Just so the Seabeast cleft the sea,
Running for the home stretch, and just so
She glided, borne by her own impetus.
- Virgil, The Aeneid Book V.280-282
This is my fifty-first 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 $780,296
Vanguard Lifestrategy Growth Fund $43,020
Vanguard Lifestrategy Balanced Fund $79,084
Vanguard Diversified Bonds Fund $104,841
Vanguard Australian Shares ETF (VAS) $279,959
Vanguard International Shares ETF (VGS) $124,196
Betashares Australia 200 ETF (A200) $261,896
Telstra shares (TLS) $1,641
Insurance Australia Group shares (IAG) $6,322
NIB Holdings shares (NHF) $6,648
Gold ETF (GOLD.ASX) $102,453
Secured physical gold $16,462
Plenti (P2P lending) $4,954
Bitcoin $650,610
Raiz app (Aggressive portfolio) $19,779
Spaceship Voyager app (Index portfolio) $3,077
BrickX (P2P rental real estate) $4,454
Total portfolio value $2,489,692 (+$171,325)
Asset allocation
Australian shares 35.5%
Global shares 19.8%
Emerging market shares 1.7%
International small companies 2.2%
Total international shares 23.7%
Total shares 59.2% (-15.8%)
Total property securities 0.2% (+0.2%)
Australian bonds 3.1%
International bonds 6.6%
Total bonds 9.7% (-5.3%)
Gold 4.8%
Bitcoin 26.1%
Gold and alternatives 30.9% (+20.9%)
Presented visually, the chart below is a high-level view of the current asset allocation of the portfolio.
[Chart]
Comments
There are no real precedents for the events affecting the portfolio over the last several months.
This month, a sharp appreciation of the price of Bitcoin – by over 30 per cent – has delivered the third single largest monthly gain of the record. As a result the portfolio has grown by over 7 per cent in a single month, increasing by around $171,000.
This significant growth has come following a series of positive months since October, leading to the overall portfolio increasing by nearly 40 per cent over the past five months.
[Chart]
As occurred in January, changes in the value of Bitcoin dominated any other changes over the course of the month. In fact, Bitcoin appreciation represents over 90 per cent of the gains. By contrast, Australian equities were up around 2 per cent, and international equities, bonds, gold holdings all lost value.
The end of the month brings into view a deeply peculiar and unlooked for landmark. Having reset to a higher portfolio goal just two months ago, with a target timeline of July 2022, this goal is already rather close to being achieved.
[Chart]
Against the background of such volatility, applying an asset allocation policy appears as a single unsteady breath against a forceful gale.
Even so, with the overall dollar exposure to Bitcoin growing this month, the only deliberate portfolio action was to counteract this with continued equity purchases. This meant purchasing units using Selfwealth* in each of the international shares (VGS) and Australian shares (VAS) funds.
Next month will see the finalisation of first quarter dividends and distributions from the major exchange traded fund holdings and the Vanguard diversified bond retail fund. Using an average of available past distributions, these might normally be expected to deliver a total of around $4,400. Whether that occurs in this environment of a partly recovering economy is an open question.
Blown to port – an unexpected journeys end?
I observed last month that chance had presented either the opportunity to write about the journey I expected to have, and omit any inconvenient parts, or write about the one I am actually experiencing. As is clear, it is no choice at all.
The continued rise of Bitcoin has created a position never anticipated in the original design of the portfolio, or when the small curiosity-fuelled purchases were originally made across 2015-16. At the final purchase date in early 2016 the total funds I had used to make these Bitcoin acquisitions represented just 0.5 per cent the portfolio. This was an amount I was comfortable losing in its entirety.
With no further investments since that time, Bitcoin holdings have unexpectedly grown to make up more than a quarter of the portfolio.
This magnitude of change means that necessarily my thoughts have continued to focused on what these developments actually mean for the FI journey, in the short and long-term.
The most common question posed by readers since October has been: having achieved previous portfolio goals, and with Bitcoin prices so high, is it time to take some gains, and sell part or all of the holdings?
The answer to this seems obvious, but this is deceptive. In reality, the answer comes surrounded by a host of imponderables, conditionalities and unknowables. It is small comfort that the passage of time alone will provide absolute and final certainty in its verdict.
Analysing some potential adjustment ‘rules’
One of the complexities that presents itself is: just what were or are the ‘right’ conditions for a re-balancing or sale?
A decision to fully or partially sell down the holdings could reasonably have been taken at many different points in the chart below.
[Chart]
Indeed, some other financial bloggers have made such a decision recently. Many of these different possible points for rebalancing or exit, however, would have left the portfolio dramatically undershooting its trajectory, and forgoing substantial gains.
This is a dilemma more commonly encountered in actively selected equity portfolios, where single small investments in emerging firms unexpectedly appreciate, than in portfolios made up of passive ETFs and funds.
Yet the issues remain the same.
To illustrate, using any fixed maximum percentage-based allocation to Bitcoin following the initial purchase would in general have resulted in early liquidation of a substantial proportion of the position.
The table below sets out the results of applying three different potential ‘exit’ triggers or rules, based on the Bitcoin holdings breaching set percentages of total portfolio holdings. The first column sets out three possible maximum asset allocation levels, following which exit from the position is assumed.
Table – Results of hypothetic maximum Bitcoin allocation (2016-2021)
Threshold Date triggered Gains secured Losses protected Gains foregone
Sell > 1% Oct 2016 $4,000 $9,000 $642,000
Sell > 5% August 2017 $52,000 $57,000 $594,000
Sell > 10% Nov 2017 $146,000 $150,000 $500,000
Looking at this, it can be observed that:
-
Hard triggers would have produced early exit – Given the initial Bitcoin purchase was around 0.5 per cent of the portfolio, even optimistic trigger points (a doubling of value, or the taking gains once the holding achieved a ten-fold increase) would have resulted in early sales, within 2 years of the original purchase.
-
The opportunity cost of early exit is high – The losses hedged or ‘protected against’ under all scenarios are a fraction of the gains foregone by the trigger.
-
And these costs are meaningful in portfolio progress terms – Selling as Bitcoin breached the maximum threshold would have resulted in foregone gains of fully 20 per cent of the total portfolio value today.
The clear rejoinder to this analysis is that any gains taken previously would be safe and certain, while the values in the ‘gains foregone’ column remain contingent on the current price.
This is true, but notice that attributing much decision-making weight to this point also implicitly suggests that the current price is incorrect, and will fall. On average, such a forecast has been wrong over the 12 years of Bitcoin’s existence.
An alternative less drastic rule to apply would be selling down the holding to a fixed maximum percentage. The results of this strategy are more complicated to model, and are less adverse, but essentially they share some broad similarities with the analysis above.
Under almost any reasonable cap, significant sales would have been triggered early, capturing some gains, but leading to relatively high opportunity costs as time progresses.
This arises because significant holdings are sold at prices which are rapidly exceeded. Once again, if it is assumed the future price falls on a sustained basis, such a strategy looks reasonable. Yet that assumption remains just that – an assumption.
Harnessing time – an alternate approach
Amidst the volatility, my views on Bitcoin remain fundamentally the same as when I wrote about my approach to its portfolio role in mid-2019. I do not recommend it as part of a financial independence portfolio.
I personally view it as an intriguing financial technology and a potential emerging store of value with some option-like characteristics. It also may have some uncertain but potentially useful diversifying characteristics as part of my specific existing portfolio, noting that extrapolating from past relationships is always subject to the caveat that these relationships can change.
This all means that the answer to the reasonable question of under what conditions would some gains be realised is still nascent.
One approach with some risk and regret minimising features is to gradually draw down on an even ‘unit’ basis over regular time periods. For example, selling 10 per cent of the total current holdings each 5 years.
This would have the benefit of a sort of ‘reverse dollar cost averaging’ effect, and harness time to potentially reduce both the opportunity cost of selling too early, or too late. But it would have other disadvantages. For the moment, I have not decided to move to that approach.
Trends in average distributions and expenses
Credit card expenses across the last two months have been significantly higher than average.
Despite this, examined as a longer-term average, monthly expenditure on credit cards has continued to track well below previous years.
[Chart]
There has been some reductions in the three-year average of distributions, from the average now including a month of (lower) estimated half year distributions than actually experienced in 2020. It remains to be seen whether this will continue and result in the two lines converging again.
The record of distributions compared to total expenses provides a broader picture of progress against total monthly spending.
Distributions and Total Expenses - 2017-2021
The chart above shows that the capacity of the portfolio to support average spending over the past three years is still close to 90 per cent, with a small downward movement this month, but a longer term upward trend.
Progress
Measure Portfolio All Assets
Portfolio objective – $2,585,000 (or $90,500 pa) 96.3% 123.7%
Total average expenses (2013-) – $85,700 pa 101.7% 130.6%
Summary
Vladimir Ilyich Lenin is credited with the sentiment that there are decades where nothing happen, and weeks in which decades happen. In the sixteen weeks since the end of October, the portfolio has grown in nominal dollars by approximately the same amount as the decade from 2007 to 2016.
There is no doubt Lenin would not have been an adherent of decentralised cryptocurrencies (pdf). Nonetheless, Bitcoin’s impact on the portfolio progress has been revolutionary. The question remaining is – does it represent a ‘permanent revolution’, or will there come reversals and counter-revolution?
One of the features of the past month has been volatility and change – with at times the new portfolio target being achieved, and then lost again. The portfolio has traded in a range of $180,000 within some weeks. To my surprise, this volatility has not been overly disturbing.
Instead, it has seemed like an object lesson in a broader learning from the journey – stoical detachment and humility around the expectations for the future, including desires for certainties. Looking at the portfolio through the month what has felt most striking is the relative lack of volatility of equity assets by comparison.
This too may change. One of the most interesting developments of this month has been signs of emerging upward pressures around government bond yields and inflation expectations.
Like similar pressures in September 2019, these potentially represent a signal that market-driven bond buyers will demand higher yields than have been apparent since 2018. Any such sustained movement has the potential to challenge equity valuations, and as this paper (pdf) shows, broad equities are not always a reliable hedge against higher inflation.
Though the least of my expectations in early January was approaching the revised portfolio goal within two months, developments such as these could impact on further progress. This would be particularly significant, as the equity segment of the FIRE portfolio remains around $470,000 below its ultimate target.
This month I enjoyed Aussie Firebug’s interview with fellow blogger Aussie HiFIRE, and this honest and thoughtful reflection on the issue of income sustainability from Chasing FIRE Down Under.
By definition, the financial independence journey demands careful consideration about the permanence and limitations of any employment income. All the more so, as the journey – clefting the waves seemingly under its own impetus – appears at risk of completing itself.
No comments:
Post a Comment