In economics, things take longer to happen than you think they will, and then happen faster than you think they could.

Rudi Dornbusch

This is my one hundred and fourth 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 $3,000,000. This should be capable of producing an annual income from total portfolio returns of about $103,500 (in 2025 dollars).

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

A secondary focus will be maintaining the minimum equity target of $2,400,000.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$942,496
Vanguard Lifestrategy Growth Fund	$47,801
Vanguard Lifestrategy Balanced Fund	$83,002
Vanguard Diversified Bonds Fund	$93,366
Vanguard Australian Shares ETF (VAS)	$663,879
Vanguard International Shares ETF (VGS)	$887,401
Betashares Australia 200 ETF (A200)	$339,521
Telstra shares (TLS)	$2,643
Insurance Australia Group shares (IAG)	$11,086
NIB Holdings shares (NHF)	$8,916
Gold ETF (GOLD.ASX)	$227,691
Bitcoin	$2,034,070
Plenti Capital Notes	$84,000
Financial portfolio value (excluding Bitcoin)
Total portfolio value	$5,425,872 (+$261,366)

Asset allocation

Australian shares	25.9%
Global shares	24.3%
Emerging market shares	0.9%
International small companies	1.2%
Total international shares	26.4%
Total shares	52.3% (-27.7%)
Australian bonds	2.9%
International bonds	3.1%
Total bonds	6.0% (+1.0%)
Gold	4.2%
Bitcoin	37.5%
Gold and alternatives	41.7% (+26.7%)

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

Comments

The portfolio experienced further strong growth this month, expanding by 5.1 per cent, or around $261,000.

A large part of this was attributable to a further rise in the value of Bitcoin holdings, occurring alongside some continued equity market advances.

This has placed both the full portfolio, and the ‘financial assets only’ portfolio at their highest ever level.

The chart below, in a new format discussed earlier this month, sets out the performance of both portfolios since the commencement of the journey.

This month featured a continued period of growth in equities, with Australian equities advancing around 1.5 per cent, and global equities by around 3 per cent.

Gold resumed it previous path, gaining around 1.6 per cent in value. This means that since substantial purchases began around 15 years ago, the gold index holdings in the portfolio have achieved an average return of around 9 per cent per annum, compared to an average annual total return (i.e. capital gains and dividends) of around 7.5 per cent for Australian shares since 2010.

Bond holdings were flat, while Bitcoin increased around 11 per cent.

This month saw the passing of a small milestone in the composition of the portfolio.

Exchange traded funds now hold over two-thirds of the total equity holdings in the portfolio, or mathematically, approximately double to value held in the older Vanguard retail funds.

Bearing off: An end to some portfolio explorations and micro-investing trials

This month I closed three small elements of the financial independence portfolio, withdrawing all investments in the Raiz and Spaceship apps, as well as selling all units of my BrickX holdings.

Each of these investments were undertaken as a small experiment, or trial, driven either by curiosity or a specific purpose which has now been superseded. As an example, investing in Acorns (the predecessor to Raiz) commenced in early 2016, BrickX followed in September 2016 and Spaceship was first invested in during 2018.

The proceeds of these withdrawals – around $35,000 – have now been reinvested in the major elements of my portfolio, split evenly between the Australian and international share ETFs (VAS and VGS).

This is an action I have long contemplated, and with extra time to think about and execute the move, it was the right time to act to simplify the portfolio composition.

An additional motivation was to reduce the average level of fees applied to this part of the portfolio. Spaceship began as a fee-free product, but changes to the product such as the introduction of a flat $3 monthly fee on top of investment fund fees led to a need to reconsider the investment vehicle. Raiz’s direct fees were less problematic – at around half that of Spaceship – but still a multiple of direct ETF equivalents, and returns were also impacted by a second layer of fees on the components of one’s chosen portfolio mix.

BrickX was unique in the sense of having no direct fees, except on transactions, but this was twinned with the disadvantages of ‘slippage’ and liquidity risks as one moves to sell.

Effectively, one may receive no bids, or bids at a lower than expected price, when one sells the individual units. This was significant in the case of my exit from the small BrickX holding, making it a poorly returning investment over time. It was a small, but appreciable, lesson in understanding exit risks more fully before further explorations of this kind.

The net impact of these sales may be some small capital gains liabilities in this current tax year, but an annual savings of around $143 in management fees. This alone represents the removal of a 0.5 per cent annual ‘drag’ on the returns of these funds.

This also takes the number of individual investment holdings from 17 in February of this year to 13 presently, reducing unnecessary complexity. Impacts on the actual characteristics of the portfolio are immaterial, given they collectively represented only around 0.7 per cent of the value of the total portfolio.

Heaving to: balancing international and Australian equity holdings

Each year in my investment policy review I examine the question of appropriate diversification, and in particular, the issue of the balance of Australian and international equities in the portfolio.

In the earliest part of the journey (2019-2021) my standard allocation was a 60/40 allocation between Australian and international equities. Before that period, in the absence of good information, the portfolio generally exhibited a slight bias in favour of Australian equities (equivalent to around a 53/47 allocation).

The major basis for the 60/40 allocation was a 2013 paper Optimal Domestic Equity Allocations for Australian Investors and the Role of Franking Credits. It found using data from 1970-2012 that taking into account franking credit benefits, an optimal domestic equity allocation of between 32-60 per cent was justified, and that balancing reduced volatility and minimising maximum portfolio loss suggested an allocation of 30 to 40 per cent to Australian shares.

In the 2021 investment policy review, I altered the then preferred 60/40 approach to target a 50/50 allocation, to adopt a neutral forward-looking position on likely performance, whilst still recognising the after-tax benefits of franking credits. A 2012 Vanguard study (see Figure 1 here) which highlighted that a 50/50 allocation provided the lowest standard deviation in returns, or volatility, using data across 1988 to 2011 was also given significant weight.

As a result of this policy change on allocation, further investments were directed to international equities, and this revised 50/50 target allocation was effectively met by April 2023.

Home bias re-examined: targeting lowest volatility, or risk-adjusted returns?

Recently, I reviewed State Street Global Advisers Equity ‘White Paper’ Home Bias in Australian Equity Allocations: Diminished Portfolio Outcomes (October 2024). This report (pdf) provides updated estimates of efficient optimised allocations using a 15-year data set covering 2009 to 2024.

The report generates much higher estimates of the ‘maximally efficient’ level of international allocation based on this period, and much lower estimates of the impact of franking credits in raising optimal domestic equity allocations.

As an example, and using some important assumptions, the paper suggests many Australians would achieve the ‘Maximum Sharpe’ (most return per unit of risk or volatility) allocation with an international allocation of 91 per cent, and a domestic allocation of 9 per cent. Other interesting but less formal analytical work has posited a ‘Sharpe point’ of as high as a 33 per cent Australian allocation, and derived longer-term average estimates over 1970 to 2024 of between 32 and 41 per cent.

Interestingly, for the period, the SSGA work estimates the conceptually distinct point of ‘minimum volatility’ – which was the basis of my previous allocation decisions – at a 53/47 domestic and international allocation.

Weighing the evidence: some data, study and historical considerations

These findings, and in particular the issue of the potential to depart from a ‘volatility minimising’ standard, towards a ‘maximum Sharpe’ point in future equity allocations have been in focus this month.

There are a range of considerations in play.

In this phase of the journey, potentially volatility minimisation is a desirable objective, particularly as bonds have abjectly failed at this task in recent years. Yet, adopting this involves a trade-off from the theoretically optimal return per unit of risk, and this performance penalty obviously has the capacity to compound over future decades.

The features and limitations of each study also need to be taken into account.

Some rely on long data series, potentially more representative of multiple cycles than shorter periods, but, equally, potentially less relevant due to the changing underlying composition and characteristics of Australian equities and their foreign counterparts.

The SSGA study also bases its estimates on indexes that assume the holding vehicle is a superannuation account, and the small difference in the overall impact of franking credits to the final optimal allocation is stark, compared to the 2013 Klements paper.

An underpinning, simplifying basis for the current equal allocation has been that in a forward-looking sense, it avoids assuming either international or domestic equities will outperform. It assume, in short, a ‘coin-toss’ on the question of whether returns will be maximised by greater global or domestic investment exposure.

Yet such an approach quite clearly does still represent a significant risk and exposure to the fate of domestic equities, albeit mitigated by the fact that Australian and international equities have less than full correlation, and Australian markets may benefit in some circumstances that result in falling global market valuations. As a crude illustration of this, financial and materials equities (such as BHP, NAB and the Commonwealth) listed in the Australian market make up around 25 per cent of the value of the total equity portfolio.

History has some other information to assess.

It tells us that Australia’s realised equity market returns across the past century have been among the highest in the world, alongside the United States (which, relevantly, constitutes around 70 per cent of MSCI global equity benchmarks). This introduces the conceptual future risk of ‘diversifying’ from one historically ‘lucky’ market, into another arguably ‘lucky’ market – to the extent that this historical record reflects either survivorship bias or an outcome of pure chance.

Setting a new course for far-off seas?

The new information in the SSGA paper is – in my view – worth careful thought, and potentially strong enough to warrant a change in my personal approach and allocation targeting.

As the portfolio has grown, I am increasingly aware of the large allocation to Australia equities, and the potential vulnerability of this holding in a range of clearly plausible future scenarios for a trade-exposed commodity exporting nation.

These scenarios include geo-political conflict, increased trade restrictions, or global recession.

Plausibly, further international diversification at the margins reduces overall portfolio exposure to these risks – even in circumstances where the same risks will impact other markets. It cannot also be discounted, as well, that Australia might once again be fortunate, and impacted less, or even benefit from some of these same types of positive events and trends, as it has generally since the early 1980s.

At present, my tentative ‘on balance’ judgement is that further international diversification may be a risk-reducing, and long-term return enhancing step, compared to the current portfolio approach. This is an inevitably imprecise and personal ex ante judgement, which may well prove incorrect after the fact.

Tacking to wind: implementation of any changed approach

There are two immediate issues with any implementation of this judgement.

First, the degree of movement.

The SSGA report findings suggest something approaching a 90/10 allocation between international and Australian shares, but based on a relatively short observation period of 15 years.

This position may well be substantially influenced by its assumptions around the marginal tax liability of a superannuation vehicle, as compared to a ordinary Australian investor. The original Klements study indicates an Australian allocation of 30-40 per cent may be optimum, in terms of minimisation of volatility and maximum possible loss, from a longer, but older data sample.

With these imperfect guideposts, a reasonable approach for my portfolio approach and circumstances may be to allow for an increase in international equities up to, initially, a range of 60 to 70 per cent, thereby moving closer to the maximum Sharpe point indicated in the SSGA study, while also being consistent with minimising maximum potential losses and volatility as indicated in the Klements paper.

The second question, is the timing or method of movement.

On this issue, my disposition is to avoid a rapid or mechanistic pursuit of a higher international exposure, in favour of a more gradual and organic movement through time, minimising avoidable tax liabilities or transaction costs.

Under this approach, a rebalancing would be achieved by means of new investments, or the direction of reinvestments made over time into international equities.

Implementation of a 60/40 international and Australian allocation immediately would involve the sale of around $300,000 in Australian equities, or around 20 per cent of these holdings, and reinvestment of these into international equities.

Without seeking to engage in market timing, it is relevant that this would currently involve large one-off purchases of, effectively, over $200,000 of US equities (given its role in the MSCI world index) at historically high price-to-earnings valuations.

The path initially preferred, therefore, is the more passive and opportunistic redirection of any further investments, or reinvestment of distributions into solely international equities, over a sustained time period.

Absent market movements – which is a substantial assumption – this is likely to result in a slow drift upward of the international allocation, reaching perhaps 55 per cent by the end of 2026, and with the lower threshold of the target of 60 per cent international exposure potentially only reached in 5-10 years. In cases of strongly differentiated Australian and global equity market performances, however, this target could easily be under or overshot by a material margin.

Currently, I intend to commence this movement to target 60 to 70 per cent allocation of the full equity portfolio to international shares through the remainder of this year, prior to a formal update of the investment policy in January of next year.

Trends in average distributions and expenses: adding the new signal

The chart below measures distributions against an estimate of total expenses.

The total expenses figure is based on actual credit card spending, with the addition of a regularly updated notional monthly allowance for other fixed expenses.

From this month it has also had an additional series or metric added, as discussed in the recent portfolio income report, so as to include an estimate of available portfolio income.

This is in green and is calculated as the product of the financial portfolio (i.e. excluding Bitcoin) and the selected safe withdrawal rate of 3.45 per cent. Thus it can be viewed as the notional ‘safe withdrawal income’ currently provided by financial assets in the portfolio. To provide a smoother view through time it is estimated on a trailing average three monthly basis.

This month average total expenses (red line) continued its recent rises. These expenses are currently running at just over $8,700 per month.

Using the most recent estimates of the three year moving average of distributions (the blue line), paid out distributions have remained at around $7,500 per month.

This leaves a continuing deficit between total expenses and average distributions of just under $1,300, which is the largest gap experienced to date. Using the updated ‘SWR portfolio income’ measure, however, portfolio income is currently around $600 per month higher than total expenses.

An alternative picture of the same process can also be provided by looking at the ‘gap’ between total expenses and the safe withdrawal rate income series.

This represents a slightly different view of the journey.

It shows that on the basis of current estimated total expenses, and the notional safe withdrawal portfolio income, the traditional financial component of the portfolio crossed into producing income surplus to expenses in around February 2024.

Progress

Measure	Progress
Portfolio objective – $3,000,000	181%
Financial portfolio income as % of total average expenses (3 yr average) – $104,700 pa	112%
Target equity holding in portfolio – $2,400,000	118%
Financial portfolio income as % of target income – $103,500 pa	113%

Summary

Through a substantial part of the journey to financial independence, a significant focus was on optimisation of the investment products used, combined with a curiosity to try alternative pathways, and understand a product or service by use.

This month, the cause of optimisation won out, with the closure of three separate, though now marginal experimentations on the road, and their reinvestment in simpler, low cost more liquid products. There are further simplifications possible, but none that hold out so significant a reduction in complexity, and fees. The remaining Vanguard funds with smaller amounts in them, for example, have fees of 0.29 per cent, higher than a pure equity ETF, but these funds do also provide a range of asset allocation, balancing and consolidated reporting features

The factor that has enabled this optimising step to be finally taken is likely time, from the greater freedom already enjoyed. Similarly, this time has enabled a more close evaluation of the state of evidence around Australian and international equity diversification than undertaken in recent annual reviews of my investment policy.

Here the data is imperfect.

It can only ever be suggestive of approaches to optimise return and risk assuming some equilibrium in outcomes over time, or that history provides some guide to future potentialities. It is quite possible that this ‘optimisation’ may turn out to be the incorrect choice with the benefit of twenty years of hindsight. That is the penalty, the price of choice. All that can be done is to seek to act with the best judgement, and information available, and with a knowledge of the risks entailed in each choice.

In this instance some of the relevant risks are an aspect of current global monetary and economic conditions, and US equity market pricing.

For decades, economists have discussed the unsustainability of US budget deficits and public debts. For only slightly shorter a time, economists have viewed Japanese monetary policies as a building risk. Discussions on each of these issues varied from the fringes of academic and political thought, to the centre. Entire decades passed with easy and rationalising assurances that these imbalances either did not matter, were a natural consequence of other phenomenon, or otherwise were unworthy of anything but passing note.

The reported Chinese curse is ‘may you live in an interesting age’, and certainly looking around financial markets this might seem to be apt. Yet there is also a risk of falling prey to a subtle kind of bias, a kind of chronological chauvinism, however, in which one imagines oneself more likely than is statistically probable at living at a key turning point.

As an example, the final fall of the Eastern Roman empire, with the fall of Byzantium during the 29 May 1453, was a seminal event in global history, the product of forces and failures reaching back more than a millennium.

Of all human beings who ever lived, however, only around 0.3 to 0.4 per cent were alive on that day, and approximately only 0.07 per cent were in Europe, potentially hearing about this event in any sort of contemporaneous way. Thus, even though we might imagine ourselves bearing witness to the tipping points of history, whether we are or not is a different and more difficult question.

For those defenders of Byzantium, waking to the sound of the final assault after midnight, the statistical improbability of their being present in history was irrelevant and likely inconceivable. They were present, impacted by forces arguably stretching back impenetrably in time.

This sort of fact makes it important to always bear a question in mind, in any investment decision: what are the costs and range of potential consequences of this decision being an error?

In the pedestrian case of a gradual rebalancing of an equity portfolio over 5-10 years, achieved through incremental moves at the margin, the costs of market timing may be mitigated, but the costs of being in error on the primary thesis of a 60/40 allocation to international and domestic shares could be significant. Equally, the cost of a 50 per cent exposure to Australian shares during even a quite ordinary period of sustained underperformance of Australian equities would be non-trivial, rising to substantial should the Australian economy or financial markets experience significant dislocations.

The possibilities of error – manifest in any investment decision – and even if they are small, of being present at turning points should give pause. As observed, events sometimes tarry and delay, before happening faster then we think they could.

Note for readers

Over the last year, there has been a noticeable degradation in the useability of my standard blogging interface. As an alternative, and because I am not interested in becoming a coder, plug-in or website management expert, I have created a rough and ready backup Substack and imported past posts. The formatting of past posts may not be as tidy as here, but should the blog ever seem to ‘disappear’ or cease, it will likely just be a signal that I have switched entirely to Substack and started posting there.

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.