Bonds have played a limited role in the financial independence portfolio so far. Hollowing the examination of the equity portfolio last month, however, it seemed fitting to complete the picture with a detailed look at the development of, and trends in, the bond and fixed interest holdings.
The last detailed examination of the fixed interest and bond components of the portfolio was undertaken in October 2019. This found that the bond portfolio was reasonably well-diversified, broadly index-aligned, and doing its job of providing ballast against equity volatility — even if it had largely arisen in conditions of ‘benign neglect’.
More than six years have passed since that examination. In the intervening period, global bond markets have experienced some of the most dramatic conditions in recent decades. These include the pandemic-era collapse of yields to historic lows, a sharp rate-hiking cycle from 2022 that delivered real capital losses to bond holders worldwide, and a gradual recovery since. The four decade secular bull market in bonds that seemed at risk of ending in 2019 did, in a sense, end — quite violently.
Along the way, some of the key assumptions underpinning the rationale for holding bonds have been tested in ways not seen for a generation.
Recapping the structure and history of the fixed interest and bond portfolio
When the bond portfolio was last examined in detail in October 2019, total bond and fixed interest holdings stood at around $257,000, representing just under 15 per cent of the overall portfolio.
That figure had itself slightly declined from a peak of around $260,000 reached in January 2018.
The chart below tells the fuller story across nearly two decades looking at all fixed interest holdings (e.g. bond holdings and Plenti peer to peer and capital note investments).
Every man takes the limits of his own field of vision for the limits of the world.
Arthur Schopenhauer
This is my one hundred and eleventh 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 $3,250,000. This should be capable of producing an annual income from total portfolio returns of about $112,000 (in 2026 dollars).
A secondary focus will be maintaining the minimum equity target of $2,600,000.
Portfolio summary
Vanguard Lifestrategy High Growth Fund
$995,439
Vanguard Lifestrategy Growth Fund
$50,114
Vanguard Lifestrategy Balanced Fund
$86,371
Vanguard Diversified Bonds Fund
$95,318
Vanguard Australian Shares ETF (VAS)
$699,678
Vanguard International Shares ETF (VGS)
$986,477
Betashares Australia 200 ETF (A200)
$358,037
Gold ETF (GOLD.ASX)
$324,307
Bitcoin
$1,024,255
Plenti Capital Notes
$84,000
Financial portfolio value (excluding Bitcoin)
$3,679,741 (+$47,657)
Total portfolio value
$4,703,996 (-$268,350)
Asset allocation
Australian shares
30.8%
Global shares
30.6%
Emerging market shares
1.2%
International small companies
1.3%
Total international shares
33.1%
Total shares
63.9%(-16.1%)
Australian bonds
2.8%
International bonds
3.8%
Total bonds
6.6%(+1.6%)
Gold
6.9%
Bitcoin
21.8%
Gold and alternatives
28.7%(+13.7%)
Presented visually, the pie chart below is a high-level view of the current asset allocation of the full portfolio.
Comments
This month the portfolio suffered a loss of $268,000 or around 5.4 per cent.
As a single month headline result, this is the eighth largest fall in portfolio ever experienced. It is also the fourth sequential monthly loss, an event which has not occurred in the history of portfolio previously.
The loss reflected continued declines in the price of Bitcoin, of around 24 per cent over the month.
Despite this, however, the smaller underlying portfolio of traditional financial assets continued to expand, hitting the highest value ever recorded ($3.67 million). By contrast, it has grown each of the past three months.
The chart below sets out the performance of both the full and ‘financial assets only’ portfolios since the commencement of the journey.
Through the month, geopolitical uncertainty continues to be heightened, with possible future military conflicts in the Persian gulf.
Australian economic developments have been dominated by a re-emergence of persistent inflationary forces, resulting in a tightening of interest rates. This occurred against a positive reporting season, which appeared to support stronger Australian equities performance (or 3.8 per cent) compared to a slight capital loss in the global equities holdings (1.1 per cent).
Gold holdings fell by around 2.0 per cent from the highs experienced at the end of the last month.
The month as previously small additional new investments were made in global equities (through the Vanguard exchange traded fund VGS), in accordance with the decision to regularly reinvest excess distributions and cash holdings.
Rose of the winds: reviewing trends and developments in the equity portfolio
Five and a half years ago, I provided a systematic analysis of the equity component of the financial independence portfolio. At that time, equities totalled $1.2 million. Today, they stand at approximately $3.0 million.
With this milestone, it seemed an opportune moment in the waning of the summer months to revisit the original mapping exercise – and the shorter snapshot in August 2022 – to see how the territory may have shifted using the compass provided by the passive indexing approach employed.
Equity holdings in the financial independence portfolio
Equities remain, as they have been since the inception, the driving force of the financial independence journey.
At the time of the first detailed review of in mid-2020, the equity portfolio stood at $1.2 million. By August 2022, that figure had grown to $1.7 million—around a 41 per cent increase.
The chart below highlights the progress of the equity portfolio in nominal value terms over the past nine years.
