We will not from the helm to sit and weep,

But keep our course, though the rough wind say no,

From shelves and rocks that threaten us with wreck.

As good to chide the waves as speak them fair

Shakespeare, Henry IV, Part III.v.4

Year in Review

A year, after all, is simply a collection of days. And therefore the story of this year is largely told in the record of past twelve months.

At the beginning of the year the portfolio goal was reset to provide a target goal for passive income equivalent to $90,500 per year.

At the same time, three essential pre-conditions were set for any movement from my current work arrangements.

These were:

• reaching the overall portfolio target of $2.58 million;

• achieving a minimum equity portfolio target of $1.93 million; and

• a cash reserve of at least one year of normal expenditure.

Rapidly, in fact by March, the first of these conditions were met.

The second remains a little distance away – perhaps 2 to 18 months away should equity markets remain positive, perhaps much longer if any significant equity drawdowns occur.

The cash reserve has been started, but it is not yet near completion. At present, it sits at around $17,000 compared to the average annual spending of about $84,000 since 2013.

The broad progress made against the financial benchmarks through this year is summarised below.

Progress against FI measures through 2021

Measure	Portfolio	All Assets
Portfolio objective – $2,585,000 (or $90,500 pa)	88%→114%	105%→146%
Total average expenses (2013-present) – $83,800 pa	93%→123%	112%→157%
Target equity holding in portfolio	75%→95%	N/A

Stepping back to look at the overall portfolio performance, this year has been unlike any other on the journey.

The overall portfolio has increased by $680,000 – making the year just passed the most significant expansion in dollar terms of the entire record.

Studying the course of the voyage

The pattern of this fifth year of the voyage has been distinctly different to any other. Looking back, there is a dual sense of consistency, and radical discontinuity.

The sense of consistency has come from the continued strong growth in equity markets and the continued regular investment into equity-based exchange traded funds. Strong equity returns have contributed to the equity component of the portfolio increasing by over $385,000.

In turn, this has made it the strongest year on record for the expansion of the equity portfolio.

The radical discontinuity has been the performance of Bitcoin through the year. With no contributions over the past six years it has increased around 70 per cent in value, pushing forward the portfolio by around $300,000.

In combination these forces have resulted in growth in the portfolio of around 30 per cent across the year – a faster pace of portfolio expansion than in 2020, though slightly less than in 2019.

Through the year, the volatility of Bitcoin’s price led to a stepped pattern of gains and losses on a monthly balance, somewhat masking the overall trend of growth.

Putting Bitcoin to one side, even the narrower ‘financial assets only’ portfolio grew around 20 per cent through the year, reaching around $2.2 million, or 86 per cent of the way to the overall portfolio goal.

Through the year the portfolio holdings of bonds has continued its steady decline. Some of this is due to capital and interest payouts of the Vanguard bond funds.

Contributing to this has also been a rolling off of a number of five-year lending agreements through the Plenti peer-to-peer platform.

A small amount is all that remains, earning 9.2 per cent interest, a relic of a past era. Rates now are below three per cent for the same term, effectively inviting the assumption of credit risk, for compensation below a plausible rate of future inflation.

These factors have resulted the bond portfolio being $239,000 at the close of the year, down from around $250,000 at the opening of the year.

Although the ‘retirement risk zone’ is arguably approaching, it is very difficult to make a strong case for addressing this decline, and making new investments. In many cases, these would be being made with negative expected returns at the initial date of investment, making holding physical currency a comparatively attractive alternative.

Hand on the tiller: portfolio allocation and contributions

As with the year before, across 2021 portfolio contributions were directed to only two significant investments – the Vanguard exchange traded funds for Australian shares (VAS) and global shares (VGS).

This contrasts with the much more complicated split nature of investments over the previous course of the journey. Through these times often more than four or five different vehicles received contributions.

This can be seen by the chart below.

Despite this steady course, the movement in Bitcoin through the year has led to some notable changes in the overall asset allocation compared to much of the journey.

The chart above highlights that while equity allocations have remained fairly constant over the life of the portfolio, Bitcoin’s growth has been increasingly consuming and minimising the defensive allocations of gold and bonds.

Reflections on the changing shorelines

In prior years of this record I would sometimes review and list out achievements of the year.

At this stage of the journey, however, this seems the wrong way to think about the matter.

After all, chance, the movements of markets and the performance of past investments have a greater and greater influence on progress than day-to-day actions.

Rather, as time and the journey has progressed what has been more of a focus is smaller markers that give proof of the changing nature of the journey. Changing shorelines, as it were.

Some of these are evident in the current composition of the portfolio as of today. Others are markers that are more nuanced, and indeed hard to notice until passed.

Examples of some of these changing shorelines or markers are:

• Historical investments that were the basis of the early journey are gradually surpassed – at the commencement of the year Vanguard funds made up over 40 per cent of the portfolio, but this has dropped to around one-third.

• Indexed equity exchange-traded funds assume the leading role – for the first time, the majority of equity holdings are now owned outside of the Vanguard retail funds, and sit within the three main ETFs owned (VAS, A200 and VGS), with these also now making up around one-third of annual projected distributions.

• Majority of portfolio assets not Australian dollar denominated – over most of the journey to date, around 65 per cent of portfolio assets have been Australian dollar exposed (denominated or equivalently hedged). This year continued global equities growth and investment reflected in the Vanguard Global Shares ETF, as well as the growth of Bitcoin, means that around 51 per cent of assets are non-Australian dollar exposed.

• Bitcoin moves from the periphery – in 2020 and prior years, Bitcoin represented an interesting but peripheral component of the portfolio, with its value averaging around 10 per cent of the portfolio. This year, it made up, on average, 25 per cent of the portfolio.

These holidays I have been reviewing my investment policy, expected journey timeframes, and the necessary minimum conditions of ceasing paid work I set at the beginning of the year.

Each year I try to consider afresh the plans I have set, what assumptions they rely upon, and the asset allocation and strategies that result from this.

As the journey potentially comes closer to that inflection point of changing more towards reliance on the overall portfolio as a source of primary income different decisions and priorities come to the fore.

In the next week or so December half-year distributions will be finalised.

I will wait to have these confirmed prior to finalising any updated targets or plans. Once confirmed, the distributions will as always be the subject of a separate portfolio income report.

These violent delights have violent ends

Shakespeare, Romeo and Juliet, Act II.vi

Monthly Portfolio Update – December 2021

This is my sixty-first monthly portfolio update. I complete this regular update to check progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2,585,000 by 31 July 2022. This would produce a real annual income of about $90,500 (in 2021 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$843,403
Vanguard Lifestrategy Growth Fund	$44,913
Vanguard Lifestrategy Balanced Fund	$80,579
Vanguard Diversified Bonds Fund	$99,204
Vanguard Australian Shares ETF (VAS)	$394,763
Vanguard International Shares ETF (VGS)	$285,850
Betashares Australia 200 ETF (A200)	$294,967
Telstra shares (TLS)	$2,227
Insurance Australia Group shares (IAG)	$5,397
NIB Holdings shares (NHF)	$8,460
Gold ETF (GOLD.ASX)	$113,578
Secured physical gold	$18,122
Plenti (P2P lending)	$252
Bitcoin	$727,180
Raiz app (Aggressive portfolio)	$21,135
Spaceship Voyager app (Index portfolio)	$3,613
BrickX (P2P rental real estate)	$4,992
Total portfolio value	$2,948,635 (-$92,253)

Asset allocation

Australian shares	35.9%
Global shares	23.1%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	26.7%
Total shares	62.6% (-12.4%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.5%
International bonds	5.6%
Total bonds	8.1% (-6.9%)
Gold	4.5%
Bitcoin	24.7%
Gold and alternatives	29.1% (+19.1%)

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

Comments

The financial independence portfolio lost around $92,000 (or around 3 per cent of its value) over this month, the third overall month with losses of this year.

Despite this, the portfolio continues to sit comfortably above the overall portfolio goal.

The dominating component of the falls this month was a reduction in the price of Bitcoin, with the value of holdings falling around 17 per cent. This has also been the driver of the two other negative months in 2021, as well as many positive months through the past year.

Australian shares performed strongly across the month, with growth of around 2.5 per cent. Global shares also advanced by 0.6 per cent. The fixed interest component of the portfolio remained essentially flat.

Through this month supply chain and inflation concerns have tended to persist, leading some nations to commence the path of increasing interest rates (such as New Zealand and United Kingdom).

What is less clear is whether this commitment to managing inflationary expectations will be transitory, or continue over time. Across the globe, monetary policy continues to be broadly accommodative, even as many asset and housing markets continue to find new heights.

Markets still appear to be poised between alternative scenarios of continued positive equity market growth, driven by monetary policy expansion, and less favourable scenarios of early tightenings, or other adverse events.

Increasingly, aspects of these conditions appear to have parallels with the period of ‘financial repression’ immediately following the exit from the second World War across key allied nations. In these years, actual inflation exceeded available bond yields for a sustained period, effectively bringing down debt levels.

While these are interesting to consider and think about, through the month I nevertheless continued to pursue my longer term asset allocation plan.

This led to an equal allocation of new investments between the Vanguard global shares (VGS) exchange fund and its Australian equivalent (VAS).

Trends in average distributions and expenses

At this time of year as distributions for the second half of the year are still be finalised, the picture of distributions compared to expenses becomes less accurate.

This is because the maximum weight is being placed on a number of ‘holding’ estimates of what distributions over the past six months are likely to total. These estimates can be approximate, and erroneous.

Using past averaged estimates can mitigate but not overcome this issue. On past trends the gap between average distributions and credit card expenses remains wide.

Credit card expenses have moved slightly up, reflecting some higher recent expenditure. Average distributions through the period have continued to grow.

These trends can be observed in the chart below.

The blue line of distributions continues to track just above $7,300. The credit card expenses (red) line has also grown by a small amount over the last month, turning around for the first time in around a year to above $4,700.

The substantial gap between distributions and credit card expenses continues, but as foreshadowed last month looks to be stabilising at around $2,000 per month.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,585,000 (or $90,500 pa)	114.1%	145.9%
Total average expenses (2013-present) – $83,800 pa	123.1%	157.5%

Summary

In spite of some headline portfolio volatility arising from Bitcoin, this month has felt like a slow, reflective period of relative quiet.

Pushing forward to the end of the year, the equity portfolio has recently reached around 95 per cent of its target level ($1.93 million), leaving it less than $100,000 away from the final target.

Taking account of the size of the equity portfolio, this means only a modest updraft or market movement in the first half of the year would be required to notionally close this gap. The opposite, a far more serious downward movement, could delay progress to the target level considerably.

What keeps the remaining journey from appearing a foregone conclusion, or a dull mechanical exercise in mathematics, is the impossibility of forecasting markets, and the peculiar monetary policy conditions markets operate in at the moment.

This month an extended The Long View Morningstar feature (video) with the well-known ‘inventor’ of the 4 per cent rule of thumb reinforced this. In a long-form interview, researcher William Bengen discusses his thoughts on, and amazement at, both the current market performance and trading levels.

Throughout, he emphasises that the need for ‘risk management’ to come to the fore following an era of unusually high and sustained equity returns, and the benefits of investors spreading their bets. Intriguingly, Bengen also discloses a small digital currency holding, in Bitcoin as part of his strategy to meet the changing environment.

Following admiring several of his individual pieces, I also made my way through Morgan Housel’s short book The Psychology of Money.

This was filled with useful ideas, and different mental frameworks to apply to personal finances. Some of the non-intuitive recommendations I was surprised to find I was already following – such as continuing to save for unknown and undefined events.

Reading the work was a powerful reminder of the role of humility, and expectations in investors’ experience of markets. As he succinctly observes, happiness equals results minus expectations.

So as one year closes and another begins the lesson may be to work to keep expectations both open, and carefully in check, to soften the impact of any violent ends to recent market return delights.