Lines of Navigation – A History of Portfolio Change

Posted on June 14, 2021March 24, 2022 by The FI Explorer

No man ever steps into the same river twice.
Heraclitus

The achievement of financial independence is often, correctly, framed as getting a few key principles and habits in place, and then repeating these consistently through time. This history of portfolio change steps beyond this valuable and instructive perspective.

This is because an exclusive focus on consistency of action conceals another fact of the journey – that constant principles and habits do not avoid change through the experience. In fact, change has been a continuous marker through the financial independence journey so far.

As the portfolio and its characteristics change, different experiences, issues and challenges emerge.

This post examines some of the major areas of change. It particularly focuses on changes since the commencement of this record in 2017, which covers the second half of the journey.

While each financial independence journey and portfolio is different, this is intended to highlight a few of the key changes I have experienced in building and managing the portfolio, for any interest and insights it offers others.

History of change in the composition of the portfolio

The most significant change – aside from the growth in the overall portfolio level – has been to the composition of the portfolio. That is, balance of actual investments held in different investment vehicles.

For most of the early part of the journey, the set of Vanguard retail funds (mainly the High Growth, Growth, Balanced funds) formed the core of the portfolio. In 2007, for example, Vanguard retail funds made up no less than 95 per cent of the total portfolio.

As the recorded journey started in January 2017, this legacy was still apparent. At this time Vanguard funds made up around 80 per cent of the portfolio, as can be seen below.

Some small gold, Bitcoin, and peer-to-peer lending had been added to the portfolio by 2017. Yet these were minor elements compared to the legacy retail funds that also received regular new investments.

The equivalent chart of the composition of the portfolio today is below.

Standing to Port – Year in Review and Monthly Portfolio Update – December 2020

Posted on January 1, 2021March 24, 2022 by The FI Explorer

In order to arrive at what you do not know
You must go by a way which is the way of ignorance.
T. S. Eliot, Four Quartets – East Coker

Year in Review

The year past has been extraordinary in so many ways, entirely separate from the progress to the goal of financial independence.

Part of the structure of the year has been seeing elements of this new reality bleed into markets and economic developments, affecting the portfolio in profound ways.

At the the broadest level, the year saw the passing of my portfolio objective, in a rapid unexpected way in December. In fact, as can be seen below, this year saw the crossing of the last two outstanding portfolio measures.

Progress against FI measures through 2020

Measure	Portfolio	All Assets
Portfolio objective – $2,180,000 (or $87,000 pa)	82%→104%	112%→136%
Credit card purchases – $71,000 pa	100%→127%	136%→166%
Total expenses – $89,000 pa	80%→102%	109%→133%

On an ‘All Assets’ basis – taking into account superannuation assets – the year saw further progress, to be well above the minimum levels required to sustain the portfolio income objective.

Course of the voyage

The progress of the year was steeped in volatility. This year saw the largest ever fall in the value of the portfolio, and also two of the largest ever monthly gains.

This volatility is clearly evidenced in the variations in the total end of month portfolio values in the chart below.

Overall the portfolio increased by over $500,000 through the full year. This is the largest rise in the value of the portfolio over a single year on record.

Quite simply, it has moved the portfolio to a different magnitude and scale of operation. The chart below of the overall value of the portfolio on a calendar year basis illustrates this alteration starkly.

It cannot be escaped that the largest single contributor to the increase over this year was a surge in the price of Bitcoin, leading to over $300,000 of the gains.

Equity markets, however, also pushed forward in the second half of the year, and the equity portfolio finished around $175,000 higher than the beginning of the year. The gold component of the portfolio also ended the year higher.

As the set out in the In Way of Harbour post two weeks ago, combined this progress resulted in the passing of the portfolio objective in mid-December.

Monthly Portfolio Update – October 2020

Posted on November 1, 2020March 24, 2022 by The FI Explorer

Sometimes, I feel the past and the future pressing so hard on either side that there’s no room for the present at all.
Evelyn Waugh, Brideshead Revisited

This is my forty-seventh monthly portfolio update. I complete this regular update to check progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars).

This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$728,112
Vanguard Lifestrategy Growth Fund	$41,606
Vanguard Lifestrategy Balanced Fund	$78,564
Vanguard Diversified Bonds Fund	$109,495
Vanguard Australian Shares ETF (VAS)	$231,548
Vanguard International Shares ETF (VGS)	$75,298
Betashares Australia 200 ETF (A200)	$231,199
Telstra shares (TLS)	$1,428
Insurance Australia Group shares (IAG)	$6,043
NIB Holdings shares (NHF)	$4,992
Gold ETF (GOLD.ASX)	$121,009
Secured physical gold	$19,482
Ratesetter (P2P lending)	$7,363
Bitcoin	$218,040
Raiz app (Aggressive portfolio)	$17,488
Spaceship Voyager app (Index portfolio)	$2,841
BrickX (P2P rental real estate)	$4,447
Total portfolio value	$1,898,955 (+$73,218)

Asset allocation

Australian shares	40.8%
Global shares	22.4%
Emerging market shares	2.1%
International small companies	2.7%
Total international shares	27.3%
Total shares	68.1% (-6.9%)
Total property securities	0.2% (+0.2%)
Australian bonds	4.1%
International bonds	8.6%
Total bonds	12.8% (-2.2%)
Gold	7.4%
Bitcoin	11.5%
Gold and alternatives	18.9% (+8.9%)

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

Comments

This month the portfolio expanded by around $73,000, continuing the strong overall pattern of recovery since March. This has resulted in portfolio growth of 4 per cent, which has taken the value of the portfolio to a new monthly high.

The portfolio was affected by small price falls across global shares, a modest increase in Australian share values, with limited movement in gold and bond holdings.

This means that the majority of gains in the portfolio have been from an appreciation in the price of Bitcoin, which in fact made up more than 90 per cent of the total monthly gains. This appears to be based on some early steps by Paypal to increase use of Bitcoin, and some recent corporate decisions by a US technology firm to seek to employ it as a corporate treasury store of value.

Outward Bound – Trends in Taxable Investment Income

Posted on October 18, 2020October 18, 2020 by The FI Explorer

But who wants to be foretold the weather? It is bad enough when it comes, without our having the misery of knowing about it beforehand.
_{Jerome K Jerome, Three Men in a Boat (1889)}

Tracking taxable investment income produced by the financial independence portfolio provides a useful external benchmark of progress on the journey.

So far, reviewing past dividends and distributions has been the primary way of tracking progress in portfolio income towards the financial independence goal.

Yet having this additional externally validated estimate of what my taxable income would be if I stopped working tomorrow is valuable. It helps illustrate the underlying income generating potential of the portfolio and also allows for broader trends over time to be observed.

Taxable investment income remains stable for now

Taxable investment income for financial year 2019-20 totalled around $42,500. This is a level which is close to the record of the past four years.

Figure 1 below sets out the fuller record over the past decade. It is based on the total of taxable income from the tax assessment categories of partnerships and trusts, foreign source income, franking credits and ‘other income’. That is, it takes in the totals of Items 13, 20 and 24 on the 2020 tax return, whilst not including capital gains.

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