It is difficult to say what is impossible – for the dream of yesterday is the hope of today and the reality of tomorrow.

Robert Goddard

Year in Review

This year has been one of the most significant in the journey to financial independence so far.

Following the set-backs of 2022, the portfolio achieved strong forward momentum through most of the past year.

The original guiding goals set for this year were three-fold:

• achieving and maintaining the overall portfolio target of $2.75 million;

• achieving a minimum equity portfolio target of around $2.2 million; and

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

The first of these goals was achieved in March. The second was just achieved in the last month, following upward movement in equity markets and a final regular investment for the year.

The cash reserve targeted has not yet been built, though this may change over the coming year.

This means that two of the three pre-conditions which were set for any movement from my current work arrangements have been met, while the last is still a little way off.

Taking a look at movement against the financial independence benchmarks set through this past year highlights the significant progress made in the past 12 months.

Progress against FI measures through 2023

Measure	Portfolio	All Assets
Portfolio objective – $2,750,000 (or $94,800 pa)	89%→121%	117%→154%
Total average expenses (2013-present) – $87,800 pa	96%→130%	127%→167%
Target equity holding in portfolio – $2,200,000	83%→102%	N/A

The past few years have seen major oscillations in the final portfolio value.

Last year saw a loss of around $500,000 across the calendar year, immediately following a strong portfolio performance in 2021.

This past year has seen the portfolio grow by over $870,000, or 35 per cent of its initial value at the start of the year.

This is the largest dollar value gain in a calendar year over the history of the portfolio, and a percentage growth of a similar scale to growth in 2019 and 2017.

Each of these previous advances changed fundementally the type of portfolio which was being managed – and the gains this year will do the same.

Progress of the journey

This year has been in its essentials a resumption of the trend of growth, assisted by compounding and bouyant markets, that has been a feature of the journey since 2007.

This growth has reversed the losses of 2022, and restored something that looks quite close to a consistent geometric style expansion in the portfolio.

The most significant achievement in this year is the reaching of the equity portfolio target of $2.2 million.

This could be a temporary achievement, given the narrowness with which the portfolio surpassed this target in December, and the possibility of falls, and sustained ones at that, in equity markets.

Increases in the equity portfolio represented about half of the gains in the portfolio this year. The other half, broadly speaking, was an increase in the price of Bitcoin.

Bonds continued to play a narrower, more constrained role in the overall portfolio.

In a small reversal of recent trends, the dollar value of bond holdings actually increased slightly through 2023, albeit off the base of some regular falls across 2018 to 2022.

As of the close of 2023, the total bond portfolio is currently at around $227,000 – up from around $205,000 at the opening of the year.

This figure is affected somewhat by a small, experimental, investment in Plenti Capital Notes made in the last few months. Outside of this, the net flow has been out of bonds and fixed interest, as new investments were directed towards seeking to close the remaining gap to the equity target.

Setting the intercept: portfolio allocation and contributions

This year contributions were split almost exactly evenly between Vanguard’s Australian Shares ETF (VAS) and its largest International Shares ETF (VGS)

The even split flowed from the achievement, and then maintenance through regular contributions, of a targeted 50/50 split between Australian and international shares.

Through the third and fourth quarter of the year most contributions were to the Australian shares ETF, reflecting in part the need to reinvest paid out Australian equity dividends, which are systematically higher than for most international equities.

In previous years of the journey, from 2007 to 2017, investments tended to be split in a more complicated manner between a few larger Vanguard retail funds, and smaller investment vehicles I was curious to trial at the time (such as BrickX, Raiz, and Spaceship).

This simplification process in the directing of new investments through time can be seen by the chart below.

Tracking the portfolio allocation through the years resulting from these contributions and value changes shows elements of continuity and one major distruption – with the emergence of Bitcoin to make up a significant part of the portfolio from 2017 onwards.

Beyond that, there has been a relatively stable total asset allocation to equities, and a gradual winding down of bond holdings towards progressively lower target allocations.

Reviewing the progress of the year

Through the year, the portfolio recovered from its losses in 2022, and slowly moved to regain and surpass levels it reached at the end of 2021.

This highlights that a single year is just part of a longer story, in this case, of recovery.

Last year, I observed that as the portfolio became larger, there is a slowed down quality to the changes it experiences. More inertia, and fewer genuine surprises.

This is shown by the composition of the portfolio looking somewhere similar – barring changes in the level of Bitcoin – as last year.

Looking at the progress of the portfolio, some noticeable points are:

• Growth of equity holdings – the portfolio has closed the significant initial gap (of $380,000) to its equity target in a year, much sooner than anticipated. This secures the central wealth generation and sustaining component of the portfolio. Looking beyond the formal portfolio, to consider equity held in superannuation, reveals that for the first time, over $3.0 million of equity assets are in place to support future income requirements. This is up from around $2.5 million at the start of the year.

• Bitcoin has surged back to form a significant portfolio component – Bitcoin has continued to be highly volatile, resulting in some volatility in the headline portfolio level as well. This year alone, Bitcoin has increased from being around 11 per cent of the portfolio to now making up 21 per cent through price changes alone.

• Reaching close to the target on the financial portfolio alone – the ‘financial’ portfolio (excluding Bitcoin) is presently quite close to the overall target of $2.75 million, meaning the journey to the target is around 96 per cent complete, even if one assigns no value at all to Bitcoin. This falls close to within a margin of error of a journeys completion on the basis of traditional assets alone. At the commencement of the year, by this narrower ‘financial portfolio’ only measure, the journey was only 84 per cent to completion.

This year, I have again been using the holidays to briefly review 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.

Each year I aim to review the plans I have made, as well as 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 achievement of two of the three conditions make this task markedly different from previously.

The focus is increasingly on how the basic building blocks of a transition to a different level of work or leisure could be safely achieved. Issues such as maintaining purchasing power over a long period, requisite and prudent cash levels, and the use of future distributions weigh more heavily than finer adjustments to allocations or safe withdrawal rates.

Over the next week or so December half-year distributions will be finalised. So far, early indications are that these have been in line with expectations.

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

Whither Zeus and cruel Fortune summon, let us go.

Virgil

Monthly Portfolio Update – December 2023

This is my eighty-fifth 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	$799,001
Vanguard Lifestrategy Growth Fund	$41,744
Vanguard Lifestrategy Balanced Fund	$75,118
Vanguard Diversified Bonds Fund	$90,187
Vanguard Australian Shares ETF (VAS)	$487,627
Vanguard International Shares ETF (VGS)	$632,570
Betashares Australia 200 ETF (A200)	$295,619
Telstra shares (TLS)	$2,110
Insurance Australia Group shares (IAG)	$7,171
NIB Holdings shares (NHF)	$8,868
Gold ETF (GOLD.ASX)	$135,885
Secured physical gold	$21,630
Bitcoin	$687,451
Raiz app (Aggressive portfolio)	$21,630
Spaceship Voyager app (Index portfolio)	$3,603
BrickX (P2P rental real estate)	$4,437
Plenti Capital Notes Market Loan	$5,000
Total portfolio value	$3,319,513 (+$173,907)

Asset allocation

Australian shares	34.2%
Global shares	30.3%
Emerging market shares	1.3%
International small companies	1.7%
Total international shares	33.3%
Total shares	67.6% (-12.4%)
Total property securities	0.1% (+0.1%)
Australian bonds	2.2%
International bonds	4.6%
Total bonds	6.8% (+1.8%)
Gold	4.7%
Bitcoin	20.7%
Gold and alternatives	25.5% (+10.5%)

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

Comments

This month the portfolio experienced another strong month of growth, expanding by around 5.5 per cent, or $174,000.

This pushes the portfolio to around 10 per cent above the levels achieved in late 2021.

Critically, as discussed above the target equity allocation has now been met, meaning the portfolio has established that core of returns-generating assets capable of supporting the portfolio income objective over the longer term.

The equity component of the portfolio performed strongly as the year closed.

Australian equities grew in value by 7.3 per cent, which global equities increased in value by around 2.2 per cent. Overall the equity part of the portfolio grew by 5.4 per cent.

Fixed interest holdings also grew modestly through the month, by around 3 per cent, while gold holdings decreased in value by around 1.7 per cent.

Bitcoin continued its recent growth, with its price increasing around 8.3 per cent across the month.

Markets appear in a pecular place at the end of the year.

There is continuing doubt over the path of future inflation, especially in Australia. In particular these doubts center around the pace of its decline, its potential resilience given its newer domestic sources, and it becoming embedded across the services sector.

End of year newspapers and financial commentary are full of refreshingly healthy acknowledgements that much of the equity markets performance this year was entirely unpredicted.

While some features of the global macro-environment can be discerned, the linkages these have to market outcomes is uncertain, and confounded by the thousands of events and decisions yet to arrive.

Through the month I continued to carry out my longer term asset allocation plan. This month, due to the relatively stronger performance of Australian shares, this led to the allocation of all new investments to the Vanguard global shares (VGS) exchange fund.

Trends in average distributions and expenses

This month average total expenses (the red line) continued to rise to around $7,300 while the moving average of distributions (the blue line) fell just below $8,000.

It would appear, unless December and March quarter portfolio distributions are particularly high, that the negative ‘cross over’ point will beckon through this next year. At this point, total expenses will be higher than ongoing distributions – noting that distributions often contain an element of paid out capital gains.

The trends in these two measures are presented in the chart below.

The gap between distributions and total expenses continues to narrow, and is currently at around $700 per month.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2,750,000 (or $94,800 pa)	121%	154%
Total average expenses (2013-present) – $87,800 pa	130%	167%
Target equity holding in portfolio – $2,200,000	102%	N/A

Summary

Pulling alongside the equity target this month has been a major area of satisfaction. In some ways, though a secondary target, it feels less ephmeral, and more tangible than the portfolio (again) meeting its headline target over the past few months.

Part of this is this volatility of Bitcoin, and no doubt some mental ‘discounting’ of its recent gains, which have pushed the overall portfolio above expectations.

As the New Year commences, assuming some relative stability in equity markets, increasingly my focus will turn to the mechanics of any transition to a different form of work, and existence.

I have read much about this phase from the financial independence community over the past few years, even though my consumption of content from this community has probably dropped back in recent years.

What I think will feel most unusual in this time is the exercise of that personal agency to shape my future circumstances. While the numbers and more mechanical financial elements of any transition will remain of interest, I have little apprehension that they can be made to work, over time with iterations.

In tinkering, however, with the nature of future work, it is easy to underestimate the unforeseen and consequential impacts of any decisions.

Engagement in full time work, for most people, and the rational expectation of its continuation, represents a significant financial asset. It is one that has elements of the intangible, and an option value, but is also one that would typically be valued in the millions in conventional expectational terms for someone in the early to mid stages of a career.

This imposes a disciple to not act lightly in respect of this asset, even in circumstances where one is no longer planning to rely on it.

All to often, confident sounding advice to not delay or fall foul of ‘one more year’ syndrome at this part of the journey comes from financial independence advocates with no appreciable ‘skin in the game’ for inadequately-based decisions which are not perfectly reversible. Quiet often these ‘experts’ themselves are either still deriving lifestyle supporting income from their commentary or activities, or are the recipients of other less visible financial supports and backstops.

Here, better to pause and consider personal circumstances and consequences carefully, than regret at leisure following a slogan.

One interesting but complicated factor to consider is that any decisions also impact the broader team and organisation, including people I value and wish to not let down, and to help succeed. Picking my way through that, to achieve either a future work arrangement I am happy with, or a departure at the right time and with the right consequences presents as a complex series of forking pathways, that can only be carefully worked through with an eye on the overall intended direction of travel.

These next choices, through 2024, will need to be made, however. And they will be made even as fortune and cruel Zeus act as they might on markets and the portfolio which has taken me to this point.

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.