I have never thought, for my part, that man’s freedom consists in his being able to do whatever he wills, but that he should not, by any human power, be forced to do what is against his will. Rousseau, Reveries of the Solitary Walker

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

Portfolio goals

My recently revised objectives are to reach a portfolio of:

$1 598 000 by 31 December 2020. This should produce a real income of about $67 000 (Objective #1)

$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%, or a nominal return of 7.19%, and are expressed in 2018 dollars.

Portfolio summary

Vanguard Lifestrategy High Growth Fund – $725 361

Vanguard Lifestrategy Growth Fund – $41 957

Vanguard Lifestrategy Balanced Fund – $75 692

Vanguard Diversified Bonds Fund – $102 924

Vanguard Australia Shares ETF (VAS) – $77 420

Betashares Australia 200 ETF (A200) – $188 899

Telstra shares (TLS) – $1 658

Insurance Australia Group shares (IAG) – $12 818

NIB Holdings shares (NHF) – $6 924

Gold ETF (GOLD.ASX) – $84 534

Secured physical gold – $13 659

Ratesetter (P2P lending) – $27 576

Bitcoin – $59 488

Raiz app (Aggressive portfolio) – $14 277

Spaceship Voyager app (Index portfolio) – $1 658

BrickX (P2P rental real estate) – $4 653

Total value: $1 439 608 (+$65 077)

Asset allocation

Australian shares – 40.6% (4.4% under)

Global shares – 24.1%

Emerging markets shares – 2.8%

International small companies – 3.6%

Total international shares – 30.5% (0.5% over)

Total shares – 71.0% (4.0% under)

Total property securities – 0.3% (0.3% over)

Australian bonds – 6.3%

International bonds – 11.4%

Total bonds – 17.7% (2.7% over)

Cash – 1.2%

Gold – 6.8%

Bitcoin – 4.1%

Gold and alternatives – 11.0% (1.0% over)

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

Comments

The past month has seen the largest single increase of the past year, and the third largest of the two year journey. This has been mostly caused by simultaneous increases in the value of equities, as well as gold and Bitcoin holdings. This synchronous performance is not what would be normally expected in a diversified portfolio, in which it is more usual to have portfolio components moving in different directions.

The result of this is that the portfolio is at the highest point in the journey so far, having regained levels not seen since September last year. This recovery from losses at the end of 2018 has occurred rapidly. As well as the largest single increase on a monthly basis in the past year, the past two month period has been the most significant period of growth experienced since the short-lived increase in Bitcoin in late 2017.

New contributions continue to be made through the Betashares A200 ETF, and there is still some way to go yet before the Australian shares component of the portfolio reaches its target. So contributions using SelfWealth* to the A200 ETF will likely continue, though this recent paper from Vanguard has raised the interesting possibility that the optimum level of international exposure to reduce portfolio volatility may actually be higher than my current target. This month the total share component of the portfolio reached just over $1 000 000. At about the same time last year, the total portfolio was just crossing this threshold.

The coming month will see two significant milestones, the investment of an additional $15 900 from the reduction of my emergency fund to recognise the role of the growing stream of distributions, and the release of first quarter dividends from A200 and some Vanguard funds. Receiving significant sums to reinvest outside of the half-yearly Vanguard distributions cycle will be a relatively new and welcome experience.

In coming months I may increasingly be facing a need to invest beyond A200 to maintain my target allocations – most likely in global shares. Continuously purchasing exclusively Australian shares over the past nine months to meet a higher equity allocation has felt challenging at times, however, Australian share market valuations have at least generally been close to long-term averages through this time.

Though this is not primarily a spending or an unsparing frugality blog, below is an updated version of my somewhat winding path towards ‘credit card’ FI over the past six years, including the most recent months and factoring in the lower distributions in the last six months.

It’s apparent that the half year portfolio income to July 2019 will need to rise substantially if I am to re-close the gap that has emerged since the high distributions across 2017-18. Over the past six months, distributions have on average totalled just under 50 per cent of credit card expenditure. In a small step towards addressing this gap, I recently re-contracted my mobile phone plan to achieve around a $500 annual savings.

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) 90.1% 126.0% Objective #2 – $1 980 000 (or $83 000 pa) 72.7% 101.7% Credit card purchases – $73 000 pa 82.7% 115.6% Total expenses – $96 000pa 62.9% 87.9%

Summary

The strong portfolio growth over the past month means that on an ‘All Assets’ basis, I have theoretically just met my portfolio objective #2. In a few short months I may actually pass my old original portfolio objective (of $1 476 000). Looking just at the ‘Portfolio only’ measures, six months or so of further progress could potentially see the new objective #1 in sight, having just reached the 90 per cent of the way this month.

Currently my conscious focus remains on the ‘Portfolio’ measures, where there is some distance to go. Nonetheless, the progress made this month has caused frequent reflection on the subtle psychological impacts of being at this advanced stage of the journey.

Independence is not yet secured in quite in the way I want, yet feels within tangible grasp. Whether this is correct or not will only be known in time, but it is a source of daily thought. The feeling of an accumulating power over one’s circumstances – particularly the shift to a position of a type of ‘quiet power’ in relation to future work – represents a remarkable calming change from a decade ago. That was a time in which, even though I had a substantial emergency fund, any period without employment income led to a restless and anxious search for a replacement income.

Putting such philosophical thoughts aside this month, and spurred by a reader comment, I have been re-reading (or rather listening to) The Big Short. This feels timely given current Australian real estate markets. What is striking from absorbing the book again is how much conviction, research and character it takes to take a different view from the crowd, and how difficult this is in current investment markets. It is a healthy warning to be wary of easy consensus, and that even that most elusive of beasts in markets – ‘being right’ – can be less satisfying than imagined in crisis conditions.

In the something of the same theme as breaking consensus, Early Retirement Now has also recently released an excellent post on ‘yield illusion’. This is interesting to think about in terms of frequent Australian FI Reddit discussions about dividend investment approaches, as well as the potential for some Australian companies and listed investment companies to shift dividend policies in response to any changes in franking credit refund arrangements.

This recent paper also discusses an interesting finding that investors need to firmly guard against what it terms the ‘free dividends fallacy’. It shows empirical evidence from real investors that failure to dispassionately appreciate total returns and the real impact of dividend payments on an assets value and price can result in poor decision-making harmful to long-term returns.

Finally, an article on Kitces recently highlighted a sometimes under-appreciated aspect of sequence of returns risks: the fact that in many cases positive market returns mean that the 4% rule and similar approaches can lead to significant unanticipated growth in the portfolio, even through the withdrawal phase. Following the past two months, considering these ‘upside risks’ too closely feels perilously close to tempting fate, and so I choose to look ahead only cautiously.

* These links contain reward referral links, which offer small rewards to any readers using them, and to me, should you choose to invest using these apps.

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