Like unto gulls, they were borne on the waves around the black ship.Homer The Odyssey Bk.XXII 403-425
This is my one hundred and eighteenth 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).
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 $2,600,000.
Portfolio summary
| Vanguard Lifestrategy High Growth Fund | $1,004,618 |
| Vanguard Lifestrategy Growth Fund | $49,528 |
| Vanguard Lifestrategy Balanced Fund | $83,310 |
| Vanguard Diversified Bonds Fund | $87,561 |
| Vanguard Australian Shares ETF (VAS) | $676,200 |
| Vanguard International Shares ETF (VGS) | $1,176,321 |
| Betashares Australia 200 ETF (A200) | $345,949 |
| Gold ETF (GOLD.ASX) | $265,987 |
| Bitcoin | $1,328,066 |
| Plenti Capital Notes | $84,000 |
| Financial portfolio value (excluding Bitcoin) | $3,773,474 (-$14,362) |
| Total portfolio value | $5,101,540 (+$104,410) |
Asset allocation
| Australian shares | 27.8% |
| Global shares | 32.0% |
| Emerging market shares | 1.1% |
| International small companies | 1.2% |
| Total international shares | 34.3% |
| Total shares | 62.1% (-17.9%) |
| Australian bonds | 2.5% |
| International bonds | 3.4% |
| Total bonds | 5.9% (+0.9%) |
| Gold | 5.2% |
| Bitcoin | 26.0% |
| Gold and alternatives | 31.2% (+16.2%) |
Presented visually, the pie chart below is a high-level view of the current asset allocation of the full portfolio.
Comments
The portfolio continued to grow at the headline level this month, increasing by around $104,000, or 2.1 per cent.
This growth, however, was entirely due to a re-pricing of Bitcoin holdings, with the underlying traditional financial portfolio contracting marginally, with losses of $14,000 or 0.4 per cent.
The chart below sets out the performance of both the full and ‘financial assets only’ portfolios since the commencement of the journey.
Australian shares declined by around 2.4 per cent across the month, with gold also falling by around 3.2 per cent.
A key trend over the month was the continuing grinding higher of long-term government bond yields, and cash rates, with the former being partly reflected in the value of bond holdings falling by 1.7 per cent.
Across the month, international equities grew by around 1.9 per cent, with US markets touching new highs within the month.
Bitcoin rose significantly, by 9 per cent, with its performance continuing to diverge from the general performance of the traditional financial assets.
This month, a small new investment was made in global equities (through the Vanguard exchange traded fund VGS), in accordance with the decision to regularly reinvest excess distributions and cash holdings.
The close of the third quarter of the year means that distributions from the ETFs and funds held will accrue and be paid out in coming weeks.
Initial indications of the ETF providers’ estimated distributions show that payments are slightly above median payouts. Should the Vanguard retail funds making up the remainder of the portfolio display only average long-term performance, they suggest total final third quarter distributions of around $21,000, about $1,300 or 7 per cent higher than projections.
What the years have gathered: trends in taxable investment income
This month I completed my tax return for the last financial year.
This taxation record data provides an independent lense through which to track trends in investment income, and progress towards the financial independent objectives set. The primary way progress is tracked is through progress to the goal, and biannually, through analysis of portfolio income, however, formal taxation records provides a useful ‘cross check’ on the trends observed there.
There are a few caveats that need to be borne in mind using this data and performing these cross-checks.
Taxable investment income does include returns from some cash holdings that are not formally part of the financial independence portfolio, which this year have produced around $11,000 of interest. This is not therefore attributable to the financial portfolio as normally described in this record, on the other hand, it is tangible income received, albeit marginal once considered in real (i.e. after inflation) after tax terms.
Many wanderings: trends in the level and growth taxable investment income
This past financial year taxable investment income was around $107,000, the highest level ever recorded, and a 13.5 per cent increase over last year.
The measure is best viewed as a ‘pre-tax’ total, as it does not attribute any value at all to franking credits, effectively pre-paid tax credits distributed by Australian equities. This measure is the sum of the interest, dividends, income from partnerships and trusts, foreign income tax return items. It excludes capital gains of any kind.
This year, the result reported above is around $5,000 below the target level of portfolio income of $112,000.
Adding the value of franking credits back in arguably better reflects the ‘face’ value of these franking credits to an Australian salaried taxpayer, who can use them to offset tax payable.
By this estimation approach, equivalent pre-tax income is around $121,000, tripling over the period of the journey in nominal terms. This figure slightly exceeds the target portfolio income.
Holding course: relationship between investment income and the financial portfolio
The growth trajectory of investment income appears strong over time, and particularly sharp through the period since FY2020. This is trend is obviously, however, critically related to size of financial assets working to product these assets.
The chart below makes this linkage explicit by mapping the average level of the traditional financial assets in the portfolio over the financial year in question with the level of investment income produced in that year.
For FY2026, as an example, taxable investment income of around $107,000 was produced from a financial assets portfolio that was valued at approximately $3.3 million through the year.
The relationship is quite matched, with some variations through some years, indicating that the growth in income has generally followed the emergence of a growing base of assets producing income.
Importantly, underpinning this growing base, there have been different drivers through time, first direct savings, then investment income emerging as a supplement to new investments, and finally, the emergence of investment income equivalent to a stand-alone Australia adult full time salary.
The absolute ‘yield’ of taxable investment income produced the financial assets has been relatively stable, with a median value of around 3.4 per cent over the past 16 years. This year the yield is slightly lower, at 3.3 per cent.
Two winds into the same sail: capital gains and investment income
The taxation records also allow for tracking of measures of capital gains through time, on a total and net basis. This provides insights into the levels of realised capital gains in the financial portfolio through time, including in terms of the concept of total returns.
What can be noticed in this series is the relative volatility of net capital gains through time.
In some years – such as FY2018 and FY2021 – these have made up around 40 per cent of the total distributions (i.e. income plus paid out realised gains) received in a year. More recently these have trended back to around 20 per cent.
Interestingly, in the period of this record – effectively FY2017 onwards – investment income has grown at around 13 per cent a year, where capital gains distributions have compounded at something just under 4 per cent per annum. This tells a story which sits somewhat at odds with the growth orientation of the financial portfolio, in that income, rather than capital gains, has been driving growth in total returns.
Investment income has also showed considerable stability never declining in two consecutive years in the period since FY2015.
The same considerations discussed above suggest that an alternative way to view this series is by adding in the value of franking credits, to track what might be termed loosely as the ‘total financial benefits’ produced by the financial portfolio each year. This is the sum of taxable investment income, net capital gains realised, and the value of franking credits.
This year this measure totals around $140,000, which is by way of comparison is around the average level of salary for a Commonwealth public servant in a central agency at a junior executive level.
As noted in prior summaries, to the extent that the net capital gains contains distributed capital gains arising from fund internal dynamics, payouts or other anomalies, the ‘total financial benefit’ measure should not be considered as marking a sustainable level of portfolio income. Withdrawing an amount equal to this measure could well result in portfolio exhaustion over time.
Rather, it is a raw measure of the actual full financial benefit in pre-tax terms that the portfolio happens to have generated in a year, some of which may need to be re-invested to sustainably maintain the real value of the portfolio.
Many devices: the composition of taxable income
The different components of the investment income measure reported in aggregate above have changed significantly over the journey.
The chart below looks next at the composition of the investment income measure, broken down by tax reporting category, and once again including franking credits.
The changes in this composition over time reflect the specific set of investment vehicles chosen, in particular the use of funds and exchange traded funds that report under the partnerships and trusts component of tax returns (marked in green).
With the expansion and focusing on greater international exposure in recent years, the absolute and proportional amounts of foreign income (purple) have expanded, from FY2023 onwards. Foreign income has doubled over the last five year in nominal dollar terms alone.
As the portfolio has expanded, and the Australian equity component of the portfolio has produced franked dividends, the value of franking credits (orange) received has grown substantially. This year the value of credits received made up approximately 11 per cent of the total investment income accrued, a little below the trends over the past 5 and 10 years.
An area of some greater variation is interest income (blue). As noted, this includes cash holdings outside of the financial portfolio.
This steadily declined from FY2014, until it effectively disappeared across FY2022 and FY2023. The cause of this was the liquidation of some cash investments (in high interest savings accounts), and lower interest rates.
Since FY2023, however, interest income has moved to become both material in its own right, and reached the highest nominal levels ever experienced historically. This has occurred as cash reserves set aside to support approaching financial independence were built up and as interest rates on cash holdings increased. As this cash reserve now sits at around the level desired, future variability in this measure might be expected to be primarily related to interest rates for at call cash accounts and timing variations.
Measuring the real growth of investment income: choice of benchmark
A perspective recent analyses has returned to repeatedly is the difference between measuring nominal and real values. This is essential to answer the question: to what extent has investment portfolio income or performance reflected real after inflation results, or just the impact of inflation?
Failing to ask this question, and only considering nominal investment income over periods of decades, could lead a seeker of financial independence to experience receiving steadily higher nominal income over time, but gradually being required to adopt a lower standard of living in real terms, as inflation or monetary benchmark growth take their invisible toll.
The chart below restates the taxable investment income including franking credits in constant 2026 dollars. This has the effect of flattening the growth trend appreciably compared to prior charts, and doing better justice to early progress.
Despite this the ‘backended’ nature of the journey, arising from the impacts of compounding along the way, is still evident.
As an example, 75 per cent of the real measured income represented in the chart has arisen in the past 10 years, and around 50 per cent in the last five years. Mathematically, this conversely means that all of the income received in the blue bars on the left of the chart, from FY2007 to FY2016 – before this record started – represent only 25 per cent of all income so far received from these financial assets.
A different appreciation of the same underlying point is evident by looking at an alternative measure – the taxable investment income produced per ordinary working hour through a year, again expressed in constant 2026 dollar terms.
This illustrates that in taxable income terms, the underlying financial assets has delivered a ‘salary increase’ of over 9 per cent compared to last year, up to around $54 per hour. This rise was delivered silently, without any requirement for longer hours, deft navigation of office politics, increased responsibilities, or exceptional performance.
Annual variations and starting points matter here when measuring this rise, so that the real growth over the past four years has been the equivalent to a more modest 5 per cent per annum, from the unusually high level of taxable income received in FY2022.
The alternative measure to use in estimating after inflation income trends is the growth in the broad monetary base itself (M2). This might be thought of as deflating nominal dollar trends using the number of individual monetary ‘claims’ (i.e. dollars) present in the broad economy in a given year.
The table below compares the index of taxable income (including franking credits) with CPI and M2 since FY2017. It also illustrates on the two right hand columns the cumulative ‘gap’ between each measure and the income, where a negative value represents income falling behind movements in either CPI or M2.
Comparing taxable investment, M2 and CPI – FY2017 to FY2026
What this shows is:
- Taxable income has had positive real growth after inflation across the period, growing faster than CPI or M2, with the caveat that this was largely during a period of new investments being made
- The outperformance looks strong (around 10 per cent p.a.) compared to CPI, but it noticeably less pronounced compared to M2 (around 6 per cent p.a.), due to the M2 broad money measure growing around 7 per cent annually across the period
- Against the more exacting M2 measure, nominal taxable income would have needed to rise by 80 per cent over the period, just to keep up with the expansion in monetary claims
It is interesting to compare the table above with a similar analysis performed in July on portfolio income. This highlights that taxable investment income has increased at a much faster rate across the period – at 13 per cent per annum, compared to a relatively modest 5.2 per cent growth in portfolio distributions.
Observations
Much of the focus in looking at investment income over time has been on the actual distributions received, and looking through these to form judgements about the income generating capacity of the portfolio as a whole. Distributions have the benefit of being tangible, received and definite, in a way that an assessed taxable investment income is not.
There are artificial biases and exclusions that argue against the too close and precise reliance on the taxable income measure for planning purposes.
As an example and as noted, it picks up interest income, which even though substantial in nominal terms, in real after-tax and inflation terms, is not what could be classified as an investment return. It also ignores (as does the distribution measure) the fact that even assuming a relatively low yield on superannuation holdings, these might easily generate a further $40,000 per annum in notional income (currently being reinvested invisibly by the relevant indexed pension fund).
Despite this, when looked at alongside other data, broad trends that are informative do flow from the taxation data. As an example, there is a quite high correlation, around 0.8 (measured on growth), between variations in distributions and taxable income measures. So, imperfectly, these two series tend to move in step.
An interesting trend to observe is that while portfolio distributions exceeded all measures of taxable income (inclusive of franking credits, and net capital gains) at times up to FY2021, this has not occurred in the past five years. In other words, the tendency of distributions to pay out more than the amount of taxable investment income generated that year has reduced, potentially as a result of the changing composition of investments and international exposure.
Looking through the lens of real or nominal values is an essential part of understanding trends over a 20 year period, due to the cumulative distorting impact of inflation.
Here, the results are quite positive, if caveated. Taxable income has grown much faster than CPI or M2. The test from here will be whether this continues as the force of compounding increases. This is not assured, however, as sequence of return risk has a critical impact in phases of transition from contributions to potential draw downs.
Trends in average distribution, portfolio income and expense measures
Every month I examine the trends across average distributions, notional portfolio income and total expenses, with the analysis below focusing on the financial portfolio only, consistent with previous updates.
The chart below measures distributions (the blue line) against an estimate of total expenses (the red line).
The total expenses figure is based on actual credit card spending, with the addition of a regularly updated notional monthly allowance for other large fixed expenses.
The chart also has a series of ‘safe’ portfolio income (in green). This is calculated as the product of the financial portfolio (i.e. the portfolio excluding Bitcoin) and the selected safe withdrawal rate of 3.45 per cent.
This value can be viewed as the notional ‘safe withdrawal income’ currently provided by financial assets in the portfolio. It is estimated on a three-month moving average basis.
This month average total expenses remained steady at around $9,000 per month, while total estimated annual expenses also stayed at around $108,000.
Meanwhile the three year moving average of distributions (the blue line) have continued level at around $8,200 per month.
This leaves the monthly deficit between total expenses and average distributions at about $800.
The ‘SWR portfolio income’ measure slightly increased to around $10,800 per month, due to stronger average growth in the financial portfolio in the last three months.
As a result, this measure of income is around $1,800 per month higher than total expenses, meaning a further expansion in the positive ‘safety margin’. If notional income from superannuation investment assets is added to the estimate, this margin grows to around $5,600 per month.
Progress
| Measure | Progress |
| Portfolio objective – $3,250,000 | 157% |
| Financial portfolio income as % of total average expenses (3 yr average) – $108,300 pa | 120% |
| Target equity holding in portfolio – $2,600,000 | 122% |
| Financial portfolio income as % of target income – $112,000 pa | 116% |
Summary
This month there has been ample new data to think about in the transition of the portfolio from a investment-led growth phase, to a later phase where past investments and the compounding of existing assets assume a greater role in momentum.
Potentially there are only a few more months of surplus cash being added to the portfolio from a part-time project-based engagement, and it is possible that within 6 to 9 months there will be effectively no new investments flowing in to support the financial independence objective. Equally, these may be the last quarters of portfolio distributions that are mostly available for reinvestment.
As this transition comes into view a number of potentially historic global trends are arguably signalling some possible phase shifts in markets and the macro-economic environment.
The first of these are high valuations in US equity markets in historical terms, and the second is the rapid surge in bond yields on developed country government debt over the last year or so, bringing current yields up to levels not seen for up to 15 years in some cases. Cash rates, too, have risen closer to historically normal levels prior to 2008. Capital expenditure booms in areas associated with artificial intelligence developments and data centres are contributing towards this increase in the global cost of capital.
It is quite possible that these trends will continue, or resolve themselves in what market economists might refer to as a disorderly event, or process of events. Some perspective on how this may occur is provided by this recent report Exponential Wealth, an interesting collected series of academic articles discussing data on US and global bond and equity returns and performance over past centuries. It examines, in particular, the impacts and effects of prolonged market drawdowns, drawn from US equity market histories.
In my investment journey there have been perhaps three market events that could be classified as significant market drawdowns: the initial ‘tech wreck’ of the early 2000s, leading to a lost decade of US returns, the 2008-09 Global Financial Crisis, and the sharp market reactions around March 2020. Each of these occurred at quite different phases of the journey – the first at the initial steps, the second at a time where a modest portfolio had just been built, and the third closer to the end of the journey. For this reason, I experienced each quite differently. I anticipate this will also be the case for any market drawdowns in the years ahead – after new investments have ceased.
For many of the key charts in the analysis of taxable income trends, I now have 20 years of data. The same length of time, supposedly, as the wily Odysseus took to wend his way back by sea from the gates of Troy, to his island home of Ithaca. For the portfolio, however, there is no set story. The waves yet to come are unknown; where exactly they bear us, also unknown.
Note for readers
Over the past two years, 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 and maintain a mirror Substack which you can subscribe to and have 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.