I was waiting for something extraordinary to happen, but as the years wasted on nothing ever did unless I caused it.

Charles Bukowski

Year in Review

This year has represented a significant pause, or lacunae, in the journey to financial independence.

This is not unexpected, indeed many prior entries have meditated on exactly this potential – for a significant delay or reversal of progress.

The engine of this significant reversal is market volatility, combined with the growing size of the portfolio. This means the direction and pace of travel is less within one’s choosing than at any other time.

At the start of this year, the portfolio goal was notionally met. The focus of this year was intended to be:

• maintaining the overall portfolio target of $2.62 million;

• achieving a minimum equity portfolio target of around $2.1 million; and

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

The original focus of this year was on the latter two objectives, but in fact, none of the objectives have survived contact with markets this year.

For the past half a year, the portfolio has slipped significantly below the target. The minimum equity portfolio has not been reached. Further investments to achieve the first two objectives has meant no meaningful progress on building a cash reserve.

In turn, this means that the three essential pre-conditions which were set for any movement from my current work arrangements are not within immediate reach.

The concerted negative movement against the financial independence benchmarks through this year is summarised below.

Progress against FI measures through 2022

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	113%→93%	144%→123%
Total average expenses (2013-present) – $84,700 pa	122%→101%	156%→133%
Target equity holding in portfolio – $2,100,000	88%→87%	N/A

2021 was an exceptional year of growth in the portfolio. This year was the reverse of this, an unprecendented period of major contraction in the portfolio.

The portfolio was reduced in value by around $500,000 this year, or around 17 per cent of its size on 1 January 2022. This is both the largest dollar loss – and proportional loss of portfolio value – in a single calendar year.

The only other year of loss over a calendar year period was in 2018, where around a 3 per cent (or around $40,000) loss was suffered.

Sailing against the wind: the course of the voyage

This year has felt like sailing against a strong wind. Progress has not been apparent, and temporary periods of advances have invariably been succeeded by backward pushes.

Most starkly, despite regular investments and reinvestments of earnings, the overall equity portfolio remains below where it started the year, despite a modest recovery through the second part of this year.

Highlighting this point, 2022 has been the only calendar year in which there has been a overall reduction in value of equities on the journey to date.

The key reason for portfolio volatility outside of reductions in global and domestic share indices has been the fall in the price of Bitcoin.

This declined by around 60 per cent, resulting in a loss of around $450,000 through the year. This was a substantial headwind through the year. Without it the overall financial asset portfolio would have been broadly stable.

A further source of downward adjustment was in the portfolio holdings of bonds. From a steady decline across 2021, this year saw bond portfolio values move sharply lower, and fail to recover.

Overall, bond holdings declined by around $34,000 this year, losing around 14 per cent of their value at the start of the year.

As a result, the total bond portfolio is currently at around $205,000 – down from around $239,000 at the opening of the year.

While the rise in longer-term bond yields may help restore bond returns over future years, higher inflation in the short-term still locks in expected negative real returns in the immediate period ahead. This, and the notional overweight position I still hold in bonds means it will not be the target of any new investment flows soon.

Plotting new courses: portfolio allocation and contributions

This year saw another first, in that all substantial investments through the year were made in a single vehicle, the Vanguard exchange traded fund for global shares (VGS).

The purpose of this was the pursuit, over time, of an even balance in the equity part of the portfolio, between Australian and global shares. Investments were heavily skewed to Australian equity exchange funds across 2018 to 2020, and the story of the past two years has been of rebalancing that tendency.

The simplicity of the execution of this strategy this year contrasts with the much more complicated split nature of investments over the previous years of the journey. Through these times it was common for more than four or five different vehicles to receive contributions.

This can be seen by the chart below.

The contraction in the value of Bitcoin this year is evident in the representation of broad asset allocation below.

The single most noticeable feature of the most recent year has been the expansion of the exposure to equities, to a level higher than at any comparable period since 2007.

The chart above also displays the lower overall exposure to bonds and gold securities through the journey, with proportionally lower holdings of each than, for example, a decade ago.

After the storm: assessing the year

In all graphs of progress on the journey, the first half of this year stands out as an exception event, a metaphorical storm amidst otherwise relatively calm and advantageous seas.

The loss of $600,000 of portfolio value in that first six months shifts almost every other measurement of the portfolio, distorting the view even at years end.

Nonetheless, as the portfolio is more dominated by slightly more stable equity values through the second half of the year, another truth comes into view.

This is that the growing size of the total portfolio itself naturally slows down the rate of change. Put simply, as a larger ship, it ploughs on less affected by smaller movements of the sea, or changes in winds.

The changes, therefore, take longer to appear, and progress more slowly than earlier parts of the journey, where even more stable components of the portfolio might change shape significantly over the course of a single year.

Some of the themes of the gradual evolution in the portfolio are shared with last year, but some are also newly emerging.

• Close to target equity and other portfolio asset allocations due to the fall in Bitcoin – the portfolio ends the year quite close, historically speaking, to its intended target allocation. In particular, the fall of Bitcoin’s value has translated to the equity allocation coming closer to its higher target allocation than at any time over the past two years. That is, the portfolio is balanced more closely to the intended plan, with equities front and centre as the primary source of return generation.

• Growth of international equity holdings – the portfolio is starting to approach the end of a re-balancing process, with global equities at close to their highest levels in absolute dollar terms, and at nearly 36 per cent of total portfolio assets, up from just 27 per cent at the start of the year.

• Indexed equity exchange-traded funds continue to move to the leading role – continuing a trend from last year, equity index ETFs have gone from approximately equalling the funding levels in the original Vanguard retail funds to comfortably exceeding them. These index ETFs now also make up around 42 per cent of average distributions.

• Stagnation in the financial assets only portfolio – the entire year has been largely flat when viewed only in terms of financial assets (e.g. the portfolio excluding Bitcoin). At the start of the year this component of the portfolio was around $2.22 million, and it ends the year at $2.17 million – well within the margin of a monthly fluctuation in value.

As in previous years, through these recent quiet weeks of holidays I have been reviewing my investment policy, expected journey timeframes, and the necessary minimum preconditions for removing myself from regular paid work I first set at the beginning of 2021.

My goal each year is to review the plans I have made, test and examine the assumptions they are built on – or exposed to – and then look at the asset allocation and strategies that result from this.

This year, the backwards movement perhaps make this task slightly less pressing than in former years. Having being pushed back further from my goal, the immediate tasks and priorities are clear – to resume forward movement.

Over the next week or so December half-year distributions will be finalised, which may assist in this task.

As previously, I will wait to have these confirmed prior to finalising any updated targets or plans. Once confirmed, the distributions will also be reviewed in a separate portfolio income report.

The road upwards and downwards is one and the same.

Heraclitus

Monthly Portfolio Update – December 2022

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

Portfolio goal

My objective has been 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 has been on achieving the minimum equity target of $2,100,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$715,935
Vanguard Lifestrategy Growth Fund	$38,171
Vanguard Lifestrategy Balanced Fund	$69,151
Vanguard Diversified Bonds Fund	$86,128
Vanguard Australian Shares ETF (VAS)	$361,499
Vanguard International Shares ETF (VGS)	$440,032
Betashares Australia 200 ETF (A200)	$274,752
Telstra shares (TLS)	$2,126
Insurance Australia Group shares (IAG)	$6,018
NIB Holdings shares (NHF)	$9,300
Gold ETF (GOLD.ASX)	$120,965
Secured physical gold	$19,190
Bitcoin	$270,759
Raiz app (Aggressive portfolio)	$19,676
Spaceship Voyager app (Index portfolio)	$3,143
BrickX (P2P rental real estate)	$4,645
Total portfolio value	$2,441,490 (-$48,780)

Asset allocation

Australian shares	39.1%
Global shares	31.8%
Emerging market shares	1.6%
International small companies	2.0%
Total international shares	35.5%
Total shares	74.5% (-5.5%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.6%
International bonds	5.8%
Total bonds	8.4% (+3.4%)
Gold	5.7%
Bitcoin	11.1%
Gold and alternatives	16.8% (+1.8%)

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 $49,000 (or around 2 per cent of its value) over the last month, returning almost exactly to the level reached at the end of July of this year.

This means the portfolio continues to sit around $200,000 below the current portfolio target. Indeed, the portfolio first reached current levels at the end of February 2021. In other words, almost two years of little sustained progress has played out, despite considerable volatility on a monthly basis.

The primary falls this month were in the equities part of portfolio.

The capital value of Australian equities held fell by around 3.3 per cent, and international equities also fell by around 3.1 per cent.

Further losses were extended across to the fixed interest holdings of the portfolio, which continued to experience capital losses arising from rising interest rates.

Bitcoin also fell around 3.1 per cent across the month – marking a relatively unusual pattern of matched losses across equities, bonds and Bitcoin, at odds with the overall objectives of portfolio diversification.

Amongst these simultaneous falls, gold securities represented the only anomaly, or bright spot. The value of gold holdings rose 2.4 per as inflation concerns persisted, and amidst renewed central bank purchases arising from Western sanctions on US denominated sovereign holdings.

The close of the year has seen continuing pessimism on the path of future inflation and interest rates, and growing concern at the potential for interest rate increases to lock in the chances of a recession, resulting in further detioration of earnings expectations.

There is little to be gained seeking to predict the future of markets.

Whilst two consecutive years of negative equity returns is unusual, it is not impossible. It is difficult to see a scenario, beyond an unexpected easing of inflationary pressures in a still negative real rate environment, which would alter the ongoing headwinds facing equities valuations.

Yet despite this, it is worth considering some other facts.

Australian equities in the portfolio, while being down in capital value terms, have not performed quite as weakly when considered in terms of total returns. Dividends paid through the year have assisted to ameloriate or offset some of the negative capital movements.

On this basis, the Australian shares ETFs in the portfolio (A200 and VAS) have produced calendar year total returns of 1.0 per cent, and -0.1 per cent respectively – even excluding December distributions.

Through the month I continued to pursue my longer term asset allocation plan. As discussed above, this led to an exclusive allocation of new investments to the Vanguard global shares (VGS) exchange fund.

Trends in average distributions and expenses

This month average total expenses (the red line) stayed essentially flat at close to $6,300 while the moving average of distributions (the blue line) increased towards $8,700.

These average distribution figures incorporate some limited provisional information on ETF distributions, which has had the impact of moving the trend line of distributions up slightly compared to last month, increasing the gap between three yearly averages of distributions and expenses.

These trends are presented in the chart below.

The substantial gap between distributions and credit card expenses continues to grow, and is currently at around $2,300 per month.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,620,000 (or $91,600 pa)	93%	123%
Total average expenses (2013-present) – $84,700 pa	101%	133%
Target equity holding in portfolio – $2,100,000	87%	N/A

Summary

A year ago the equity component of the portfolio was nearing its then target. I noted at the time that a serious downward movement could delay movement to the target considerably.

This, it turns out, is exactly what has occurred.

As the year closes, financial commentary has drawn parallels to both 2020 and 2008, and noted the unusual positive correlation between bond and equity returns. For traditionally weighted 60/40 portfolios, a relatively unusual set of combined losses has transpired.

It seems fitting, somehow, to end the year largely in a similar fashion as it has progressed.

Having endured what has felt like a storm in the first half of this year, and being becalmed for the remainder of it, I naturally find myself looking to the new year as a break in this pattern.

Steady accumulation of global equities through this past year and month has felt like building a more robust base on which future progress can be made. While previous reversals and upwards movements across the past few years have have been sharp, and transformed the overall level of the portfolio, this is not my expectation for the year ahead.

In this phase of continuing to strain towards the goal through regular investments and reinvestments of distributions, accurate prediction is not required, however. For the moment, the road upward and downward truly looks – and is – the same road.

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.