And coming events cast their shadows before.
Thomas Campbell, Loichiel’s Warning (1802)
This is my thirty-fifth portfolio update. I complete this update monthly to check my progress against my goals.
Portfolio goals
My objectives are to reach a portfolio of:
- $1 598 000 by 31 December 2020. This should produce a passive income of about $67 000 (Objective #1) – Achieved
- $1 980 000 by 31 July 2023, to produce a passive income equivalent to $83 000 (Objective #2)
Both of these are based on an expected average real return of 4.19 per cent, or a nominal return of 7.19 per cent, and are expressed in 2018 dollars.
Portfolio summary
- Vanguard Lifestrategy High Growth Fund – $773 028
- Vanguard Lifestrategy Growth Fund – $44 094
- Vanguard Lifestrategy Balanced Fund – $80 383
- Vanguard Diversified Bonds Fund – $108 964
- Vanguard Australian Shares ETF (VAS) – $139 698
- Vanguard International Shares ETF (VGS) – $27 138
- Betashares Australia 200 ETF (A200) – $259 380
- Telstra shares (TLS) – $1 860
- Insurance Australia Group shares (IAG) – $13 847
- NIB Holdings shares (NHF) – $8 412
- Gold ETF (GOLD.ASX) – $98 755
- Secured physical gold – $15 979
- Ratesetter (P2P lending) – $17 791
- Bitcoin – $147 130
- Raiz app (Aggressive portfolio) – $16 931
- Spaceship Voyager app (Index portfolio) – $2 240
- BrickX (P2P rental real estate) – $4 410
Total value: $1 760 040 (+$30 378)
Asset allocation
- Australian shares – 42.0% (3.0% under)
- Global shares – 22.6%
- Emerging markets shares – 2.4%
- International small companies – 3.1%
- Total international shares – 28.1% (1.9% under)
- Total shares – 70.1% (4.9% under)
- Total property securities – 0.3% (0.3% over)
- Australian bonds – 4.8%
- International bonds – 9.9%
- Total bonds – 14.7% (0.3% under)
- Gold – 6.5%
- Bitcoin – 8.4%
- Gold and alternatives – 14.9% (4.9% over)
Presented visually, below is a high-level view of the current asset allocation of the portfolio.
Comments
This month the portfolio grew by just over $30 000 in total, building on the previous month of growth.
The equity component of the portfolio has grown, including through new contributions and another part of the June distributions being ‘averaged into’ equity markets.
The only other major changes in the monthly value of the portfolio have been the result of gains in the value of equity holdings and a sharp upward movement in the price of Bitcoin.
This month marks the notional passing of one of the additional FI benchmarks set at the beginning of the year – ‘Credit card FI’. This benchmark is estimated on the basis of reaching a portfolio value where the annual assumed real return of 4.19 per cent could in theory fully meet average annual credit card expenses of $73 000.
This benchmark is notionally met in that sense, and it is also close to being met on a far more practical and tangible basis also. The actual gap between a trailing average of distributions paid and card expenses has now fallen to less than $300 per month.
Even so, it is important to note that this narrow gap could stabilise or modestly rise once forthcoming December distributions form part of the average, replacing a higher placeholder assumption based on June’s figures.
Quarterly distributions from Betashare’s A200 ETF and Vanguard’s Australian shares ETF (VAS) were paid this month. These distributions, in addition to another staggered reinvestment of June distributions were invested in the market.
They have been mostly placed into VAS, to obtain the benefit of accessing a slightly wider range of holdings at a comparable fee, as well as to reduce any (admittedly small) risk and volatility in future returns and payout levels between A200 and VAS.
To maintain the target balance for international (40 per cent) and domestic equities (40 per cent), a smaller additional investment was also made into Vanguard’s International shares ETF (VGS).
Sighting harbours and early arrivals – revising the FI target date
A focus of thought in the two months ahead will be the expected timing of reaching my FI Objective #2.
This goal is current set to July 2023. In setting this original target timeframe I used approximate and conservative estimates, based on previous average total portfolio increases over the past five years.
This method effectively ignored extra contributions arising from any above average portfolio distributions, or any return impacts, given the relatively short time until both targets. As such, it represented a clear simplification of reality. Achievement of the target – I reasoned at the time – would inevitably be impacted by market fluctuations and this meant constructing spuriously exact yearly forecasts of the impacts of average returns would not be worthwhile.
What has become clear since meeting Objective #1 more than 18 months earlier than expected is that more rapid progress was also being made towards Objective #2. To understand and explore this progress further I have applied a few estimation techniques to start understanding possible revised trajectories.
These estimate approaches included:
- simple extrapolation from past progress over a long time period
- using the median monthly progress since 2017; and
- assuming no investment returns at all, and reliance just on contributions.
The results of the different estimation approaches being applied were broadly consistent, with projections of Objective #2 being reached at least two years ahead of schedule. A further interesting fact was that average assumed investment returns alone would be sufficient to carry the portfolio to the original target level by mid-2023. Indeed, even if the portfolio suffered a one-off 33 per cent fall in equity values tomorrow – as is quite possible – modelling suggested the target would still be likely to be met early.
With two months to go until a full portfolio review, this indicates that it may be useful to reset this target to an estimate that more closely aligns with progress to date, whilst still retaining a respectful regard for the critical role that market variations can have in this phase of the journey.
Casting the shadow before – a better approach for estimating distributions?
At this time of year December distributions begin to cast their shadow forward, as the previous July distributions recede.
Seeking to estimate the approximate level of future distributions has been an ongoing interest, and has been looked at previously in both the Set and Drift and Wind in the Sails posts. The level of distributions is a solid and important marker of how far the journey has progressed.
This month I found time to fully develop an expanded data set to allow a better estimate of likely distributions. From the website of the relevant Vanguard retail funds, as well as the sites for the ETFs VAS, VGS and A200 I was able to download the available histories of distributions.
These stretched back a decade for some funds, and five years for VAS and VGS, but substantially shorter for A200. This enables the estimation of average payouts (in cents per unit) to be reached. In turn, this allows an estimate to be made of the level and components of the December distributions, using average values. This is set out below.
There are significant boundaries of uncertainty around this estimate, and some simplifications. For example, it excludes Ratesetter and smaller individual shareholdings (which represent about 10 per cent of the holdings). It also assumes for simplicity equal ETF payments through the year.
With these caveats and using this approach, the total December distributions are estimated to be around $19 500, out of an annual forecast distributions of $49 800.
Progress
Progress against the objectives, and the additional measures I have reached is set out below.
| Measure |
Portfolio |
All Assets |
| Objective #1 – $1 598 000 (or $67 000 pa) |
110.1% |
150.0% |
| Objective #2 – $1 980 000 (or $83 000 pa) |
88.9% |
121.1% |
| Credit card purchases – $73 000 pa |
101.1% |
137.7% |
| Total expenses – $89 000 pa |
82.9% |
112.9% |
Summary
Coming events do cast their shadows before them. Even an initial review of progress towards my remaining financial objective has left me with a sense of time foreshortening, and the shadow reaching out towards the present. At some point this shadow will start inevitably and undeniably reaching into and touching my daily life.
At the same time as this sense grows, markets feel delicately poised, with risks of bubbles, and unusual events such as required US Federal Reserve support for the inter-bank market, and a rare failure of a recent tender of short term Australian Treasury notes to reach its target issuance. Despite these types of events and historically low bond rates globally surveyed investor equity expectations remain at elevated levels.
It often pays dividends at times such as this to look to the past. This is an opportunity provided by listening to Yale University’s Robert Shiller in this recent podcast as well as by reading his new work Narrative Economics focused around the historical and continuing role of stories in markets and finance.
Stories – such as a ‘clear’ link between a countries’ economic growth and share market performance – can often be plausible, commonly held, and incorrect. Another informative podcast was an interview with the Head of Product Strategy for Vanguard Australia by Equity Mates. Further interesting insights into the development of modern portfolio theory and efficient markets theory can be accessed in these Youtube videos with interviews of Markowitz and Eugene Fama. The latter makes the point that the growth in indexing is likely to lead to active managers facing higher competition from more skilled investors, as the less skilled depart, making outperformance tougher rather than easier.
This month I was pleased to be mentioned in this short but practical piece on Australian FI seekers, alongside Aussie HIFIRE and Aussie Firebug. For a striking visual tool around planning for FI and safe withdrawal rates, this US-based calculator also occupied some of my time. It gives a unique and simple demonstration of the different probabilities and tradeoffs that can be embedded in reaching FI. Ordinary Dollar here in Australia has some similar calculators. Without seeing coming events, they represent a useful way to look further over the horizon.
The total equity component of the portfolio has grown, including through new contributions and another part of the June distributions being ‘averaged into’ equity markets. The only major reductions in the portfolio has been the result of a sharp downward movement in the price of Bitcoin.
The complete closure of the remaining gap is within sight. Assuming no sustained reversals in the absolute level of distributions through time, this could happen in the next 12 months.
At the same time Australian equities now make up 42 per cent of total portfolio, and have just reached 60 per cent of the equity portfolio. All this has occurred as the total equity portfolio has grown from $630 000 at the start of this journey, to over $1.2 million this month.
The main vehicles for this expansion over the past two years has been Betashares A200 and Vanguard’s VAS ETFs. More recently, as mentioned, I have added Vanguard’s global share ETF (VGS) to allow an avenue to keep within the targeted split with future contributions.
This shows that taxable investment income has risen only around five per cent over the past financial year. This likely reflects the decline in higher interest payments from a slow rebalance away from Ratesetter towards equities. Taxable investment income is still well short of both the original objective, and even further short of Objective #2.
Once again movements this month within the portfolio have been relatively limited in terms of the size of the portfolio.