The farther back you can look, the farther forward you are likely to see.

Winston Churchill

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

Portfolio goal

My objective is to achieve and maintain a portfolio of at least $2,750,000 by 31 December 2024 or earlier. This should be capable of producing an annual income from total portfolio returns of about $94,800 (in 2023 dollars).

This portfolio objective is based on an assumed safe withdrawal rate of 3.45 per cent.

A secondary focus will be achieving the minimum equity target of $2,200,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$776,574
Vanguard Lifestrategy Growth Fund	$40,530
Vanguard Lifestrategy Balanced Fund	$72,853
Vanguard Diversified Bonds Fund	$87,316
Vanguard Australian Shares ETF (VAS)	$404,668
Vanguard International Shares ETF (VGS)	$592,416
Betashares Australia 200 ETF (A200)	$286,699
Telstra shares (TLS)	$2,270
Insurance Australia Group shares (IAG)	$7,513
NIB Holdings shares (NHF)	$9,936
Gold ETF (GOLD.ASX)	$131,560
Secured physical gold	$20,805
Bitcoin	$488,404
Raiz app (Aggressive portfolio)	$21,631
Spaceship Voyager app (Index portfolio)	$3,549
BrickX (P2P rental real estate)	$4,451
Total portfolio value	$2,951,175 (+$22,458)

Asset allocation

Australian shares	35.1%
Global shares	32.4%
Emerging market shares	1.4%
International small companies	1.8%
Total international shares	35.7%
Total shares	70.8% (-9.2%)
Total property securities	0.2% (+0.2%)
Australian bonds	2.2%
International bonds	5.1%
Total bonds	7.3% (+2.3%)
Gold	5.2%
Bitcoin	16.5%
Gold and alternatives	21.7% (+6.7%)

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

Comments

This month the financial independence portfolio increased modestly at a ‘headline’ figures level, with an increase of 0.8 per cent, or around $22,000.

What may be easily missed, however, is that this relatively modest headline movement compared to last month obscures a set of wider incremental changes that continue to subtly reshape the portfolio from within.

As an example, looking at only the non-Bitcoin ‘financial portfolio’ shows a growth of around $48,000 – which is actually a greater level of expansion than the equivalent movement in financial assets last month. The equity portfolio has advanced to 95 per cent of its eventual target, or $2.09 million.

So beneath the apparent steadiness of the monthly portfolio value this month there sits some emerging, and no doubt some ebbing or changeable, trends.

Australian equities advanced around 2.0 per cent in capital growth terms through the month, while international equities posted similar gains of around 2.2 per cent over the same period.

Gold securities advanced around 1.7 per cent across the month, while there was a lack of substantial movement in the value of bond holdings.

In contrast to last month the value of Bitcoin weakened slightly, falling around 4.5 per cent. This is possibly related to the same cause of the more positive equity movements, with some evidence of inflationary pressures within the US and Australian economies retreating.

The continued strong gains made by international equities has meant that to continue to target a 50/50 allocation between Australian and global equities as set out in the plan, all new investments through July were made in Vanguard’s Australian shares ETF (VAS).

An addendum on components of portfolio income

Around two week ago I released the regular six-monthly update on portfolio distributions received, which has tracked the level of distributions received over the life of the portfolio, with a specific focus on the period since 2017.

One issue raised in this and previous such reports is the level of capital gains which are inevitably ’embedded’ in the distributions from the various retail funds and ETFs that generate investment income.

Length considerations mean this was discussed only in general terms, with no further data being provided on it.

Yet there are some interesting observations available from tax return data that give a sense of the magnitude of this issue. This same data also provides an imperfect, but insightful, glimpse of the evolution of the pure sustainable ‘income generating’ potential of the portfolio over time.

The graph below separates out taxable reported capital gains from the portfolio (Item 18H), and taxable investment income. It should be noted that as tax data, it closely follows, but does not exactly align with the raw portfolio income data reported (which is typically simply net dividends, distributions and interest).

The next chart is a simple derivation of the chart above, expressing the level of paid out capital gains as a percentage of the total distributions received that year.

That is, it shows how much of total portfolio distributions received were actually capital gains payouts, rather than purely passive income generated, with no realisation of capital gains.

These charts demonstrate a few points.

• First, since this record began in 2017, paid out capital gains have constituted a material proportion of distributions – around 47 per cent on average. This has exceeded 50 per cent routinely.

• Second, distributions of capital gain have been growing, but are relatively volatile on a year-to-year basis, with single years such as FY2017-18 and FY2020-21 showing outsized, and unexpected growth.

• Third, the level of taxable investment income has been expanding more steadily, showing a trivial decline or stagnation in only two out of the 7 years of data.

• Fourth, there is no clear evidence of a decline in the level of capital distributions in recent years, despite a sustained investment in this period in more tax efficient ETFs which are likely to have fewer pressures arising due to their structure to pay out one-off capital gains in a volatile pattern than retail funds.

• Fifth, the absolute underlying level of investment income from the portfolio in the last financial year available (FY2021-22) was sufficient to meet around 88 per cent of estimated expenses, and is equivalent to the portfolio generating $8.62 per hour, for every hour in a year.

The recent end of the last financial year should make it possibe to provide an updated snapshot of this data in the next few months. Given the drop off in portfolio distributions described in the last portfolio income report, it will be intriguing to see the impact.

Trends in average distributions and expenses

With the completion of the portfolio income report two weeks ago, the trends in average distributions and expenses were recalculated, based on actual distributions received, with these taking the place of projected ‘placeholder’ average distributions over the past six months.

This produced, as discussed in that report, a new and less positive ‘scissors’ pattern to the graph of average distributions and expenses.

Consistent with this new pattern, average total expenses (red line) continued to rise, reaching above $6,700, while the moving average of distributions (the blue line) has declined across 2023, falling to just over $8,300.

The chart above measures distributions against an estimate of total expenses. The total expenses figure is based on actual credit card spending, with the addition of a fixed allowance for annual fixed expenses.

As a function of the revisions in data, at the moment the total ‘gap’ between distributions and total expenses is now around $1,600 per month, significantly down from around $2,200 per month in early 2023.

The revisions also mean a retreat from the previous milestone of total distributions since 2013 being projected to have met all actual credit card expenses in the same period. Instead, with the lower revised figure, this metric instead stands at around 97 per cent.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,750,000 (or $94,800 pa)	107%	140%
Total average expenses (2013-present) – $85,300 pa	119%	155%
Target equity holding in portfolio – $2,200,000	95%	N/A

Summary

The preparation of the portfolio income summary aside, this past month has not been one focused on financial independence issues, or even financial issues.

Rather, my attention has drifted to other interesting news events, such as Congressional hearings on UAPs, and podcasts discussing them.

Perhaps this is a naturally expected function of where the journey is, with the achievement of its final milestones likely to be defined not by any personal action, but through the fluctuations of markets, pressed on by the momentum of past choices.

There is much discussion in the FI community of the ‘boring middle’ of the journey. There is often little, however, about the closing stages – beyond a dutiful discussion of the dangers of ‘one more year syndrome’ and the injunctions to have a positive plan to ‘retire to’. Ignoring these well-worn points would be a foolish approach, yet my own experience as the journey comes nearer to its close does not neatly fit in either of these tropes.

Instead, what I have found is a growing sense of philosophical detachment from ‘the numbers’ as they might move from week to week or month to month, and an expanding awareness of the strength of force of inertia – or perhaps more precisely, a body tending to move on the same vector unless met with an opposing force.

This is different from the ‘boring middle’ in that the goal is well within sight. Perhaps it might be termed a ‘quiet finishing stage’. At this stage, the input of daily decisions is relatively minimal – the exact opposite situation than that which marked the first steps.

From a position of seeking to create that small critical gap between income and expenses, to create an opportunity for investment, where small daily choices matter and are multiplied through the power of compounding over time, a different circumstance gradually arises later in the journey.

In this different case, daily choices matter very little, one’s overall progress is increasingly pushed along by impersonal market movements, and societal-level phenomenon such as inflation, casually acting on the sum of capital already accumulated.

The shift calls for a philosophical realignment, from one focused on conscious choice and agency, to one focused on its opposite, an acceptance of a relative lack of control, and a detachment from the fleeting changes in portfolio value.

As an example, it is not unusual for the current portfolio to move in market value in one day by a nominal dollar amount that exceeds the total average annual amount invested in the early stages of the journey in the 2000s. At least in nominal dollar terms, a single days exposure to changeable equity markets thus holds as hostage the entire effort and progress of an earlier year, or even two.

Another example of the shift in perspective is evident in considering the closing of the final remaining gap to the equity target. This gap is around $110,000 at present, which at the commencement of the journey would have seemed like a challenging milestone of its own.

Due to the vagaries of markets, this indeed could be years away. Yet looking to the past, it is also clear it could quite possibly be reached in a matter of months or a year without further conscious choice. Indeed, in some sense, it could even be difficult to avoid.

Of course, it is simple empirical investing truth that reliance on past projections and extrapolations is a risk-laden course. At a broader level, however, looking back at the past, a few observations are striking.

One is that actual outcomes can make fools of our most careful calculations, or our worst fears in a moment.

A second is that the journey as experienced is quite different from that imagined, even though those imaginings might have had perfectly reasonable and logical foundations.

As we look back, we are inevitably different from that past self who projected forward, and imagined how we might feel in the future. Rather, different aspects of the journey hold our interest through time, while other metrics or perspectives fade in importance.

At one level, this is the entire purpose of this record.

To ensure I encounter that past self as I consider the passing tides. That I listen when they have something to say, which I have either forgotten, or hurried past when I should have paused. And so, as the record lengthens, as Churchill suggests, I hope that it will in some small way help me see just that farther into the future.

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.