You must live in the present, launch yourself on every wave, find your eternity in each moment. Fools stand on their island of opportunities and look toward another land. There is no other land;
Thoreau
there is no other life but this.
This is my one hundred and fifth 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 | $962,986 |
| Vanguard Lifestrategy Growth Fund | $48,665 |
| Vanguard Lifestrategy Balanced Fund | $84,215 |
| Vanguard Diversified Bonds Fund | $93,886 |
| Vanguard Australian Shares ETF (VAS) | $684,230 |
| Vanguard International Shares ETF (VGS) | $907,183 |
| Betashares Australia 200 ETF (A200) | $349,908 |
| Telstra shares (TLS) | $2,606 |
| Insurance Australia Group shares (IAG) | $11,048 |
| NIB Holdings shares (NHF) | $9,240 |
| Gold ETF (GOLD.ASX) | $232,696 |
| Bitcoin | $1,849,104 |
| Plenti Capital Notes | $84,000 |
| Financial portfolio value (excluding Bitcoin) | |
| Total portfolio value | $5,319,767 (-$106,105) |
Asset allocation
| Australian shares | 27.1% |
| Global shares | 25.3% |
| Emerging market shares | 1.0% |
| International small companies | 1.2% |
| Total international shares | 27.5% |
| Total shares | 54.6% (-25.4%) |
| Australian bonds | 3.0% |
| International bonds | 3.2% |
| Total bonds | 6.2% (+1.2%) |
| Gold | 4.4% |
| Bitcoin | 34.8% |
| Gold and alternatives | 39.1% (+24.1%) |
Presented visually, the pie chart below is a high-level view of the current asset allocation of the full portfolio.
Comments
The portfolio moved backwards by a significant amount this month, with an overall contraction of 2.0 per cent, or around $106,000.
This was principally due to a modest fall in the price of Bitcoin – with a loss of around 9 per cent across the month. The financial portfolio, in contrast, grew – achieving its highest ever level. Total equity holdings in the portfolio also expanded to the highest level so far, to sit at just over $2.9 million.
The chart below sets out the performance of both the full and ‘financial assets only’ portfolios since the commencement of the journey.
Australian equities performed strongly this month, growing by around 3 per cent, significantly outpacing the growth of 0.7 per cent in global equities.
Gold holdings have also experienced growth through the month, with prices advancing around 2 per cent. Bonds also grew in value by a small amount, around 0.5 per cent.
This month a further investment in the Vanguard global shares ETF (VGS) was made, in accordance with my previously discussed plans to gradually reinvest excess distributions and cash across the next 16 months.
Other islands? Assessing trends from 2017 in distributions, expenses and other crossing points
Last month I added a new measure to the previous set of monthly measures of average distribution and expenses, recognising that average portfolio income distributions are an imperfect proxy for the capacity of the portfolio to support financial independence.
The journey has always targeted a total returns approach, acknowledging that the intent is to go beyond only drawing on dividends or interest, to realise capital gains as part of a traditional ‘safe withdrawal rate’ style pathway.
The addition of this third measure, an assumed ‘safe’ measurement of portfolio income (using the safe withdrawal rate of 3.45 per cent) changed the picture of the journey somewhat.
Bending the curve? Trends in average distributions from 2017
The chart below measures average distributions (the blue line) against an estimate of total expenses (the red line) since 2017.
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 last 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.
The tracking of trends since January 2017 has featured a few broad themes.
First, average distributions growing relatively steadily through 2017, until around the end of 2022.
From this period, distributions have generally declined, aside from a minor recovery through 2024. At present, average distributions are sitting around $1000 per month lower than through much of 2022 and 2023.
There are a range of causes for this structural decline, including the impact of the averaging approach interacting with record distributions across both 2020 and 2021. In turn, those arose due to record payouts of capital gains.
A further factor, more incremental in operation, has been the increasing focus in new investments on relatively tax efficient passive ETFs. And nested within this factor is another. This same trend has seen an increased exposure to relatively low dividend international equity sector, meaning that even as the total portfolio expanded, its distribution generation potential did not increase proportionally.
Collectively, these factors mean that a more significant gap has opened up between the ‘true’ income potential of the portfolio (including such realisation of capital gains as application of the SWR approach would imply) in a draw-down phase, and the day-to-day record of actual paid out distributions. Highlighting this divergence was part of the purpose of the addition of the new ‘SWR portfolio income’ metric.
Interestingly, the metric of average distributions is derived on the basis of the last three years of data. This means that a period of extraordinarily high distributions in the first half of 2021 is about to fall entirely out of the sample used for the average.
Absent any sharp movements, this is likely to mean that future averages of distribution will be based on a set of distributions at more normal levels, and as a result, the line will flatten out close to current levels.
Total expenses: understanding trends and measure construction
The second trend has been a broad ‘u’ shape in total expenses (the red line) overall, with the past two years also seeing total expenses rise to their highest ever level.
The broad drivers of these trends are a sustained focus on minimising fixed expenses from 2017 to 2020, greatly amplified for a period of social distancing, lock-down and remote working.
This led to a low pattern of expenditure, of approximately $1000 per month, for a sustained period. Slowly, as these factors receded, total expenditure increased, until it again passed the historical level of around $8,000 per month by around May 2024.
This measure is somewhat of a hybrid, when closely considered.
It is calculated as the sum of the set of current expenses not met through credit card payments (such as utility bills and some insurances) estimated in $2025, and actual credit card liabilities, measured in nominal dollars from 2017 onwards.
On average, around 85 per cent of expenditure is through the credit card, meaning that the total expense metric can be viewed as mostly a nominal measure. This means, clearly, that some overall growth should be expected in total expenses, reflective of consistent inflationary forces.
Third time is a charm? The safe withdrawal rate portfolio income measure
The third metric, just introduced is the notional ‘safe withdrawal rate income’, estimated as the product of the safe withdrawal rate, and the financial portfolio level, averaged over the previous three months.
As such, its progress simply reflects the growth in the total financial assets of the portfolio over time, varying slightly over time with market movements.
The only expected move for this particular measure is for it to flatten over time, as new contributions to the portfolio slow, compared to much of the intense accumulation phase across 2017 to 2024. Over time, it will rise in nominal terms, at least to the extent that the nominal value of the underlying assets keep pace with inflation.
In early 2024, the portfolio target was met, meaning by definition the selected SWR portfolio income crossed about the target income measure of around $104,000.
Three crossings: the 2024 intersection of measures
At approximately the same time, there was an intersection of a few different metrics and trends that had been evident for some time.
For example, in April 2024, average distributions dipped below measures of average total expenditure for the first time since 2021. Just as this occurred, the notional SWR portfolio income measure exceeded the level of average distributions for the the first time in the record.
So in essence, within a couple of months, on traditional measures, the portfolio’s distributions began to be insufficient to meet actual total expenses, signalling a notional loss of financial independence on this particular measure.
At the same time, the notional capacity of the financial portfolio began exceeding both the record of actual distributions, and current actual expenses.
One part of this crossover is more closely illustrated below, expressed in terms of the monthly gap between the SWR income measure (green) and expenses compared to the gap between distributions and expenses (red). Note that a positive value in this chart below reflects a surplus to total measured expenses, while a negative value reflects a deficit or shortfall.
How should this intersection be thought about?
At this stage it is probably too early to fully interpret its meaning.
The key is likely to be the future shape of total expenses, and the degree of growth in this measure, compared to the SWR portfolio income measure, which is estimated on a relatively conservative basis at 3.45 per cent.
The degree to which that portfolio income measure stays ahead of, and moves relative to the total expenses metric is likely the best indication of the overall sustainability of financial independence over time. In a way, the outcome of these two curves as they move over time forms part of the answer to the primary question motivating this record: can financial independence be reached and sustained in my circumstances?
Past the crossover: taking a fix on the current position
Zooming into the current position, there is a continuing shortfall or gap between total expenses (around $8,800 per month) and the trailing three year average of paid out distributions (of around $7,300). This gap is currently at $1,430, and has recently been widening.
Using the notional ‘SWR portfolio income’ measure the picture is different.
Consistent with recent growth in the financial portfolio, it shows a surplus of around $800 per month, once total expenses are accounted for.
The months ahead, affected by a mix of spending decisions and portfolio movements that lay beyond direct control, are the only things that can truly reveal the path beyond the crossroads.
Charting Errors? Stocks for the Long-Run: New Evidence, Old Debates
This month an illuminating brief was released by the CRA Institute Research Foundation, written by Paul McCaffrey.
This brief followed the previously discussed but recently renewed debate about the accurate measurement of long-term realised returns of different asset classes.
This debate focuses in particular on the thesis of the historical outperformance of equities compared to a range of alternative investments, the basis of Jeremy Siegel’s Stocks of the Long-Run landmark work.
A challenge to this thesis is presented by Edward McQuarrie’s Stocks for the Long Run? Sometimes Yes, Sometimes No paper. This highlighted the contingent nature of the concept of long-run equity outperformance, with a closer consideration of data periods and asset return evidence.
The brief contains an informative analysis of both conceptual issues McQuarrie’s work points to, around the meaning and comparability of the asset returns data over long-period. A point highlighted, for example, is the sheer variation in the liquidity and very nature of instruments routinely crudely bundled under the terms ‘stocks’ and ‘fixed interest’.
Another element highlighted is the ‘right side bias’ of many common comparative asset return charts.
The example provided is the apparent outperformance of ‘small stocks’ over century long presentations of returns data. As McQuarrie points out, in charting terms this can present a false impression of sustained outperformance, where in fact periods of relative outperformance can be only a narrow slice of the sample period investigated.
As the paper (pdf) notes in relation to equity outperformance being assured:
“But, as Peter Bernstein liked to say, “only for the most part!” Edward McQuarrie’s research demonstrates that there can be long periods, some as long as an individual investor’s adult life, when stocks and bonds have essentially the same returns. Investors need to be aware of this fact, which is supported by McQuarrie’s and others’ careful examination of history through the centuries and across many countries. And studying history is the best way for investors to understand the future. When it comes to investments today, the future is the only time period that matters, but we cannot see even a wisp of it. So study history—and, as history would tell us, allocate our assets between stocks and bonds, not “all equities all the time.”
A further intriguing analysis of the chronological ‘skewness’ of equity returns is also provided, where the dependence or fragility of the existence of the equity premium is illustrated.
The analysis show that removing just the top 12 years from a series of equity returns across 1793-2019 (or about 5 per cent of the years in the sample) completely eliminates the presence of any equity risk premium.
Progress
| Measure | Progress |
| Portfolio objective – $3,000,000 | 177% |
| Financial portfolio income as % of total average expenses (3 yr average) – $105,200 pa | 114% |
| Target equity holding in portfolio – $2,400,000 | 121% |
| Financial portfolio income as % of target income – $103,500 pa | 116% |
Summary
This month there has been less focus on the overall portfolio, a consistent trend since June. From habit I am conscious of market movements, but I have not spent considerable time thinking about the portfolio, other than around the issues discussed above.
Part of this disconnection is likely conscious.
For most asset types, monthly or weekly movements have low information value for the purposes of tracking long term performance. With markets reaching or close to their highs, it is well to be mindful that equity markets can deliver rapid surprises, and also grinding periods of underperformance, or losses that can sometimes last decades.
These periods of underperformance (for example the 1970s and 1930s to 1950s in many developed country markets) are not pre-announced. Rather they proceed slowly, day-by-day, year-by-year, to disrupt or delay the smooth mathematical impact of compounding returns so often implicitly relied on by those seeking financial independence. As they progress, some set of current investors quite reasonably expect them to end, but in fact their terminal points are only visible in retrospect. These are the types of phases that drive the findings in the McCaffrey paper discussed above.
The journey to date, happily, has barely been affected by financial market events of such magnitude.
Assessed over half-year periods, for example, the financial portfolio suffered a minor reverse in the first half of 2020, contracting around 2.8 per cent in net terms. Two years later at the start of 2022, a much more substantive fall of nearly $200,000, or around 9.0 per cent, occurred. Outside of these, however, across every six month period since 2007 the financial portfolio has expanded in absolute terms.
This type of performance, the result of generally strong equity markets since 2008, cannot be taken as foreordained for the next few decades, as the accumulation phase tails off. And the only way to prepare is to be mindful of the temporary quality to today’s market prices, and humble about one’s own degree of contribution to performance to date, or tomorrow.
The analysis in the McCaffrey paper is a useful intellectual challenge to an easy presumption to make – to look to history at the broadest level, and generalise the future, and make plans on the future being consistent with one perspective on the past.
There is simply no objective reason to imagine that the next phases of the financial independence journey will necessarily be shaped by a comparable set of market conditions as that experienced in the past 25 years.
Markets could be entering into one of those periods of either equal performance between bonds and equities, or a sustained multi-decade period of underperformance of equities.
The longest historical record and evidence might suggest that on average, this is unlikely. Yet as Thoreau might observe, we must live in the present, and we are confided to launching ourselves on those waves in front of us, whatever their shape or power. And similarly, there is no other land than this island we stand upon, however beguiling visions of other distant lands may be.
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.