Make a spot in the middle of your mind where you can lie hidden, rejoice, and relax with no one interrupting you.

Petrarch

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

Portfolio goal

My objective is to maintain a portfolio of at least $2,620,000 through 2022. This should be capable of producing an annual income from total portfolio returns of about $91,600 (in 2022 dollars).

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

A secondary focus through 2022 will be achieving the minimum equity target of $2,100,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$763,710
Vanguard Lifestrategy Growth Fund	$40,760
Vanguard Lifestrategy Balanced Fund	$73,303
Vanguard Diversified Bonds Fund	$90,568
Vanguard Australian Shares ETF (VAS)	$378,234
Vanguard International Shares ETF (VGS)	$320,331
Betashares Australia 200 ETF (A200)	$287,538
Telstra shares (TLS)	$2,068
Insurance Australia Group shares (IAG)	$5,536
NIB Holdings shares (NHF)	$8,868
Gold ETF (GOLD.ASX)	$116,688
Secured physical gold	$18,607
Plenti (P2P lending)	$23
Bitcoin	$487,750
Raiz app (Aggressive portfolio)	$20,142
Spaceship Voyager app (Index portfolio)	$3,196
BrickX (P2P rental real estate)	$4,715
Total portfolio value	$2,622,037 (-$158,939)

Asset allocation

Australian shares	38.2%
Global shares	25.9%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	29.5%
Total shares	67.7% (-12.3%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.5%
International bonds	5.8%
Total bonds	8.3% (+3.3%)
Gold	5.2%
Bitcoin	18.6%
Gold and alternatives	23.8% (+8.8%)

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

Comments

This month is a story in two parts – with declines across both the traditional financial portfolio, and in the value of Bitcoin holdings.

Combined, these led to an overall loss of about $159,000 or around 5.7 per cent of the total portfolio value.

The portfolio has narrowly stayed above the revised portfolio goal of $2.62 million at the end of the month, but through the month dipped below it for the first time in nearly a year.

More than three-quarters of the absolute decline in portfolio value was caused by a fall of around 20 per cent in the price of Bitcoin over the month.

These falls occurred as inflation outcomes continued to illustrate the potential need for monetary policy tightening to the market, and the price of Bitcoin was also likely impacted by the failure of the Terra Luna algorithmic stablecoin.

The remainder of the portfolio loss was largely attributable to simultaneous declines in Australian and global share indexes. These each fell between 2 to 2.5 per cent.

Completing the overall negative pattern were falls in gold (of 3.3 per cent) and continued further declines in the value of bonds or fixed interest (0.2 per cent).

Global economic conditions continue to be challenging for equity-focused portfolios, as well as more traditional portfolio mixing both equity and bonds.

Across a range of dimensions, the first five months of the year have been one of the most negative starts to the year in equities and bonds in decades – as well as one of the relatively few where equity and bond losses have coincided.

The factors contributing to this include higher bond yields demanded due to higher expected inflation, global supply chain disruption, and increasing input prices across commodities and energy.

With the ongoing conflict in Ukraine, geo-political uncertainty is also high, and trade in wheat and other mineral exports are circumscribed compared to normal conditions. Expectations of recession and stagflation are higher now than at any time since the Global Financial Crisis.

This month, Incrementum AG released its annual In Gold We Trust report, titled appropriately enough Stagflation 2.0. While clearly having a strong gold focus, the report provides a persuasive set of warnings around the risks facing the global economy and financial assets. One of its primary focal points is on the unsustainability of current paths of government debt under any standard process – by historical expectations – of normalising interest rates.

The recent sharper falls in global equities, compared to Australia shares has led to investments this month being focused on the Vanguard international shares ETF (VGS).

The difficult start to the year for global equities has the portfolio allocation to international shares at well below its target, and in danger of falling further behind the medium-term objective of reaching an equal allocation of Australian and international equities.

Diverging courses: tracking the financial and full portfolio

A significant feature of the past year and a half has been a sharp divergence between the traditional financial portfolio – made up of equities and fixed interest – and the full FIRE portfolio including Bitcoin.

Consistent with a focus on all significant assets, this record typically reports on the full FIRE portfolio, seeking to avoid the behavourial traps of ‘thinking in buckets’. This was the rationale for beginning to report Bitcoin holdings in my financial records, once they passed beyond a minimal threshold and started to represent a potentially meaningful part of the portfolio.

From time to time, however, it can be useful to ‘look through’ the consolidated numbers and identify what is happening to different components, if only to better understand the whole. More pessimistically, this could be considered an analysis based on an extreme ‘what if’ scenario of Bitcoin turning out to be entirely valueless.

The chart below set out a different perspective of monthly portfolio progress. It counts monthly changes in value of only traditional financial assets – excluding Bitcoin entirely. The effect of this is to take out its contributions to upward and downward price variations across the past three and a half years.

This month represented the fourth largest loss in absolute dollar terms for the whole portfolio over the history of the financial independence journey.

Yet the chart above also shows that this loss is approximately the same magnitude as a quite ordinary monthly gain over the period from early 2019 onwards, and is comparable to levels of losses in other months across the past two years.

That is, from a financial assets point of view, the result this month falls well inside the distribution of gains and losses ordinarily to be expected.

Another broader perspective is gained by looking at the shifting levels of the financial asset portfolio, and the full FIRE portfolio over the past three and a half years, when Bitcoin started regularly emerging from the shadows as a major portfolio element.

This chart starkly illustrates that from around December 2020, Bitcoin appreciation led to a period of the financial and full portfolio substantially departing from each other.

More recently, what is observable is a general period of relatively sideways movement in the financial portfolio, whilst the full FIRE portfolio including Bitcoin has experienced in turn significant growth, volatility, and now contraction.

Interestingly, compared to around a year ago, the traditional ‘financial assets only’ portfolio is larger, even as the full FIRE portfolio itself is smaller.

A further more subtle point highlighted by the recent changes in the value of different portfolio components is easy to overlook. This is that the portfolio is now closer to its target weightings than at any point since December 2020.

The share of equities is approaching 70 per cent, and holdings of international equities, even after the recent falls, are as a percentage of the portfolio at levels not seen since the first quarter of 2019.

Thus, while the route may not may not be that which would have been chosen, the final course may have been brought into closer sight this month.

Trends in average distributions and expenses

There were minimal shifts in average portfolio distributions or expenses over this month. Distributions continue to track around $1,200 per month above average total expenses.

The trend of the three-year average of total distributions slowly declining continues.

The blue line of distributions continues to track at around $7,300 per month. The total expenses (red) line continues to sit at around $6,100, rising slightly this month.

Monthly total expenses have generally drifted downwards since mid-2017, but shifted materially lower from February 2020. This lowering now appears to have paused, with a floor of around $6,100 having been found in recent months.

Distributions payments, on the other hand, have recently reached a maximum, and have started to gently decline, as some higher distributions in the first half of 2019 progressively drop out from the sample set of those averaged.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	100%	130%
Total average expenses (2013-present) – $84,300 pa	109%	141%
Target equity holding in portfolio – $2,100,000	85%	N/A

Summary

This month has rushed by, without a lot of time to think about personal finances or developments. Despite heightened volatility in markets, the focus has been less on the portfolio, and more on broader macro-economic and financial market trends.

In many ways the market environment feels turbulent, something akin to the second half of 2018 – but as yet nothing like either 2008 or 2020.

Recession, further supply chain challenges, higher inflation all loom over market participants’ expectations. And yet whatever future lays in store has not occurred, it has yet to be experienced, day-by-day or month to month.

Well within my expectations is a scenario in which markets continue to fall, or drift lower for 6 to 12 months before the pattern of events changes. High recent correlations between equities and Bitcoin, and continued falls in bond prices, could combine to make this a period of portfolio stagnation or decline.

Yet there is nothing to be done but understand this possible future – and all the others beside – that lay outside of our knowledge, and continue to invest. These times have occurred before. The highs of early 2018 were not reached again until more than a year following.

In fact, such times of extended downdrafts should be expected to happen more frequently as the portfolio grows in size, and its performance becomes dominated by the performance of existing assets.

The fact that the portfolio spent considerable time below its target this month reinforced the need for patience and realism in the later stages of the journey to financial independence.

Through these times, consciousness of the limits of control and action is required. For the moment, a figurative room in one’s mind to lay hidden and relax – amidst the gusts and tumult of market turmoil – is something to both seek and rejoice in when found.

Disclaimer

The specific portfolio allocation and approach described has been determined solely based on my personal circumstances, objectives, assessments and risk tolerances. It is not personal financial advice, or recommendation to invest in any particular investment product, security or asset, and investors considering these issues should undertake their own detailed research or seek professional advice.