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;

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

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.

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.

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