…if any maintain their independence, it is because they are strong. Thucydides The Pelopponesian War, Book V.84

This is my twenty-sixth 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 – $694 784

Vanguard Lifestrategy Growth Fund – $ 40 522

Vanguard Lifestrategy Balanced Fund – $73 808

Vanguard Diversified Bonds Fund – $102 364

Vanguard Australia Shares ETF (VAS) – $73 249

Betashares Australia 200 ETF (A200) – $168 727

Telstra shares – $4 145

Insurance Australia Group shares – $12 364

NIB Holdings shares – $6 408

Gold ETF (GOLD.ASX) – $83 188

Secured physical gold – $13 399

Ratesetter (P2P lending) – $28 926

Bitcoin – $53 006

Raiz app (Aggressive portfolio) – $ 13 461

Spaceship Voyager app (Index portfolio) – $1 534

BrickX (P2P rental real estate) – $4 646

Total value: $1 374 531 (+$55 768)

Asset allocation

Australian shares – 39.9% (5.1% under)

Global shares – 24.2%

Emerging markets shares – 2.8%

International small companies – 3.6%

Total international shares – 30.6% (0.6% over)

Total shares – 70.5% (4.5% under)

Total property securities – 0.3% (0.3% over)

Australian bonds – 6.6%

International bonds – 11.7%

Total bonds – 18.2% (3.2% over)

Cash – 1.2%

Gold – 7.0%

Bitcoin – 3.9%

Gold and alternatives – 10.9% (0.9% over)

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

Comments

The delivery of half-year distributions from the Vanguard funds and ETFs, as well a recovery in equity markets has led to the strongest monthly growth in the portfolio in the past year. This comes immediately after the weakest period of performance in the previous three months.

The portfolio increased in value by over $55 000 through January, with Australian and international equity, newly invested capital, as well as gold, accounting for the increase.

With the payment of half yearly distributions across early January, the pressing question has been re-investment priorities At this stage, to achieve my new target share allocation, further investment in Australian shares (through the A200 ETF) are required. I have split this investment into two parts, with one half invested already, and the other half due to be invested at the end of the first quarter. Whilst not reflecting the average superior performance of immediate ‘lump sum’ investment versus dollar cost averaging, it nonetheless helps to minimise the risk of a single ill-timed purchase.

One of the regular steps of my annual investment review process is to look at the level of my required emergency fund. This year I put in place a new estimate of the required amount: a target of $83 000, equal to the income target of Objective #2. Previously, I have typically based this amount purely on 12 months of average full-time earnings, with no adjustments.

Over the past two years, however, as portfolio distributions became a more significant factor, I have resolved to factor an annual estimate of these distributions into the required emergency fund level. That is, I now reduce the required emergency fund level, by an estimate of average distributions that could be expected to be delivered by the portfolio over a year. To ensure this adjustment is conservative and stable, I have based the estimate on an average of the past 5 years of distributions (which came to around $45 000 per year).

For 2019, applying this approach has lowered my emergency fund requirement from around $60 000 to $38 000. The cash surplus arising from this reduction has been invested with the same timing as re-investment of recent distributions. As distributions from the portfolio grow, the emergency fund requirements will therefore automatically decrease from year to year. The emergency fund is kept in a liquid high interest savings account.

Overall, the portfolio in absolute value terms has ended the last rolling twelve-month period well above where it began. Through the last two years the portfolio has grown by almost 40 per cent, despite some challenging months in equity markets.

Through this period I have continued to invest new savings and maturing Ratesetter funds into Australian equities through the Betashares A200 ETF.

The holiday period has provided lots of opportunity for looking over the journey so far. A particular focus has been consciously prioritising a greater balance between Australian and international shares. One reason for doing this is to diversify away from the risks of the Australian equity market, and ensure that progress towards FI is not unduly relying on an assumption that Australian equity will forever continue it’s positive history performance. A study in 2010 by Professor Wade Pfau highlighted that internationally markets that permit a safe withdrawal rate of 4 per cent are the exception, not the rule. In fact, only in 4 out of 17 equity markets studied, would such an approach have been safe, with many developed market equity markets supporting far lower safe withdrawal rates of between 1-3%.

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) 86.0% 120.7% Objective #2 – $1 980 000 (or $83 000 pa) 69.4% 97.4% Credit card purchases – $73 000 pa 78.9% 110.7% Total expenses – $96 000pa 60.0% 84.2%

Summary

The portfolio moved perceptibly towards my first objective this month. Interestingly, it is also closing in on Objective #2 on an ‘All Assets’ basis (which includes superannuation).

The recent downdrafts from the market, and lower portfolio distributions than expected in January has, however, tempered any perception that progress towards the goal will be either smooth or inevitable. Risk inevitably exists in the market, as is covered in a quite clever and comprehensive way here by high profile US finance academic Aswath Damodaran in a recent fascinating note on the many faces of risk.

This month, as well as taking my chances discussing some of the weaknesses in the implicit claims for Listed Investment Company focused investment, I have been absorbing a few new pieces of research, this one about the ‘buckets’ approach to investment, and also caught up with pieces from new Australian bloggers HisHerMoneyguide and Late starter FIRE. For a different perspective on buckets, this article from Laurence Siegel is also thought-provoking. Finally, this analysis of the futility of market timing provided welcome reassurance as I set in place my plan for dollar cost averaging previous distributions into the market on a staggered basis, and this podcast from Mad Fientist was a thoughtful discussion of the real goals, and some challenges of the retire early part of FIRE.

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