year. It doubled in value in the first half of the year, going from 4.5 per cent of the portfolio in January to 10.9 per cent in July. Since that time it has drifted downwards, increasing the sense of pushing against headwinds in the second half of the year.

Time and fate – the record of contributions 

This year is the first year where all substantial portfolio contributions have been made through exchange traded funds.

This process commenced from May last year, when I ceased regular contributions to Vanguard’s Diversified High Growth retail fund that had been made on a fortnightly or monthly basis over seventeen years. Instead, I turned to Vanguard’s Australian shares ETF (VAS), Betashares’ Australian shares ETF (A200), and more recently Vanguard’s International shares ETF (VGS).

This decision was driven by reducing costs, and also the opportunity to move more rapidly to my desired allocation. Its impact can be seen below, which shows that contributions have been fairly evenly split between A200 and VAS, with some smaller contributions to VGS to seek to reach and maintain the current target of 30 per cent of the total portfolio being placed in international equities.

Through the arch of experience

This record is seeking to explore and identify if it is possible for me to make the transition to financial independence. In that context, the achievements of 2019 that seem most important are:

• Reaching financial independence on an ‘All Assets’ basis – This probably garnered much less self-reflection and attention than I might have expected, however, this is because my primary focus and target has so far been to achieve financial independence just with the portfolio immediately accessible in taxable accounts (i.e. excluding superannuation). Nonetheless all four of my benchmarks were met by the end of the year.
• Passing Portfolio Objective #1 – My expectation at the beginning of this year was to reach this particular goal only at the end of 2020. Instead it has been reached more than 18 months earlier than this.
• Arriving close to the target allocation – This required investment decisions in accordance with the asset allocation plan, amidst market volatility, doubts over the sustainability of equity market rises. Mechanistically applying new investments to meet the target allocation can be emotionally challenging, but ultimately protects us from costly emotional and short-term decision-making.
• A substantial fall in the level of credit card expenditure – This year I have spent substantially less (around $10 000) than the annual average on my credit card over the past seven years. I don’t really have an explanation for this, though perhaps carefully monitoring and reporting monthly trends compared to distributions has psychologically discouraged some wasteful spending.

This year has also seen continued pleasing growth in the readership of the blog. Over the past year readership and visitors have more than doubled, to levels that feel slightly difficult to comprehend for a blog focused on a single personal journey, and applying some finance theory and evidence to investment. Receiving over 100 000 views from more than 40 000 visitors since commencing is both humbling and a tremendous motivation to keep writing.

Waiting on time and fate 

As with each year during this holiday break,  I have been reviewing my investment policy and looking at possible new goals. I have also been updating and stress-testing my plans, assumptions and asset allocations.

As previously, before finalising these in a new post in coming days, I want to fully understand the shape and level of fund and ETF distributions arising from the past six months. This means waiting until all December distributions are finalised or announced. I am looking forward to sharing these updated plans – including possibly new portfolio objectives – in the next week or so.

You can’t go back and change the beginning, but you can start where you are and change the ending.

C.S. Lewis 

Monthly Portfolio Update – December 2019

This is my thirty-seventh portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My objectives have been to reach a portfolio of:

• $1 598 000 by 31 December 2020. This should produce a passive income of about $67 000 (Objective #1) – Achieved
• $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 per cent, or a nominal return of 7.19 per cent, and are expressed in 2018 dollars.

Portfolio summary

• Vanguard Lifestrategy High Growth Fund – $797 016
• Vanguard Lifestrategy Growth Fund  – $45 124
• Vanguard Lifestrategy Balanced Fund – $81 635
• Vanguard Diversified Bonds Fund – $108 591
• Vanguard Australian Shares ETF (VAS) – $160 304
• Vanguard International Shares ETF (VGS) – $33 337
• Betashares Australia 200 ETF (A200) – $262 478
• Telstra shares (TLS) – $1 886
• Insurance Australia Group shares (IAG) – $9 705
• NIB Holdings shares (NHF) – $7 584
• Gold ETF (GOLD.ASX)  – $99 178
• Secured physical gold – $16 035
• Ratesetter (P2P lending) – $15 778
• Bitcoin – $116 300
• Raiz app (Aggressive portfolio) – $17 476
• Spaceship Voyager app (Index portfolio) – $2 406
• BrickX (P2P rental real estate) – $4 425

Total portfolio value: $1 779 258 (-$14 495)

Asset allocation

• Australian shares – 43.2% (1.8% under)
• Global shares – 23.3%
• Emerging markets shares – 2.4%
• International small companies – 3.2%
• Total international shares – 28.9% (1.1% under)
• Total shares – 72.1% (2.9% under)
• Total property securities – 0.2% (0.2% over)
• Australian bonds – 4.7%
• International bonds – 9.8%
• Total bonds – 14.6% (0.4% under)
• Gold – 6.5%
• Bitcoin – 6.5%
• Gold and alternatives – 13.0% (3.0% over)

Presented visually, below is a high-level view of the current asset allocation of the portfolio.

Comments

This month the value of the portfolio fell slightly – by around $14 000 in total – following a three month expansion.

Across the portfolio there was mostly a story of stability, excepting small falls in some Australian equities and bonds. The significant exception was as mentioned above a continued fall in Bitcoin, which has fallen $70 000 since July, marking a significant headwind for the portfolio.

This month contributions were evenly split between Vanguard Australian shares and global shares ETFs (VAS and VGS), to seek to maintain the target asset allocation split.  With the slow withdrawal from Ratesetter as loans are repaid, the bond element of the portfolio continues to drift below the allocation, and it may need to be addressed in future months.

Balancing the load

This month has also seen the portfolio the closest it has ever been to the target asset allocation. That is, the level of variation between where the investment assets are allocated, and where there should be based on the plan, is the lowest it has ever been. This has been a long journey with many missteps in retrospect.

These have included short periods in which nearly 30 per cent of assets were invested in bonds, and times in which cash made up to 15 per cent of the portfolio (at the commencement of a 10 year period of growth in equities).

This journey is illustrated in the chart below.

A few features stand out in this chart.

Firstly, a recent rise in share exposure, and contraction in bond allocations. A second feature is the gradual elimination of any cash forming part of the portfolio. Finally, Bitcoin makes a late appearance and enjoys a short flowering period in early 2018, to fade back to part of a generally more diversified and growth-orientated portfolio. 

This has occurred during a period of generally strong and consistent calendar year growth since 2007. This can be seen from the updated chart below (with dates from the commencement of this record in green).

Progress

Progress against the objectives, and the additional measures I have reached is set out below.

Summary

The start of this new year marks three years of this record. As I review the progress of the month, year and record together what is striking is the gradual transition from directly controlling investing progress through individual decisions, to progress itself becoming a loose and nearly random variable.

Part of what is happening in the near doubling of the portfolio is that market fluctuations take a greater role. But another part is distinctly psychological, and is well described in this Of Dollars and Data post, which analyses the concept of the gradual receding importances of some types of decisions, as overall wealth increases over a life journey.

For these decisions, over time, there is a need to balance the concept of ‘rational ignorance‘ (not expending attention on perfectly optimising and analysing what will have a marginal impact) with the risk of picking up wasteful habits through poor decisions.

A more pervasive psychological challenge likely to be faced in coming weeks is buying at market highs. The year just passed has been a rare one of strong performance of both US bond and equities, and safer assets.

Data such as this interactive analysis can help bring light to these decisions – showing that historically returns from periods of ‘all time highs’ are statistically indistinguishable from any other periods. Put simply, the uneasy feeling of investing as indexes hit their peaks is, at least on past data, unjustified in terms of the actual future returns that tend to eventuate.

This kind of finding should serve as a reminder. Past choices and markets are closed to us, all we can do is start where we find ourselves and take the best action we can to shape the ending.