For gifts beguile men’s mind and their deeds too.

Nostoi, Fragment 1

This is my one hundred and seventeenth 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	$1,016,625
Vanguard Lifestrategy Growth Fund	$50,179
Vanguard Lifestrategy Balanced Fund	$84,517
Vanguard Diversified Bonds Fund	$89,102
Vanguard Australian Shares ETF (VAS)	$692,260
Vanguard International Shares ETF (VGS)	$1,142,404
Betashares Australia 200 ETF (A200)	$353,868
Gold ETF (GOLD.ASX)	$274,881
Bitcoin	$1,209,294
Plenti Capital Notes	$84,000
Financial portfolio value (excluding Bitcoin)	$3,787,836 (+$74,005)
Total portfolio value	$4,997,130 (+$270,617)

Asset allocation

Australian shares	28.9%
Global shares	32.1%
Emerging market shares	1.1%
International small companies	1.3%
Total international shares	34.5%
Total shares	63.4% (-16.6%)
Australian bonds	2.6%
International bonds	3.5%
Total bonds	6.1% (+1.1%)
Gold	5.5%
Bitcoin	24.2%
Gold and alternatives	29.7% (+14.7%)

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

Comments

The portfolio produced substantial growth this month, increasing by around $270,000 or 5.7 per cent.

This represents the fifth largest monthly growth in nominal dollar terms. The traditional financial portfolio also produced a strong result, increasing by around $74,000.

The chart below sets out the performance of both the full and ‘financial assets only’ portfolios since the commencement of the journey.

Across the month, international equities grew by around 0.8 per cent, with US markets touching new highs within the month. Gold holdings also increased by around 6.5 per cent, reversing broad falls and flatness over the last two months.

Australian equities also performed well, increasing by around 1.6 per cent, while bond holdings remained relatively steady.

Across the month, Bitcoin rose significantly, by 18 per cent. Interestingly, this month it remains in its longest period as a ‘negative beta’ asset experienced since 2017 – at four months. Correlation between the Bitcoin holdings and the broader financial portfolio is also close to the most negative levels since 2019. In other words, Bitcoin is tending to move in the opposite direction to the broadly equity based portfolio.

The month, a small additional 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.

Lessons from 150 years of Australian asset returns

This month I had time to look over a new paper Long-Term Comparative Analysis of The Relative Performance of Australian Asset Classes by Tonkin, Bilson, Brailsford, and Gallagher which uses 150 years of asset returns data to compare returns and correlations across the full set of traditional asset classes, such as equities, property, fixed interest and cash.

Papers of this breadth and depth focus on purely Australian asset records, over such a long historical sampling period are relatively rare. There are a few elements of the paper that provide observations relevant to the investment approach I have adopted on the journey.

The past is another country?

One of the most important relates to the level of historical equity returns, over time, and trends in these as expressed in ‘generational’ cohorts. The overall picture is of a long-term decline in risk-adjusted equity returns, with each generation facing less favourable conditions in realising returns than the one that preceded it. While the equity returns over the full period appear strong, 8.4 per cent per year, this paper raises the question – are they likely to be sustained, given trending lower returns in past decades?

A significant underlying assumption of many FI journeys is the persistence of equity returns over time, with many using straight-line assumptions of yearly growth in equity returns as a tool in multi-decade projections. A more sophisticated discussion in the same area often stresses the ‘episodic’ and clustered nature of returns, and accepts the possibility of long periods of flat or negative equity returns, most frequently in discussions of sequence of returns risk.

There is relatively rarer engagement with another possibility, however: that past returns may not be guides to the future, but largely irrelevant, or actively misleading. If this is true, it calls into doubt whether projections that are based on historical average returns may have an unrealistically optimistic assumption at their heart. In turn, this alters in fundamental ways the mathematical operation of FI, for example, through affecting the timing and nature of compounding returns.

This does not mean that compounding as a hypothesis is itself wrong.

It means the observed growth rate may reflect a combination of genuine compounding dynamics and a historically unusual period of broad market support — low interest rates, strong international equity returns, a weak Australian dollar boosting unhedged international holdings — that has been particularly favourable for the specific asset mix in the financial independence portfolio.

This data demonstrates that humility about forward extrapolations, rather than a reflectively sanguine view that the relative cross-period consistency of the recent record might otherwise encourage.

Equity income: the illusion of stability

This record has produced portfolio income reports since 2017, and for some of the earlier part of the journey, it was comforting to believe that eventually income from an equity dominated portfolio would form a stable basis for future living expenses. Over time, this confidence has decreased.

The Tonkin et al paper provides an arresting reminder that equity income does not provide a safe hedge again inflation.

In fact, over the periods sampled, the paper finds that dividend income – which on average represents only around 40 per cent of the total real equity return – is almost perfectly negatively correlated with realised inflation. Equity returns, however, are made of two components, and the capital gains return does fare significantly better, with a mild negative correlation of -0.28. In other words, the inflation protection components of equity holdings comes almost entirely due to the capital appreciation component of returns.

For approaches which rely on ‘living off dividends’ these findings have stark implications. Such an approach risks being a slow path to locking in declining real living standards, especially in periods of high inflation – such as has been experienced in Australia since 2021.

To some extent, the general flattening off of total distribution income witnessed since FY2022 may be attributable to the findings of this paper. Over time, should the inflation ‘regime’ move back towards a lower-inflation environment, this might suggest this recent trend of flattened distributions could alter.

Diversification logic affirmed

One of the less dramatic but more durable findings in the Tonkin et al. paper is the persistent weakness of correlations between Australian asset classes across the full 150-year record. Equity and property are assessed as nearly entirely independent (correlation of 0.09 to 0.10). Bonds and equity show a modest positive correlation of around 0.24. Bills and equity sit at 0.29. The average pairwise correlation across all asset class combinations is just 0.15.

This matters for the current portfolio design because diversification — across domestic and international equities, bonds embedded within the Vanguard diversified funds, physical gold, and Bitcoin — is a structural assumption underpinning the portfolio allocation rather than an objectively verifiable fact.

The 150-year Australian record provides the strongest available empirical basis for that assumption: low inter-asset correlations are not a recent phenomenon or a product of particular market conditions. They appear to be a persistent feature of the Australian investment landscape across the different inflationary regimes, business cycles, and political environments examined in the paper.

Knowledge is always incomplete, however. Past correlations can provide some information on past asset performance, and return relationships, but the critical determinant of the portfolio from here are the future asset class correlations. These can change through time, and experience long ‘regimes’ which can diverge and change over time.

Here the time period examined is key, 150 years is obviously longer than an individual’s likely investment horizon.

One inevitable lives, invests, and draws income through particular regimes and investment environments. The past, through this paper, can shed light on how assets correlated and performed in similar periods, but limitations remain. No two periods are directly comparable, an army of small and large differences compound and confound neat parallels. So, once again, caution against over-interpretation, and exclusive reliance on the record of the past, is warranted.

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 broadly steady at around $9,000 per month, while total estimated annual expenses fell slightly to around $108,000.

Meanwhile the three year moving average of distributions (the blue line) have continued at around $8,200 per month.

This leaves the monthly deficit between total expenses and average distributions continuing to narrow to about $800.

The ‘SWR portfolio income’ measure increased to around $10,700 per month, due to stronger growth in the financial portfolio.

As a result, this measure of income is around $1,700 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 $5,500 per month.

Progress

Measure	Progress
Portfolio objective – $3,250,000	154%
Financial portfolio income as % of total average expenses (3 yr average) – $108,300 pa	121%
Target equity holding in portfolio – $2,600,000	122%
Financial portfolio income as % of target income – $112,000 pa	117%

Summary

This month has been a relatively quiet one, with project work winding down for a pause, allowing the re-establishment of more relaxed rhythms of life – and the re-adjustment after a period of near full-time work to an abundance of time.

The additional time has been spent on personal pursuits, exercise and long walks listening to Eric Cline’s 1177: The Year Civilisation Collapsed, addressing the end of the late Bronze age in the Mediterranean. This follows the through line of stories of ‘The Sea Peoples’ mentioned in ancient sources, tracing references and archeological evidence, who are partially referenced as a plot device in the recent adaptation of the Odyssey.

At heart, the closing of this period was likely a gradual self-propagating system collapse, informed by multiple sustained external pressures, and compounded by a range of contingent events and the fragility of emerging trade links. At a time where powerful states vie for control and annexation of the entry to the Persian Gulf, sending trade disruptions cascading across global supply chain, the history of this era seems strangely relevant, at 3,200 years distance.

This is not to say the same fated is destined, if anything, history teaches that the default is human and civilisational resilience through changes, even as economic forces impose hardship. The very breadth of global trade linkages does not automatically reduce fragility of financial investment terms, but nor does a narrowing down and crude attempts at the placement of assets outside of its forces.

This point is made in another article in a way far more directly linked to the goals of financial independence in this article (h/t Aussie HiFIRE) about the issue of purchasing power, CPI and retirement. The piece carefully pulls on the threads of two common ideas: that outperforming CPI is a sound proxy for sustaining real purchasing power and that Australia denominated asset holdings and cash are automatically a reasonable ‘match’ of Australian dollar liabilities experienced by those living off investment income.

The issue of the meaning of sustaining real purchasing power is likely to assume even greater salience in coming years. Disruptions in the US bond market, policy-based responses to these, currency fluctuations, and geopolitical stressors on the global monetary, financial and trade systems seem to be building up – bringing with them greater risks of volatility. As the monthly performance of Bitcoin and to a lesser extent gold indicate, not all of this volatility will necessarily be unidirectional.

In the short term, both the financial portfolio and alternative holdings have combined to deliver an apparent ‘gift’, in the form of exceptional monthly growth of 5.7 per cent. As this month closes, however, such gifts can temporarily deceive us, mislead our thinking, and obscure risk, the unwelcome guest temporarily waiting outside our halls, but destined to enter.

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.