Little islands are all large prisons; one cannot look at the sea without wishing for the wings of a swallow.

Sir Richard Francis Burton

This recorded journey towards financial independence started nine years ago, with an initial objective of building a passive income of $58,000 per annum by July 2021.

Since that time, goals have evolved and changed, with the most recent targets being achieved from January 2024 onwards, as well as temporarily before that.

Each year in early January I spend time reviewing my investment goals and how I plan to reach them.

This post talks about reflections arising from this annual review, updates my portfolio goal, and reviews the measures and assumptions I will use. It also discusses how I will approach management of the portfolio and associated finances given the current achievement of each of my past portfolio goals.

The aim each year is to have a clear written record of the objectives, approaches and reasoning underlying the plan, to serve as a reference point through the year to come. The process also enables the updating of plans and assumptions for changes in circumstances, thinking, as well as available data and evidence.

Little island? Reflecting on a post-journey agenda

The objective of this record at its commencement was to seek to test whether there were any hidden or invisible barriers to the actual achievement of financial independence, given a path of consistent investing over a long period.

Early posts around future goals were largely focused on setting specific financial targets, to put in place the foundations of financial independence, such as achieving a certain portfolio level, or amount of distributions.

At this point in the journey, following the formal meeting of past goals and targets, arguably the approach of setting yearly goals has less to recommend it. The task of a record is to focus on what is occurring, and may occur, rather than becoming trapped in formalities and rituals now existing beyond their natural utility.

Uncertainty and the potential for major market movements, and financial crises, do mean that all progress in quantity terms is provisional.

It would be within the expected run of financial markets for the portfolio’s equity component to fall 40-50 per cent in an exceptionally poor year. Similarly, more volatile components of the portfolio could suffer even larger falls, without falling anywhere outside of historical precedents. And of course, there is always the potential for entirely new precedents to be set, including ones that undermine the entire basis of the FIRE exploration.

This remains true, and yet there is another emerging, less urgent truth emerging over past years. This is that perhaps the main task is shifting from forging the portfolio, to a role of observing and monitoring its own internal processes, applying judicious action only where necessary.

A reason for this is the growing part played by internally generated compounding forces within the portfolio. Put simply, this means that the portfolio has grown to a level where it is less affected by small ongoing decisions or investment choices made. The goal perhaps switches to a more negatively framed one – of not acting in a way that interrupts, or disrupts this self-sustaining process of portfolio growth.

Again, humility is required, because compounding in equity markets does not occur by virtue of smooth annual 7 per cent glide-paths. It occurs in between brutal, sharp upward and downward saw-tooth moments in markets.

These movements themselves are demonstrations of the movement of the journey from one of deliberate, calibrated, controlled choices to a different stage. A stage requiring a greater sense of detachment from the impacts of market forces on the portfolio. And a stage that redirects energy from goal-setting in the financial sphere to other aspects of life.

The tasks that seem most relevant to this stage continue to be evolutions of the two set out for the last two years.

• First, to provide for a reasonably assured passive income which is consistent in real after-inflation terms with the target chosen.

• Second, to maintain reserves of cash that will be essential to future movement to entire reliance on investment returns and the application of the safe withdrawal rate to the portfolio over an extended multi-decade period.

Should financial markets fall substantially, it is possible I will use reserves in excess of the above requirements, as well as any regular distributions, to purchase new investment assets to restore in particular the targeted level of equity holdings.

Continue reading “Looking at the Sea: Reviewing the Portfolio Goal and Investment Plan”