Most men thought it would come, but no man prepared for it; no man considered it would come like a Thief in the night. . . . They have dreamed out their dream, and awakening have found nothing in their hands.
Daniel Dafoe
This is my one hundred and twelfth 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 | $931,054 |
| Vanguard Lifestrategy Growth Fund | $47,355 |
| Vanguard Lifestrategy Balanced Fund | $82,469 |
| Vanguard Diversified Bonds Fund | $93,420 |
| Vanguard Australian Shares ETF (VAS) | $648,615 |
| Vanguard International Shares ETF (VGS) | $954,738 |
| Betashares Australia 200 ETF (A200) | $332,674 |
| Gold ETF (GOLD.ASX) | $296,460 |
| Bitcoin | $1,096,718 |
| Plenti Capital Notes | $84,000 |
| Financial portfolio value (excluding Bitcoin) | $3,470,785 (-$208,956) |
| Total portfolio value | $4,567,503 (-$136,493) |
Asset allocation
| Australian shares | 29.5% |
| Global shares | 30.2% |
| Emerging market shares | 1.1% |
| International small companies | 1.3% |
| Total international shares | 32.6% |
| Total shares | 62.1% (-17.9%) |
| Australian bonds | 2.8% |
| International bonds | 3.7% |
| Total bonds | 6.5% (+1.5%) |
| Gold | 6.5% |
| Bitcoin | 24.0% |
| Gold and alternatives | 30.5% (+15.5%) |
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 continued its sustained period of losses, the longest period of losses in the headline portfolio record to date.
The overall portfolio recorded a loss of $136,000, or 2.9 per cent.
The traditional financial asset portfolio experienced higher losses, of around $209,000, or 5.7 per cent. This fall represents the second largest monthly loss in financial assets, in percentage term after March 2020. In nominal dollar terms, it is the largest monthly loss the financial portfolio has ever incurred.
The combination of these two results means that at a portfolio level, the month was unremarkable, due to rises in the value of Bitcoin significantly offsetting broad losses in traditional financial assets. Yet when only the financial portfolio is considered, the losses were unusually high relative to any events since 2020.
The chart below provides the performance of both the full and ‘financial assets only’ portfolios since the commencement of the journey.
The dominant theme of markets has been volatility and losses, as macro-economic conditions and expectations deteriorate around geopolitical conflict and disruption in the Persian gulf.
While the value of bitcoin holdings have increased around 7 per cent across the month, the value of gold holdings have declined sharply, by 9 per cent. This fall in gold perhaps reflects some forced selling from previously significant state holders, and expectations of higher interest rates to respond to expected inflationary forces associated with oil and supply chain disruptions.
Australian equities have fallen around 7.2 per cent across the month, while global equities have also fallen, by 4.3 per cent.
This picture of generally correlated sharp asset movements is a common marker of financial market stress. As this occurred, however, the correlation between bitcoin holding and the financial portfolio have turned negative, and bitcoin has at least temporarily become a ‘negative beta’ asset, moving in the opposite direction to other financial assets.
As March closes, so does the the first quarter of the financial year. This means that quarterly distributions are being finalised across the ETF and retail fund holdings. Based on past average payouts and some estimated ETF distributions, it is projected that the portfolio will generate around $20,000 in total distributions in this quarter.
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.
Fixing the plot: tracking portfolio income, distributions and expenses (2017-2026)
For the past six years portfolio updates have generally included a comparison of portfolio distribution and expenses, inspired by a similar chart in the classic financial independence guide, Your Money or Your Life published in 1992.
More recently, I have added in an estimate of portfolio income using the assumed safe withdrawal rate, and even demonstrated the impact of superannuation assets strictly outside the portfolio on this measure.
Typically this graph is examined on a month by month basis, observing small changes.
Stepping back and looking more closely at the data of close to a decade, however, may provide a different perspective on the progress of the financial independence journey, and possible trends for the future.
Data and limits
The analysis used in this chart below bears some explanation.
The chart measures are few different series:
- distributions, which are averaged on the trailing three year basis of actual distributions (noting these can include paid out capital gains)
- total expenses, which are also a moving three year average of actual credit card spending, with the addition of a regularly updated notional monthly allowance for other large fixed expenses.
- an assumed safe withdrawal rate from the financial assets portfolio (e.g. all reported portfolio assets – bitcoin holdings), this value can be viewed as the notional ‘safe withdrawal income’ currently provided by financial assets in the portfolio, and is estimated on a three-month moving average basis.
- an assumed safe withdrawal rate from the ‘all financial assets’ portfolio (as above, but adding in superannuation fund holdings not typically reported in each portfolio update).
Each of these series is a monthly nominal figure, with the partial exception of the total expenses series.
By construction, this is derived from an regularly updated current estimate of large fixed expenses (i.e. real $2026), added to a purely nominal historical record of credit card spending reaching back to 2017. This has the effect of slightly inflating past estimates of total expenditure, though this impact is small, as around 80 per cent of all spending is captured in the nominal credit card figures.
The assumed safe withdrawal rates are derived using the selected rate of 3.45 per cent, consistent with the portfolio plan. In the case of the ‘all assets’ portfolio income series, it is noted that this does include superannuation assets that are not currently accessible, and so it remains a notional estimate until preservation age is reached.
Longer-term trends in portfolio income, distributions and total expenses
The overall picture presented in the graph can be described as follows.
Distributions from the portfolio grow with some consistency as the investment portfolio expanded, rising from around $2,400 per month in 2017 and reaching a peak in 2022 of around $8,500. They then declined and for the past two years have averaged at between $7,000 to $8,000 per month.
This has coincided with changes in the structures of the Vanguard retail funds in the portfolio which may have limited capital distributions, falls in interest income and a gradual increase in the role of international equities with lower dividend payments.
Interestingly, distributions exceeded total expenditure for around three years between 2021 and 2024. This is even as they exceeded estimates of the total safe withdrawal income that could be drawn from the portfolio, a circumstance that persisted from 2017 to 2024. For a short time in 2022, in fact, distributions were so unusually high that they exceeded measures of the safe rate of withdrawal of the broader financial ‘all assets’ portfolio, which included significant superannuation assets. In other words, the level of distributions provided a falsely optimistic, and potentially quite unsustainable guide to available income to meet living expenses.
Total expenses began at around $8,100 in January 2017. Expenditure gradually dipped through the pandemic impacted years, reaching its trough around $6,800 in early 2022, before steadily expanding to nearly $9,000 by March 2026.
Across the full nine-year period, by this measure, expenses rose by 10.4 per cent. Across the period 2017 to 2020, significant and active cost savings were being targeted through optimisation of a number of fixed cost items, something that has not been undertaken with the same ardour since 2020. This likely contributed to the relatively flat expenses measures of that period.
The investment portfolio safe withdrawal measure tells a more straightforwardly positive story. Beginning at $2,766 per month in January 2017, it crossed the total expenses line in 2024 and now sits at $10,335 — a nominal increase of more than 270 per cent over the period. The pattern is of steady growth, with occasional small draw downs, or periods of relative flat performance, such as across 2021-22. Around March 2024, ‘safe withdrawal’ investment portfolio income began exceeding both expenses and distributions.
A similar trajectory, from a higher base and to a higher final estimate, is described by the all financial assets portfolio income line. This starts at around $4000 per month in 2017, and now stands close to $14,000, growing more than 240 per cent through the period. It exceeded the total expenditure series in early 2021, signifying an early achievement of a hypothetical of financial independence from that time. The practical constraints on superannuation access, however, means that the accessible portion of this figure remains lower.
Unpicking nominal and real trends in purchasing power
Observing the broad trends in nominal figures above, it could be tempting to terminate the analytical question, with the answer that independence had clearly been secured.
This may be the case, but doing this would risk falling victim to the nominal ‘money illusion’. Nominal dollar values, in this context, are a starting point, not a conclusion. What should matter to individuals is sustaining real purchasing power — that is, what a dollar of income actually buys in goods and services relative to the past.
Over the period from 2017 to 2026, cumulative CPI inflation in Australia averaged 3.2 per cent per annum, or around 32.7 per cent over the period.
This means that, for example, nominal expenses would have need to have grown to around $10,800 from $8,100 just to maintain the same standard of living. This did not occur, pointing to the fact that while over the period expenses grew in nominal terms, in real after inflation terms, expenditure actually declined around two per cent per year.
Plotting past courses: three windows into trends in distributions, expenses and portfolio income
Applying the focus to trends in real terms therefore has the capacity to let a fuller view of the underlying data trends to be reached.
Table 1 below sets out the real annual growth in distributions, expenses and portfolio income on a portfolio only or ‘all assets’ basis across three distinct time periods.
The first is the full period of records since 2017, to help undercover broader trends across a decade.
The second is the last four years, to understand patterns in the post-pandemic recovery period.
The third is the most recent approximate two year period since the financial independence target was formally reached. This third, shorter, window might be informative of more recent trends, picking up some of a period of a part-time work engagement from last year.
Table 1: Real annual growth – distributions, expenses and portfolios across selected periods
| Measure | Full Period 2017-2026 | Last 4 years 2022-2026 | Jan 2024 – March 2026 |
| Distributions | ≈ +10.0% yr | ≈ –4.0% yr | ≈ –1.8% yr |
| Expenses | ≈ –2.0% yr | ≈ +4.5% yr | ≈ +3.1% yr |
| Safe portfolio income (Portfolio) | ≈ +11.8% yr | ≈ +11.6% yr | ≈ +10.3% yr |
| Safe portfolio income (All assets) | ≈ +10.8% yr | ≈ +10.2% yr | ≈ +9.0% yr |
Across the full period distributions have grown in real terms by the smallest of any of the measures, at around 10 per cent per year. In the last two periods since 2022, however, distributions have fallen in real terms.
Expenses show the reverse of this trend.
Over the full period since 2017, total expenses have fallen in real terms by nearly two per cent per annum. Looking more closely over the last two periods, however, expenses are up in real terms, quite strongly at 4.5 per cent since 2022. In the most recent period since early 2024, this growth has eased somewhat to 3.1 per cent.
Turning to safe portfolio income, this is a far more consistent story, across each period. In terms of portfolio income from the narrow financial assets portfolio, this grew at 11.8 per cent per annum since 2017. Over the two more recent periods, real annual growth was between 10-12 per cent.
Where superannuation assets are included, a similar set of results occur – with 11 per cent per annum growth over the longer period, but slightly lower growth in the period since January 2024.
The distributions and portfolio income series, and their performance over time, need to be interpreted with a range of factors in mind.
The first and most important of these is the attractive real growth rates reflect relatively consistent portfolio expansion over this time through regular investments. In other words, they cannot be taken to be stable or representative tendencies where the portfolio is not growing strongly based on new investments and reinvestments of distributions.
Yet, as noted in the January update analysis, from a pure mathematical perspective, as the portfolio size grows, new investments are becoming less and less relevant. In turn, this means that going forward, what will be observed will be the ‘true’ underlying real annual growth in portfolio income and distributions. This could easily be half or less than the currently experienced growth rates as this ‘new investment’ factor recedes.
It is critical to bear this in mind as the growth in expenses since 2022 is considered. If the growth in real terms of the safe income potential of the portfolio does not exceed the growth in total expenses, this is a formula for a gradual erosion of capital and living standards.
Keeping an offing: measuring margin of portfolio safety
A different view of the same issue can be gathered from examining the ‘margin of safety’ inherent in monthly estimates of the income produced by the financial portfolio and the broader ‘all assets’ (inclusive of superannuation assets) portfolio.
Table 2 below essentially reproduces the same type analysis presented each month, and the primary chart above, but expresses it in the form of a ‘margin’, i.e. the degree to which total expenses can be met by either distributions, or either narrow or wide versions of ‘safe withdrawal’ portfolio income.
Table 2: ‘Margin of safety’ of distributions, portfolio income and expenditure
| Distributions (actual) | Financial portfolio only | ‘All assets’ financial portfolio assets | |
| Monthly income | $7,746 | $10,335 | $13,933 |
| Monthly expenses | $8,998 | $8,998 | $8,998 |
| Monthly surplus / (deficit) | (–$1,252) | $1,337 | $4,935 |
| Margin of safety | –13.9% | +14.9% | +54.8% |
This shows that:
- Actual distributions will not meet total expenses, even though some will contain elements of distributed capital gains, as well as income
- The financial portfolio assets in the financial independence portfolio will presently meet total expenses, with a margin of around 15 per cent, or $1,300 per month
- A much wider margin of around 55 per cent, or almost $5,000 per month is current present between the notional safe income from the ‘all assets’ portfolio and existing total expenses
It should be noted that market falls in the portfolio value can erode this ‘margin of safety’ as estimated by a notional safe withdrawal rate. As an example, the above estimates are based on a financial market performance which was measured in an aligned point in time to total expenses. This aligned point in time was earlier this month.
Yet, the financial portfolio has actually declined around 6 per cent from this point just a few weeks ago, implying a current monthly surplus of just under $1,000 from the financial portfolio, and a margin of safety closer to 11 per cent today.
Markets may recover in the short-term, or they may not, and further erosion of this margin, or its disappearance is perfectly plausible.
That is, it is possible that major market downturns, particularly those arising from geopolitical events or any subsequent recessions could mean average total expenses start to exceed the notional safe withdrawal rate income from the financial portfolio. In practical terms, this would be an at least temporary ‘loss’ of the status of financial independence against this measure.
At this stage it is difficult to see a reversal of the magnitude that would entirely remove the ‘margin of safety’ when superannuation assets are included in the third column. Again, however, history can provide example of substantial equity market falls approximating even this significant margin of above 50 per cent.
Broad to the beam: risks to the analysis
The stability of the growth trends over time, and to some degree the quantum of the margin of safety discussed above can project an sense of inevitable safety, or irreversibility, over the proceeding to financial independence.
This is an illusion, however, created by the particular market and investing circumstances encountered so far, and the specific choices made to date.
As mentioned, a major risk to the margin of safety currently enjoyed is market volatility through time, and in particular, prolonged significant market falls, of the kind experienced in 2008, 2020, and to some degree, 2022. Each of this has the potential to erode away the moderate margin that exists when the financial independence portfolio is considered on a stand-alone basis.
Closely aligned to this risk of volatility and market falls is the risk presented by sequence of returns.
Falls which are not quickly reversed, occurring at precisely the time when reliance on the portfolio commences in full, have the potential to dramatically affect the sustainability of the portfolio. Protection against this can occur in a number of forms, such as the selection of a safe withdrawal rate that encompasses and has succeeded during previous historical declines, is one form.
Allowing for some flexibility around both expenditure and that rate of withdrawal based on out-turn market performance is another. Retaining paid work for a period during significant market downturns, hence avoiding significant portfolio drawdowns is another option, for those fortunate enough to have this option.
In combination each of these approaches can form a material bulwark against early portfolio exhaustion in most foreseeable market conditions.
A more subtle risk is made clear from the expense trajectory.
Real expenses growth of 3 to 4.5 per cent means over recent periods expenses have been running at much higher levels than CPI. A continuation of this trend, or acceleration, combined with a moderately adverse market environment, would narrow any ‘margin of safety’ quite quickly.
The best way to manage this risk is consciousness in spending decisions, and regular monitoring and adjustment, encouraged by tracking this metric.
Closing observations
Looking over a period of nine years at the progress of distributions, total expenses and portfolio income provides a sense of perspective around the journey since this record, but also highlights a few non-intuitive facts.
Much of the early focus of this record was around quantifying concrete paid out portfolio distributions, as an indicator of the journey’s progress. Yet of the series measured, this has arguably been the most erratic and unstable, and potentially the misleading in multiple dimensions. It always included elements of capital gains, and has contracted even as the portfolio has grown substantially. Over time, it has become a poor proxy for the potential of the portfolio to generate sustainable returns.
By contrast, expenses have largely performed as one might expect, falling in periods of lockdown and conscious spending optimisation, and rising afterwards, as ‘catch-up’ spending and experimentation with life after the achievement of the formal FI goal occurs.
Monitoring and adjusting this level of expenditure, and checking against the capacity of the portfolio to meet it, for early signs of unfavourable convergence will be of key importance. Implicitly, this is what it occurring each month as the update considers these trends briefly.
The analysis shows that, assuming only access to the financial portfolio, a modest margin of sustainable portfolio income over expenses has been achieved over the past two years. Yet present market conditions are delivering a lesson in caution on this score, with the potential for the margin to disappear for an extended time, if serious market retrenchments or dislocations continue in the months and years ahead.
A wider perspective, accounting for the superannuation assets ‘beyond’ the regularly reported portfolio makes clear, however, that a strong margin of safety still exists, a margin substantial enough to likely weather all but the most exceptional financial market conditions. Exceptional conditions, in financial history terms, however, appear to occur with somewhat troubling regularity.
Progress
| Measure | Progress |
| Portfolio objective – $3,250,000 | 141% |
| Financial portfolio income as % of total average expenses (3 yr average) – $108,000 pa | 111% |
| Target equity holding in portfolio – $2,600,000 | 109% |
| Financial portfolio income as % of target income – $112,000 pa | 107% |
Summary
In some senses, the past few weeks have offered uncomfortable echoes of the experience of March 2020, as relatively rapidly the global economy shifted from a period of anticipation of normal conditions, to a rapidly updated set of more negative expectations around economic development.
Almost inevitably, speculations around the shape and trends in global market conditions made at such a point of inflection will turn out to be correct – infected either by a status quo bias, or over-confident extrapolation from current conditions, without adequate reflection around second-order impacts and feedback mechanisms.
The past month’s performance has been relatively unremarkable when viewed as a whole portfolio, but potential exists for significant further reverses in the performance of the equity-dominated financial portfolio.
This month UBS released its annual yearbook of global investment. This reviewed the performance of a range of assets over the extreme long-term – around 126 years of history. The summary version of the report is an excellent primer on the shifts that have occurred in equity market composition over the past century and a quarter, as well as what history so far tells us about the performance of assets under periods of significant inflation.
One of its most apposite findings is that geopolitical risks are less important than economic risks in long-term equity performance, and that the equity premium has generally led to a sustained real returns for broadly diversified equity investments over over the long-term.
The analysis provided in this monthly update on longer term trends in portfolio income, distributions and expenses provide another set of insights into underlying directions in the financial independence journey to date.
The trends set out show that through a period with some equity market volatility, notably in 2018, 2020 and 2022, a steady rate of progress has been made towards a resilient set of assets capable of supporting income generation at around the level of current average expenses. If broader assets that will become accessible over the next decade or so are added to the analysis, a significant margin is present between portfolio income measures and expenses.
These margins no doubt narrowed this month, and may continue to narrow or dissipate entirely if equity market disruption becomes more marked. Even so, trends from 2017 at least would suggest that this is a less likely outcome than eventual recovery, and a continued growth in margins of safety.
Around 306 years years ago, investors, Daniel Dafoe records, woke from their dreams and held nothing in their hands, as the South Sea bubble ended. Many investors may have faintly similar feelings this month, and in the months ahead, as the world and history itself wakes from its own kind of dream.
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 Substack replication of this site 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.
Also, if you are reading this article on a website called “Geldmountain”, please be aware that this and other updates have been reproduced without any contact or permission. Please feel free to view the original site, and subscribe if you wish, here.
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.