The most difficult thing is the decision to act, the rest is merely tenacity.
- Amelia Earhart
This is my fiftieth monthly portfolio update. I complete this regular update to check progress against my goal.
Portfolio goal
My objective is to reach a portfolio of $2,585,000 by 31 July 2022. This would produce a real annual income of about $90,500 (in 2021 dollars).
This portfolio objective is based on an assumed safe withdrawal rate of 3.5 per cent.
Portfolio summary
Vanguard Lifestrategy High Growth Fund $775,158
Vanguard Lifestrategy Growth Fund $43,025
Vanguard Lifestrategy Balanced Fund $79,641
Vanguard Diversified Bonds Fund $107,429
Vanguard Australian Shares ETF (VAS) $269,445
Vanguard International Shares ETF (VGS) $117,712
Betashares Australia 200 ETF (A200) $257,703
Telstra shares (TLS) $1,662
Insurance Australia Group shares (IAG) $6,144
NIB Holdings shares (NHF) $6,624
Gold ETF (GOLD.ASX) $109,475
Secured physical gold $17,648
Plenti (P2P lending) $5,480
Bitcoin $494,160
Raiz app (Aggressive portfolio) $19,508
Spaceship Voyager app (Index portfolio) $3,106
BrickX (P2P rental real estate) $4,447
Total portfolio value $2,318,367 (+$52,337)
Asset allocation
Australian shares 37.4%
Global shares 20.9%
Emerging market shares 1.8%
International small companies 2.3%
Total international shares 25.0%
Total shares 62.4% (-12.6%)
Total property securities 0.2% (+0.2%)
Australian bonds 3.4%
International bonds 7.2%
Total bonds 10.5% (-4.5%)
Gold 5.5%
Bitcoin 21.3%
Gold and alternatives 26.8% (+16.8%)
Presented visually, the chart below is a high-level view of the current asset allocation of the portfolio.
[Chart]
Comments
This month the portfolio has increased by over $52,000, extending the strongest period of growth since this record started.
This has contributed to an expansion in the overall portfolio of over 25 per cent since the beginning of October last year. In this month alone the portfolio grew around 2.3 per cent.
[Chart]
Increases in the price of Bitcoin have provided the key motive force for the portfolio both this month and since October. Equities have made a smaller contribution since October, but the value of equity holdings actually fell slightly this month.
Part of this is related to the reduction in value arising from the payout of substantial distributions earlier this month, which will be averaged back into the portfolio over the next six months. The value of gold and fixed interest holdings have also marginally declined.
Stepping back, the result of this is the strongest consecutive four month performance of the portfolio on record, based quite narrowly on the fortunes of just two of its components, equities and Bitcoin.
[Chart]
A month ago I reset my financial independence objective and also signalled a gradual adjustment of the equities portfolio towards a medium-term goal of equal allocation of Australian and international equities.
Developments in both Australian and global equity markets make it a challenging psychological time to be increasing equity purchases. Many markets are expensive on traditional metrics, with the critical question being the extent to which these valuations are justified by future stimulus, broader economic recovery flowing from the rollout of COVID-19 vaccinations, increased earnings, and historically low interest rates.
In these extraordinary times it is also still an open question whether many investors are seeing equities acting as an imperfect store of value and hedge against rising inflation expectations over coming years.
Applying the revised investment policy this month led to continued purchases of Vanguard exchange traded funds, with units bought using Selfwealth in each of the international shares (VGS) and Australian shares (VAS) funds.
Force majeure – portfolio impact of Bitcoin
The past month has seen the price of Bitcoin reach all time highs. A plethora of reasons have been provided for this, including increased institutional interest in the technology, irrationally exuberant market behaviour, and impacts of fiscal and monetary policy expansion.
This has created a position never anticipated in the design of the portfolio, or at the inception of the small experimental purchases driven by curiosity across 2015-16. At the final purchase in early 2016 the total funds I had used to make these Bitcoin purchases represented just 0.5 per cent the portfolio, and an amount I was comfortable entirely losing.
With no further investments since that time, Bitcoin holdings have unexpectedly grown to make up 21 per cent of the portfolio.
This is a rare occurrence. In the five years I have owned Bitcoin, it has only exceeded 10 per cent of the portfolio across only a handful of months. Yet the fact remains, it currently sits as the second largest portfolio component, if measured as an asset class.
[Chart]
The ‘if’ in that last sentence is there for a reason.
The inclusion of Bitcoin in these updates and portfolio estimates is designed to recognise that it currently represents a large monetary value. It is not to suggest that Bitcoin is an ordinary investible asset alongside equities, property, or fixed interest, which should form part anyone else’s portfolio.
Rather, it is there as a significant financial asset for the moment, which may, or may not successfully transition over time to a store of value. Further, it may emerge over time to have some value as a non-correlated ‘option’ on certain (low probability) future states of the world.
Response to the (re)rise of Bitcoin
Given time, markets teach humility to all. When this record started, I naively expected it to be a story of relatively steady progress of equity focused purchases and market growth over time bringing about the reaching of portfolio goals.
As it turns out, markets had other ideas.
[Chart]
So the choice is this: to write about the journey I expected to have and omit the inconveniently inconsistent parts, or write about the one I am actually experiencing. That is no real choice, if the purpose is to act as a genuine record.
Despite the significant price increase, my views on Bitcoin remain fundamentally the same as when I wrote about my approach to its portfolio role in mid-2019.
I would not recommend it as part of a financial independence portfolio.
Rather, I personally view it as an intriguing innovation and a possible emerging store of value with some option-like characteristics. It also may possess some uncertain but potentially useful diversifying features as part of my specific existing portfolio, taking into account my risk bearing capacities and appetite.
Most of all, the price increase has led me to seek to follow the discussions about these potential emergent properties more closely, and to work to further increase my knowledge.
This useful debate between a skeptic and Bitcoin adherent brings out some of the issues nicely. Significant traditional investment managers are similarly publicly discussing the characteristics and prospects of Bitcoin, in contrast to a number of previous dismissals of its future. Bitcoin is also drawing out fascinating debates and discussions amongst adherents around the nature of money as a technology (video).
According to this exchange commissioned report last year (pdf), curiosity and adoption is also growing here. Around 1 in 5 Australians owned some cryptocurrency in 2020, up from the previous year, with growth in the 25-44 years old demographic driving this increase.
Trends in average distributions and expenses
The holidays and Christmas period resulted in a substantial increase in total expenses.
Even so, average monthly expenditure on credit cards has continued to track below previous years, by nearly $1,000 per month. The rolling average level of distributions in the chart below has been revised due to the much higher than expected levels of December distributions.
[Chart]
This clearly indicates that distributions have moved significantly ahead of average credit card expenses, the actual crossover having occurred in the middle of the last year.
The record of distributions compared to total expenses provides a broader picture of progress against total monthly spending.
The chart below shows that the capacity of the portfolio to support average spending over the past three years is approaching 90 per cent, having started at around 30 per cent at the beginning of this record.
[Chart]
Progress
Measure Portfolio All Assets
Portfolio objective – $2,585,000 (or $90,500 pa) 89.7% 117.0%
Total average expenses (2013-) – $85,600 pa 94.8% 123.7%
Summary
January usually provides more time to think about the portfolio and progress on the financial independence journey than any other point in the year.
Having reset my portfolio goal and adjusted the course, there now seems to stretch out ahead a year that I know will bring events I have not contemplated, and which in some cases cannot be guessed at. A prolonged flat period, or reversals, are well within the range of possibilities.
While I am comfortable with the plan, and the current risk exposures of the portfolio, this does not mean an end to thinking and learning. New information and perspectives continuously present themselves.
An example is this paper Stocks for the long run? Evidence from a broad sample of developed markets which examines a fuller sample of equity market history. It finds that the risk of underperforming inflation over a 30 year period with diversified equity holdings is 12 per cent if broad multi-country equity market data is assessed, versus just 1.2 per cent if ones’ view is restricted to an inevitably narrower US data set.
Another example, from one of original academic advocates of stocks for the long run, is Professor of Finance Jeremy Siegel pointing to the likelihood of higher inflation and bondholder losses as a consequence of current fiscal and monetary policies.
With the extra time this month it was enjoyable to catch up on this annual review from Pat the Shuffler, Strong Money Australia’s plans for 2021, as well as this in-depth Mad FIentist podcast with the founder of Early Retirement Extreme – one of the pioneers of the US FI movement.
This month it was also pleasing to see the blog recognised in an excellent Sharesight listing of ‘Top 50 Finance and Investing Blogs’, and also to somehow come in at the top of the global Dividend Driven leaderboard for financial independence portfolio income for 2020.
Amidst volatility and transition, it is often difficult to distinguish the signal from noise. The recent trading events around GameStop illustrate this, with interpretations ranging from it being an unmistakeable sign of a market top to representing the French revolution of finance. History and intuition both suggest revolutions are usually bad times for investors.
Whether revolution or a long period of quietude lays ahead, decisions have been made and a goal set. From here, the rest truly may be tenacity.
No comments:
Post a Comment