Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth

Robert Frost, The Road Not Taken

This is my forty-second portfolio update. I complete this update monthly to check my progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars).

This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent.

Portfolio summary

• Vanguard Lifestrategy High Growth Fund – $727 917
• Vanguard Lifestrategy Growth Fund  – $42 128
• Vanguard Lifestrategy Balanced Fund – $78 569
• Vanguard Diversified Bonds Fund – $110 009
• Vanguard Australian Shares ETF (VAS) – $187 003
• Vanguard International Shares ETF (VGS) – $39 987
• Betashares Australia 200 ETF (A200) – $225 540
• Telstra shares (TLS) – $1 726
• Insurance Australia Group shares (IAG) – $7 741
• NIB Holdings shares (NHF) – $5 652
• Gold ETF (GOLD.ASX)  – $117 714
• Secured physical gold – $18 982
• Ratesetter (P2P lending) – $11 395
• Bitcoin – $159 470
• Raiz app (Aggressive portfolio) – $16 357
• Spaceship Voyager app (Index portfolio) – $2 492
• BrickX (P2P rental real estate) – $4 477

Total portfolio value: $1 757 159 (+$62 325 or 3.7%)

Asset allocation

• Australian shares – 41.4% (3.6% under)
• Global shares – 22.2%
• Emerging markets shares – 2.3%
• International small companies – 3.0%
• Total international shares – 27.4% (2.6% under)
• Total shares – 68.8% (6.2% under)
• Total property securities – 0.3% (0.3% over)
• Australian bonds – 4.4%
• International bonds – 9.7%
• Total bonds – 14.1% (0.9% under)
• Gold – 7.8%
• Bitcoin – 9.1%
• Gold and alternatives – 16.9% (6.9% over)

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

Comments

This month featured a further recovery in the overall portfolio, continuing to effectively reduce the size of the large losses across the first quarter.

The portfolio has increased by around $62 000, leading to a portfolio growth of 3.7 per cent. This means that around half of the large recent falls have been made up, and the portfolio sits around levels last reached in October of last year.

Leading the portfolio growth has been increases in Australian shares – particularly those held through the Betashares A200 and Vanguard VAS exchange traded funds, with both gaining over four per cent. Most other holdings remained steady, or fell slightly.

Markets appear to be almost entirely disconnected from the daily announcements of the sharp effects of the global coronavirus pandemic and the resulting restrictions. Bond and equity markets seem to have different and competing expectations for the future, and equity markets – at best – are apparently intent on looking through the immediate recovery phase to a new period of strong expansion.

On some metrics, both major global and Australian equity markets can be viewed as quite expensive, especially as reduced dividends announced have largely yet to be delivered. Yet if historically low bond yields are considered, it can be argued that some heightening compared to historical equity market valuations may be sustainable.

Reflecting this moment of markets holding their breath before one of two possible futures plays out, gold and Bitcoin remain elevated, and consequently above their target weightings.

Perhaps the same contending forces are in evidence in a recent Australian Securities and Investment Commission study (pdf) which has found that average Australian retail investors have reacted to uncertainty by activating old brokerage accounts, trading more frequently, and holding securities for shorter periods. My own market activity has been limited to purchases of Vanguard Australian shares ETF (VAS) and the international share ETF (VGS), to bring the portfolio closer to its target allocations.

Will Australia continue to be lucky through global slow downs? 

Despite this burst of market activity in the retail market, it is unclear how Australian markets and equities will perform against the background of a global economic slowdown. A frequently heard argument is that a small open trade exposed commodities provider such as Australia, with a more narrowly-based economy, may perform poorly in a phase of heightened risk.

This recent Bank of England paper (pdf) makes the intriguing suggestion that this argument is not borne out by the historical record. In fact, the paper finds that industrial production in Australia, China and a mere handful of other economies has tended to increase following global risk shocks.

A question remaining, however, is whether the recovery from this ‘risk shock’ may have different characteristics and impacts than similar past events. One key question may be the exact form of government fiscal and monetary responses adopted. Another is whether inflation or deflation is the likely pathway – an unknown which itself may rely on whether long-term trends in the velocity of money supply continue, or are broken.

Facing all uncertainties, attention should be on tail risks – and minimising the odds of extreme negative scenarios. The case for this is laid out in this moving reflection by Morgan Housel. For this reason, I am satisfied that my Ratesetter Peer-to-Peer loans have been gradually maturing, reducing some ‘tail risk’ credit exposures in what could be a testing phase for borrowers through new non-bank lending channels in Australia. With accrued interest of over $13 000, at rates of around 9 per cent on average, over the five years of the investment, the loans have performed relatively well.

A temporary sheltering port – spending continues to decline 

This month spending has continued to fall even as lockdown and other restrictions have slowly begun to ease. These extraordinary events have pushed even the smoothed average of three year expenditure down.

On a monthly basis credit card spending and total expenses have hit the lowest levels in more than six years. Apparently, average savings rates are up across many economies, though obviously individual experiences and starting points can differ dramatically.

Total estimated monthly expenditure has also fallen below current estimates of distributions for the first time since a period of exceptionally high distributions across financial year 2017-18.

The result of this is that I am briefly and surprisingly, for this month, notionally financially independent based on assumed distributions from the FIRE portfolio alone – at least until more normal patterns of expenditure are resumed.

Following the lines of drift – a longer view on progress made 

Yet taking a longer view – and accounting for the final portfolio goal set – gives a different perspective. This is of a journey reaching toward, but not at, an end.

The chart below traces in purely nominal dollar terms the progress of the total portfolio value as a percentage of the current portfolio goal of $2.18 million over the last 13 years.

It also shows three labels, with the percentage progress at the inception of detailed portfolio data in 2007, at the start of this written record in January 2017, and as at January 1 of this year.

Two trend lines are shown – one a polynomial and the other exponential function – and they are extended to include a projection of future progress out to around 18 months.

The line of fit is close for the early part of the journey, but larger divergences from both trend lines are evident in the past two years as the impact of variable investment returns on a larger portfolio takes hold.

There are some modest inaccuracies introduced by the nominal methodology adopted – such as somewhat discounting early progress. A 2007 dollar had greater ‘real’ value and significance than is assigned to it by this representation. The chart does demonstrate, however, the approximate shape and length of the early journey – with it taking around 5 years to reach 20 per cent of the target, and 10 years to reach around half way.

Progress

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

Summary

With aspects of daily life slowly and incrementally adjusting to a ‘new normal’, the longer-term question for the portfolio remains around how markets and government actions interact in a recovery phase.

The progress of the portfolio over the past 13 years has seemed, when viewed from afar as in chart above, predictable, and almost inevitable. Through the years it has felt anything but so smoothly linear. Rather, tides and waves have pushed and pulled, in turn stalling progress, or pushing it further ahead than hopes have dared.

It is possible that what lays ahead is a simple ‘return leg’, or more of the same. That through simple extrapolation around 80 per cent of the challenges already lay behind. Yet that is not the set of mind that I approach the remainder of the journey with. Rather, the shortness of the distance to travel has lent an extra focus on those larger, lower probability, events that could delay the journey or push it off-course. Those ‘third’ risks types of tail risks which Morgan Housel points out.

In one sense the portfolio allocation aims to deal – in a probabilistic way – with the multiple futures that could occur.

Viewed in this way, a gold allocation (and also Bitcoin) represents a long option on an extreme state of the economic world arising – as it did in the early 1980s. The 75 per cent target allocation to equities can be viewed as a high level of assurance around a ‘base case’ that human ingenuity and innovation will continue to create value over the long term.

The bond portfolio, similarly, can be seen as assigning a 15 per cent probability that both of these hypotheses are incorrect, and that further market falls and possible deflation are ahead. That perhaps even an experience akin to the lengthy, socially dislocating, post-bubble phase in Japan presided over by its central bank lays in store.

In other interesting media consumed this month, ‘Fire and Chill’, the brand new podcast collaboration between Pat the Shuffler and Strong Money Australia got off to an enjoyable start, tackling ‘Why Bother with FIRE’ and other topics.

Additionally, investment company Incrementum has just published the latest In Gold We Trust report, which gives an arrestingly different perspective on potential market and policy directions from traditional financial sources.

The detailed report questions the role and effectiveness of traditionally ‘risk-free’ assets like government bonds in the types of futures that could emerge. On first reading, the scenarios it contains appear atypical and beyond the reasonable contemplation of many investors – until it is recalled that up to a few years ago no mainstream economics textbook would have entertained the potential for persistent negative interest rates.

As the paths to different futures diverge, drawing on the wisdom of others to help look as far as possible into the bends in the undergrowth ahead becomes the safest choice.