Who dares not speak his free thoughts is a slave.

Euripides The Phoenician Women

This is my twenty-third portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My current objectives are to reach a portfolio of:

• $1 476 000 by 31 December 2018. This should produce a real income of about $58 000 (Objective #1).
• $2 041 000 by 31 July 2023, to produce a passive income equivalent to $80 000 in 2017 dollars (Objective #2)

Both of these are based on a real return of 3.92%, or a nominal return of 7.17%

Portfolio summary

• Vanguard Lifestrategy High Growth Fund – $691 943
• Vanguard Lifestrategy Growth Fund  – $40 358
• Vanguard Lifestrategy Balanced Fund – $73 033
• Vanguard Diversified Bonds Fund – $100 197
• Vanguard Australia Shares ETF (VAS) – $72 441
• Betashares Australia 200 ETF (A200) – $118 299
• Telstra shares – $4 072
• Insurance Australia Group shares – $17 535
• NIB Holdings shares – $6 636
• Gold ETF (GOLD.ASX)  – $79 033
• Secured physical gold – $12 691
• Ratesetter (P2P lending) – $33 553
• Bitcoin – $98 423
• Raiz app (Aggressive portfolio) – $ 12 318
• Spaceship Voyager app (Index portfolio) – $1 397
• BrickX (P2P rental real estate) – $4 837

Total value: $1 366 766  (-$57 077)

Asset allocation

• Australian shares –  39%
• International shares – 18%
• Emerging markets shares – 2%
• International small companies – 2%
• Total shares – 61.6% (3.4% under)**
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.0% (1.0% over)
• Australian bonds – 8%
• International bonds – 9%
• Total bonds – 17.2% (2.2% over)**
• Cash – 1.3%
• Gold – 6.7%
• Bitcoin – 7.2%
• Gold and alternatives – 13.9% (1.1% under)

Comments

This month has delivered the largest monthly fall in the overall portfolio level since commencement of the journey. This has resulted from the sharp falls in Australian and international share values from mid-October. The falls have made it unlikely that Objective #1 will be reached by the end of this year as was the target, which is a slight disappointment given how close to the target I was just last month.

The most significant effect this has had is to make me more restless to continue to dollar-cost average into the market, and take advantage of these better valuations. Academic research and history reinforces that key drivers of valuations, such as the equity risk premium (pdf), are variable over time.

The falls also made me curious to examine the record of volatility in the portfolio, to place the events of this month in context. The below graph provides a raw ‘change in value’ measure of the portfolio since the start of this journey. For simplicity, it includes contributions, on the basis that outside of July and December distributions, market movements tend to dominate contributions.

The data is instructive on the issue of volatility in a diversified portfolio. It shows that:

• the portfolio has experienced five down months and 17 monthly gains over nearly two years;
• the median monthly change in value is around $24 000, or 2.2 per cent of the total portfolio – however, gains around this size have only occurred five times;
• the larger falls and gains have each been associated with movement of the Bitcoin component in late 2017 and early 2018, rising and falling respectively;
• last months fall is the largest ever fall, however, it’s worth recording that this has occurred in a generally low volatility environment for shares.

Investment through this period has been almost exclusively in the Betashares A200 ETF, with much smaller ongoing contributions to Raiz and Spaceship. Third quarter dividends of around $2300 from VAS and A200 were reinvested. Receiving significant dividend payments on a quarterly basis is a pleasant and novel experience arising from my entry into ETFs, as most of my significant Vanguard managed fund investments only pay distributions twice a year.

This month I’ve also been following – and occasionally participating in – the ongoing debate on the advantages and disadvantages of Listed Investment Companies compared to index funds or ETFs. The ever thoughtful Pat the Shuffler is convinced there is a ‘cultural shift’ occurring towards LICs, and is adopting that approach for new investments. For my part, I am not as sure that the additional manager and concentration risks are worth taking for any of the claimed benefits.

As one example of the concentration risk mentioned, LICs make active choices to pick equities to be in their funds, including some, excluding others. Such an approach, however, is fraught with the risk of including under-performing equities, and excluding potential out-performers. Such decisions can have very significant impacts on portfolio performance. To illustrate, one study found that for the US market, if an investor had missed investing in the top 20 per cent of equities, total portfolio return between 1989-2015 would have been zero per cent. Nonetheless, the debate has made me curious about the record and conceptual basis of Listed Investment Companies, even if unconvinced at the moment of the added value.

Progress

Progress to:

• Objective #1: 92.6% or $109 234 further to reach goal.
• Objective #2: 67.0% or $674 234 further to reach goal.

Summary

The market movements this month may have either set achieving my targets back a few months, or could herald the beginning of a more substantial weakness which defer their achievement for much longer periods. At the moment, I am relatively unconcerned about missing my target by a few months. I have reached this period of volatility, however, still underweight on my equity allocation, so decisions from here will focus on the path to the right balance of international and domestic shares.

In the period of weakness my allocation to gold – with its long and storied history – has provided some stability and cushioning of overall portfolio volatility, as have bonds. Storms may be ahead, but with each passing investment, the freedom to speak thoughts and weather the consequences grows.

** These variances have been recalculated from this month onwards to be in reference to my longer term allocation targets for equities and bonds (65/15), rather than a previous lower transitional target of 61-62 over the past two years.

Soon you will have forgotten all things: soon all things will have forgotten you.

Marcus Aurelius Meditations, Book VII: XXI

This is my twenty-second portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My current objectives are to reach a portfolio of:

• $1 476 000 by 31 December 2018. This should produce a real income of about $58 000 (Objective #1).
• $2 041 000 by 31 July 2023, to produce a passive income equivalent to $80 000 in 2017 dollars (Objective #2)

Both of these are based on a real return of 3.92%, or a nominal return of 7.17%

Portfolio summary

• Vanguard Lifestrategy High Growth – $740 894
• Vanguard Lifestrategy Growth  – $ 42 541
• Vanguard Lifestrategy Balanced – $ 75 812
• Vanguard Diversified Bonds – $100 542
• Vanguard ETF Australia Shares ETF (VAS) – $79 787
• Betashares Australia 200 ETF (A200) – $90 985
• Telstra shares – $4 252
• Insurance Australia Group shares – $18 285
• NIB Holdings – $7 020
• Gold ETF (GOLD.ASX)  – $75 242
• Secured physical gold – $12 097
• Ratesetter (P2P lending) – $34 411
• Bitcoin – $101 289
• Raiz app (Aggressive portfolio) – $ 12 916
• Spaceship Voyager app (Index portfolio) – $1 433
• BrickX (P2P rental real estate) – $4 830

Total value: $1 423 843 (+$9 194)

Asset allocation

• Australian shares –  39%
• International shares – 18%
• Emerging markets shares – 2%
• International small companies – 3%
• Total shares – 62.3% (2.7% under)**
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.1% (1.1% over)
• Australian bonds – 8%
• International bonds – 9%
• Total bonds – 17.0% (2.0% over)**
• Cash – 1.3%
• Gold – 6.1%
• Bitcoin – 7.2%
• Gold and alternatives – 13.2% (1.8% under)

Comments

The portfolio has made a smaller advance this month than previously, around a $10 000 increase, leaving around $50 000 remaining to Objective #1 due at the end of the year. This month lower expenses and a bonus has meant more cash to invest, so it is bracing to know those amounts have been added to the portfolio, without much visible effect on total value.

Those acquisitions will tell in future distribution payments, however. Those are due to appear soon from the Vanguard bond fund, the Vanguard Australian shares ETF as well as the Betashares A200 ETF, where most of my recent investment effort has gone. Quarterly payments used to be something barely noticed most years. With movement to greater amounts being invested in ETFs which pay quarterly, however, I am hoping that this year third quarter distributions will actually total enough to allow for a significant one-off reinvestment on their own.

September is also the beginning of tax time in Australia, which has meant a trip to my tax agent, who is retiring (not due to my return, they assured me). My past two posts have focused on the history of my dividend income and expenses based on my records over recent years. Looking back over some of the numbers in past tax returns provides another perspective on the same issues, and one which I still have to fully reconcile back to my dividend records.

The graph below represents trends in taxable investment income. For clarity it is taken from the return items for partnerships and trusts, foreign source income and franking credits (i.e. items 13, 20 and 24, and not including capital gains) over the past eight years.

It shows that taxable investment income at least has not yet reached close to my target Objective #1 of passive income of $58 000, even as in the past year my actual ‘cash in hand’ dividends have reached and exceeded that figure. Measured in percentage terms, better data availability means I can give a much longer series giving a sense of progression over time.

There are no doubt some factors that account for the mismatch between tax return income and received distributions. These could include timing differences, and potentially even errors in how I have added in individual return items. I have particularly sought to avoid double counting and so understatement is also a possibility. The formats and labelling of tax returns are, shall we say, non-intuitive.

This month I have also spent time reviewing evidence on the issue of the right balance between Australian and international shares in my portfolio. Previously, I have not been able to find very good information on this, however, I have recently found an excellent 2013 paper titled Optimal Domestic Equity Allocations for Australian Investors and the Role of Franking Credits published in the Journal of Wealth Management. It has some analysis which seeks to reach some conclusions based on historical market data.

Some key findings of the paper are:

• without franking credit benefits, the past performance of Australian versus international shares would justify a 9-32% domestic allocation;
• with the impact of franking credits, however the optimal allocation shifts to between 32-60%, with higher allocations leading to lower volatility; and
• balancing reducing overall portfolio volatility and minimising the maximum portfolio loss would suggest an allocation to Australian shares in an equity portfolio of around 30-40%.

This analysis is obviously based and dependent on historical data only, and therefore is not necessarily a firm guide to the future. However, to the extent that underlying relationships between Australian and global equity markets remain similar in the future, it does at least provide some data to shed light on the allocation question. There is also an interesting Vanguard note (pdf) on similar questions, that adds the interesting point that this decision needs to also take into account the investor’s overall portfolio allocations.

This month has also been a pleasing period of growth for the blog, as well, with traffic and visitor numbers doubling compared to recent months. So, thank you and welcome to any new readers. Embarrassingly, I discovered one reason only well after the fact was a kind and brief review on the website of Canstar as one of five FIRE bloggers recommended to watch out for.

Progress

Progress to:

• Objective #1: 96.5% or $52 157 further to reach goal.
• Objective #2: 69.8% or $617 157 further to reach goal.

Summary

The research this month will have implications for my future portfolio contributions as I move towards my first goal. Currently, Australian equities make up around 63% of my equity holdings, around 10% more than the portfolio has usually had since inception. This reinforces the potential need to consider global equity ETFs in future investments, and to consider the trade-off carefully between income (dividends) and portfolio diversification. A substantial barrier to this is a lack well diversified global ETF that would avoid exposure to the United States, which appears fully valued.  The world – or US investors at least – appear to have done their share of forgetting.

Regardless, forgetting these darkening clouds in the warming spring weather I have been enjoying walks at lunch-time listening to Aussie Firebug’s weekly listener question podcasts. It’s a great format, and nice to hear some of Firebug’s views applied to listeners’ interesting practical circumstances.

* These variances have been recalculated from this month onwards to be in reference to my longer term allocation targets for equities and bonds (65/15), rather than a previous lower transitional target of 61-62 over the past two years.

Make the best use of what is in your power, and take the rest as it happens.

Epictetus

This is my twenty-first portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My current objectives are to reach a portfolio of:

• $1 476 000 by 31 December 2018. This should produce a real income of about $58 000 (Objective #1).
• $2 041 000 by 31 July 2023, to produce a passive income equivalent to $80 000 in 2017 dollars (Objective #2)

Both of these are based on a real return of 3.92%, or a nominal return of 7.17%

Portfolio summary

• Vanguard Lifestrategy High Growth – $743 491
• Vanguard Lifestrategy Growth  – $ 42 691
• Vanguard Lifestrategy Balanced – $ 76 095
• Vanguard Diversified Bonds – $100 542
• Vanguard ETF Australia Shares ETF (VAS) – $79 787
• Betashares Australia 200 ETF (A200) – $90 985
• Telstra shares – $4 132
• Insurance Australia Group shares – $19 284
• NIB Holdings – $7 824
• Gold ETF (GOLD.ASX)  – $76 095
• Secured physical gold – $12 212
• Ratesetter (P2P lending) – $35 692
• Bitcoin – $106 623
• Raiz app (Aggressive portfolio) – $ 12 910
• Spaceship Voyager app (Index portfolio) – $1 329
• BrickX (P2P rental real estate) – $4 823

Total value: $1 414 649 (+$41 435) 

Asset allocation

• Australian shares –  38%
• International shares – 18%
• Emerging markets shares – 2%
• International small companies – 3%
• Total shares – 61.5% (3.5% under)**
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.2% (1.2% over)
• Australian bonds – 8%
• International bonds – 9%
• Total bonds – 17.3% (2.3% over)**
• Cash – 1.3%
• Gold – 6.4%
• Bitcoin – 8.7%
• Gold and alternatives – 15.1% (0.1% over)

Comments

Overall, the portfolio has now closed above $1.4 million for the first time since the heights of the temporary Bitcoin fever early this year, with growth of over $41 000 this month. This means I am now only around $60 000 away from achieving my first objective. In theory, this could occur within a few short months if markets move positively. Alternatively, a market setback could see it receding back to the target date of the end of this year, and even beyond. The sensation of seeing one finish line approach is interesting.  A summary of the progress of the portfolio through time can be seen below.

From one perspective, it feels like a significant, life-changing milestone is in prospect. On the other hand, however, it leads to pondering with a greater focus than ever before about precisely what that objective would mean, in living standard terms, compared to other objectives.

As an example, I can trace back the goal of providing for a stream of passive income of $58 000 to at least July 2009. Back then, my return assumptions were optimistic, and I envisaged the goal being achievable around 2020. The movement of inflation means that the target of $58 000 is around the median Australian income, but below the mean average. One of the issues I intend to review in January is whether I need to adjust this target to take into account inflation and average income growth from when I originally made it.

My major new investments have focused on Betashares A200, the lowest cost vehicle to build Australian equity exposure. From May of this year, I have invested over $88 000 in this investment vehicle. This has a weighting of 33 per cent to Australia’s financial sector, so with the ongoing Royal Commission and future regulatory risks, it is not an entirely anxiety-free prospect. My reasoning for continuing to invest is my long-term interest in the dividend component of the return, the fact that the Australian market continuing to trade closer to its historical average, and a concern to avoid currency risks and US market valuation risk from other globally diversified ETF options.

I am considering making further investments in BrickX, as they have two new properties available, which would help further diversify the very small residential property allocation in my portfolio. However, the entry transaction fees are very high (1.75%), and the available rental yields looks extremely unattractive. Overall, with current declines in the residential property markets, it does not seem a fruitful time to extend my exploration of this area in any more significant way.

One savings focus over the past month has been on reconsidering my insurance requirements, based on likely future distributions flows. Previously, I adopted a highly conservative approach to both income and life insurance that almost completely ignored the income stream of future dividends from my portfolio. I have updated these policies to at least partially reflect likely annual distribution payments – based on a backward looking average of the past four years of distributions. This has allowed me to reduce my overall level of coverage to target the income assurance level right for my circumstances, while saving on unnecessary insurance premiums. This has led to over $600 additional contributions to my investment portfolio, and will lock in an annual saving as well.

Finally, it feels like it has been a month of lively debate, including on Reddit, about different investment approaches. I have enjoyed these, as it helps test and strengthen my thinking, and be clear about why I adopt my current approach of a passive index-based and diversified approach, with a focus on total returns (capital and dividends). One of the reason for this diversified approach, compared to narrow Australian equity only approaches, is because high Australian dividend yields likely come with lower overall equity returns compared to those countries with lower dividends. The case for passive investment is nicely detailed in video here. In between time I have been enjoying reading new blogs from the growing Australian FIRE community, such as Path to Fire and HIFIRE.  I have also been engrossed in a fascinating audiobook version of The Bitcoin Standard, an economic perspective on the history of money and possible future and value of Bitcoin.

Progress

Progress to:

• Objective #1: 95.8% or $61 351 further to reach goal.
• Objective #2: 69.3% or $626 351 further to reach goal.

Summary

Approach my first objective has a feeling of required natural caution surrounding it. Like stepping over a crack in a rock floor, or approaching an unknown cliff edge, one is never entirely sure of the footing or terrain on the other side. It’s possible that this sensation will be one I live with for one, two or three years, depending on market movements and any number of possible developments. I find myself caught between divergent feelings of restlessness, and also a desire to slow down and mentally imprint what this phase of the journey feels like.

** These variances have been recalculated from this month onwards to be in reference to my longer term allocation targets for equities and bonds (65/15), rather than a previous lower transitional target of 61-62 over the past two years.

Mens fortunes are on a wheel, which in its turning suffers not the same man to prosper for ever.

Herodotus

This is my twentieth portfolio update. I complete this update monthly to check my progress against my goals.

Portfolio goals

My current objectives are to reach a portfolio of:

• $1 476 000 by 31 December 2018. This should produce a real income of about $58 000 (Objective #1).
• $2 041 000 by 31 July 2023, to produce a passive income equivalent to $80 000 in 2017 dollars (Objective #2)

Both of these are based on a real return of 3.92%, or a nominal return of 7.17%

Portfolio summary

• Vanguard Lifestrategy High Growth – $727 907
• Vanguard Lifestrategy Growth  – $41 957
• Vanguard Lifestrategy Balanced – $75 075
• Vanguard Diversified Bonds – $100 122
• Vanguard ETF Australia Shares ETF (VAS) – $78 653
• Betashares Australia 200 ETF (A200) – $55 263
• Telstra shares – $3 785
• Insurance Australia Group shares – $20 083
• NIB Holdings – $6 768
• Gold ETF (GOLD.ASX)  – $75 509
• Secured physical gold – $12 058
• Ratesetter (P2P lending) – $38 431
• Bitcoin – $119 600
• Raiz app (Aggressive portfolio) – $12 077
• Spaceship Voyager app (Index portfolio) – $1 215
• BrickX (P2P rental real estate) – $4 711

Total value: $ 1 373 214 (+$34 066) 

Asset allocation

• Australian shares –  36%
• International shares – 18%
• Emerging markets shares – 3%
• International small companies – 3%
• Total shares – 59.5% (1.5% under)
• Australian property securities – 3%
• International property securities 3%
• Total property – 6.2% (1.2% over)
• Australian bonds – 9%
• International bonds – 9%
• Total bonds – 17.8% (2.8% over)
• Cash – 1.3%
• Gold – 6.4%
• Bitcoin – 8.7%
• Gold and alternatives – 15.1% (0.1% over)

Comments

The allocation of distributions for the last half-year has been the most significant decision over the past month. After some thought my allocation decision was to do three things:

• $1 000 investment in Spaceship index – the logic being that this has no fees, is consistent with indexed globally diversified approach, and putting a significant amount at risk will better test my views of its performance.
• $10 700 set aside for future tax liabilities – this is to avoid having to sell an investment to meet a future ‘surprise’ or higher than expected tax liability, arising from capital gains.
• $29 000 investment in A200 Australian equity ETF – this is due to this being the lowest cost vehicle for exposure to Australia equity markets, and is consistent with seeking to reach my target equity allocation. The Australian equity market continues to appear more fairly value on a dividend yield and price to earnings ratio than global markets (taking into account US valuations).

Seeing such a significant re-investment in the portfolio has felt motivating, and increased the sense that momentum is shifting. Each fortnight this has been added to by a regular additional investment in A200, supplemented by the slow draw down of Ratesetter loans as they mature.

Movement in my portfolio has been limited, aside from distributions. My reliance on A200 for recent investments is slowly building my Australian equity exposure. At some point, I will need to consider ‘how much is too much’ domestic exposure.

With past financial years distribution finalised, my curiosity also turned to the question touched on in my last post, that is, the proportion of my credit card expenses that can now be said to be notionally met by portfolio distributions. After much exploration with spreadsheets, averages, and assumptions the results are below. Whichever way the data is analysed, around September of last year I reached the ‘cross over’ point (the concept made popular by Your Money or Your Life) in terms of credit card expenses.

Credit card expenses are obviously volatile from month to month, and the distributions line is an averaged per month figure from the total annual distributions. Obviously, all of my expenses don’t occur through my credit card – though I would estimate around 80-90 per cent do. This means it is just short of a full ‘cross over point’. Nonetheless, it is an arresting and motivating fact to consider that each time I use my credit card to buy an essential item, the portfolio is notionally paying that expense.

Over the past month, I have also signed up to join the waitlist for Xinja, a new app based banking product, featuring a pre-paid card and spending categorisation. I need to study this further, as functionality seems restricted to joining a queue at the moment. Making someone join a queue for access to services seems a non-intuitive way to signal a commitment to disrupting traditional banking models, but my curiosity is still piqued. Finally, I listened to an interesting Equity Mates podcast with the founder of Raiz (formerly Acorns), who gave an insight into where that fintech product was going in the future, and the challenges facing fintech startups.

Progress

Progress to:

• Objective #1: 93.0% or $102 786 further to reach goal.
• Objective #2: 67.3% or $667 786 further to reach goal.

Summary

Looking at the graph above of credit card expenses versus portfolio income feels like a peculiarly tangible manifestation of the gradual approach of financial independence. It’s provided an extra impetus to be careful of what I purchase, and to try to keep the blue line below the red. July distributions will hopefully increase my future portfolio income, even as I continue to expect a significant reversal in capital markets over the coming year.