My Investment Allocation is All Wrong

Time for a rethink!

Well, this is embarrassing.

After fifteen years of investing and eight years of running RetireJapan, I have realised that some of my investments are not fit for purpose.

Drat.

How it started

Until very recently I was pretty happy with my portfolio. We own a core of index funds, with a dividend paying stock portfolio on the side.

My investing philosophy so far has been to buy things and never sell, reinvesting any dividends that come along.

This approach has worked pretty well so far.

However.

How it’s going

I’ll be leaving my job at the end of March (not entirely by choice), and while I won’t be retiring just yet, I don’t plan to look for formal employment again, immediately or in the future.

So I have been thinking about what retirement might look like, how we might start selling our investments in the future to generate funds to live off, and what rules I could make to help me make effective decisions.

And I realised that while I have effective rules to help me buy investments, I don’t have any idea of how we are going to go about selling them.

Fortunately we will still have some money coming in, mainly from my wife’s business but also from my side businesses and projects. But if we didn’t, I would have no idea how to approach drawing down our portfolio.

I had a very rough image that we would start spending the dividends from our dividend generating assets, and slowly sell off the index funds as needed. But there are too many stocks, and they make up too large a proportion of your portfolio. What should I do with them, and what should we sell first?

And USD dividends bring their own issues, in the form of the US withholding tax as well as the extra friction of changing them back to yen and keeping track of potential forex gains for tax purposes.

I don’t think I like our portfolio very much.

What I need to do next

I probably need to restructure things. For now, I’m going to direct any new money into whole world stock mutual funds (eMaxis Slim All-Country or similar) or Japanese dividend stocks. I think we also need to start thinking about buying a bond fund (probably developed country bonds).

I will stop buying US stocks altogether.

Then I will take a while to think things through. In my experience, any time I make a hasty investment decision I end up regretting it. There is no rush here.

It’s quite likely we will just keep our current US holdings, or perhaps slowly sell them off in order to switch the funds into the investments above.

We’ll see.

Learn from my mistakes

So once again by trying to be clever I have managed to cause problems for myself.

Pretty much everyone who is anyone in personal finance or investing says the same thing: invest in low-cost index funds, automate it as much as possible, and then ignore your investments.

And if we had done that I believe we’d be in a better position.

So if you are just getting started or you are looking to increase the amount you invest every month, please consider sticking to the basics: low-cost diversified index funds, one stock and one bond fund. Make clear rules for yourself on how you will invest AND how you will spend.

And you won’t end up like me.

I’ll be writing another post about this soon, and discussing it on the forum if anyone cares to join me 🙂

20 Responses

  1. Which is likely to earn you more: a collection of 20 blue chips with robust dividend and share price histories, healthy P/B ratios and operating margins, etc., with (taxed) dividends reinvested, then a decumulation phase of dividend income and probably increasing stock prices, or a whole-world equity index with a 4% withdrawal rate?

    (The answer is 42)

  2. Gave up on stocks many years ago. Made a little. Lost a little. Probably made a little more than I lost. Most of the money just went into the bank but I also bought nenkin plans. One from the post office which they apparently stopped offering will pay me for life. Another with the life insurance company which paid me a lump sum at age 60. (6 years ago) and of course I have paid into Japan’s nenkin since 1980 and have taken it since 62. So, between those three and what I have saved that is what I will live on with a little part time work for a few more years. I am already tired of working. My wife also has a nenkin from a life insurance co. and her national nenkin so between the two of us I suppose that should be enough. What do you think?

    1. Personal finance is personal, so I think the most important thing is that everyone understand their situation, then takes action to make the most of it.

      Ideally you’d have enough pension (and pension-like) income in retirement to meet your spending needs, then some savings or investments to fund your discretionary saving ^-^

      1. Having enough pension or pension-like income is a difficult thing to assess. Especially, with a spouse who needs to be helped at home there are a lot of monthly expenses. Usually, I wind up covering the cost by withdrawing from savings. A dangerous way to survive but I really don’t have many options.

        1. Daniel: Thank you for you very honest reply. Aren’t we all tired of people posting on the Internet about how “amazing” their finances and savings are!? No, you are real… they are…well… maybe real, but few! 🙂

          @BenTanaka: I think this would be a great source of material for your website (and financial consulting business!).

          Real World interviews with people who have imperfect financial situations. Then, provides realistic, simple ways to improve their situation — no matter how small. Important: Focus on “story telling” and their emotions (risk appetite) to help make an emotional connection with your readers… which is much more impactful than a yet another list of “10 financial things to do”.

          2. I especially agree with the comment to Daniel above. But also to Ben. I couldn’t help feeling insecure whenever I read the number and diversity of his investments; feeling I was selling myself short investing in just stock and bond indexes, despite all I’d read about that being the most sensible thing.

          3. I completely agree with that interviews with real people about their finances would be beneficial and incredibly interesting. Many personal finance blogs do this effectively, like Physicians on Fire’s FIRE Crossroads posts and Millennial Revolution’s Reader Cases segments.

            Implementing this would be easy, as you can create general questions for the interviewer to complete. You can add some comments yourself when, for example, the reader is looking for advice. I think it would be a great way to create interesting content. I’d love to read more about how others are managing their money in Japan.

  3. Congratulations on reaching (semi) retirement. That’s my goal, so I’m envious. Very happy for you as it was your RetireJapan site that got on track with IDeCo & NISA. Much appreciated.

    I’m pretty new at investing in stocks, but figured I’d put in my two cents…partly in the hope that my simple plan helps, & partly in the hope that those wiser than myself in the ways of personal finance point out the holes in my plan 😅

    Many commentators say the US stock market is way over priced & potentially on the verge of popping…the US $ has appreciated significantly against the yen…from April you’ll be retired from formal work…from my vantage point you’re sitting pretty. My simple suggestion is taking profits on your overpriced US shares before a potential bubble burst, repatriation of those funds to take advantage of the dollar/yen situation, & do it this year as your lower taxable income for 2022 will help to buffer you from the tax bill. Finally load up your & your wife’s 2022 NISAs with Japanese stocks that pay decent dividends.

    All the best!

  4. Don’t you think that once you reach retirement age as I have that it is time to lay off the stocks and stay with something with less risk? I may be overly conservative but at least I sleep nights. Not sure I would with much of my money in stocks and having less time to make up for any losses,

    1. Being able to sleep at night is critical, so whatever works for you is important, Daniel.
      The challenge that many of us will face is longer retirement. For someone lucky enough to retire early, say at 60, they could potentially have 30 years (or even more) of retirement. A lot of U.S. -based analysts and advisors are now suggesting that for this length of time, cash and bonds alone are not enough. Some stocks or equity funds/ETFs are needed to combat inflation, at least, over a long retirement.

      As you wrote above, medical costs can be a challenge as one gets older. If savings do not grow with inflation, but the costs of those medical bills go up, one could run out of money. Hence the need to keep some growth (and of course risk) in the portfolio, even at 65,, or 70, or 75.

  5. I strongly recommend ultra-low cost ETFs that track US-based S&P 500. Why S&P 500? There are three very large, open, highly advanced economic regions in the world: US (OK… “North America”!), Europe, and Japan. There are three equity indices that cover these regions: US: S&P 500; Europe: Euro STOXX 50 or S&P Europe 350; Japan: Nikkei 225.

    Of those three regions: Which has the most dynamic economy and, hence, can most quickly recover from a crisis? Easy: US.

    But wait… there’s more! If you only invest in a single equity index, won’t you miss great emerging markets (and frontier markets) investments? No, those companies in US/EU/JP are already doing the hard work for you. How long do you think Toyota has been making cars outside Japan? Longer than you have been alive. The top 500 companies in those three regions are constantly thinking (day and night!) about how to expand their international operations to increase revenues and profits outside of their home countries. Surely, they can generate a more consistent return than you can by picking a few EM stocks.

    Also, setup auto-reinvest on dividend payment. This is called DRIP in the US. I cannot recall, but very long term studies of “total returns” on equities indices (which include *perfect* reinvestment of dividends into the same equity index) demonstrate a huge portion of long term return comes from divs reinvestment.

    Last: Never sell. Ever. Until you need regular draw downs. But nothing big. Crisis comes? Great, reduce your life expenses and invest even more in these indices.

    After 20-30 years you will be objectively rich compared to any of your friends or co-workers.

    Yes, I admit, this is not a “fun” investment strategy, but it works very well.

    One place I do think that you can “beat the index funds” is by picking junk bonds one-by-one. Yes, you take *lots* of credit risk by buying low rated bonds (think S&P BBB and below), but you can easily beat index funds. How? Because index funds are very generic and mostly investment grade. As long as your purchase size is small and your transaction fees are low, you can at least match bond index funds and sometimes beat them! That said, you are mostly losing money by investing in bonds instead of equities, so please make it a small part of your portfolio. Also, this strategy works best *after* a credit crisis (once every 7-10 years).

    1. Don’t see much reason to choose S&P500 fund over an all-world fund, or even a US total stock market fund.

      In Japan, mutual funds can reinvest dividends internally without paying them out (and avoiding paying tax). This is an advantage over ETFs.

      1. Good point I guess. I wonder if there’s any need for me to allocate a little money to a bond fund as I’m only 29 now.

        1. Depends on your goals and how you feel about risk. The closer you get to retirement (needing the money) the more important stability might seem to you.

          1. I’m more open to risk now so I’ve been focussing on stocks. I feel I’ve made bad mutual fund choices so I’m leaning towards index funds as of late.

  7. Thanks for honesty, Ben. If I had managed to get myself to your position, I would actually be pretty satisfied. Surely isn’t the whole idea not to do it perfectly, but to have a solid and doable overall plan, so if one part goes north, it doesn’t mean the whole plan goes in the bin? And as an (ex?)-teacher, you must know that making mistakes is part of the process of learning. And on the scale of things, this sounds like an annoyance, like a bluebottle, or a mosquito. Definitely not a murder hornet.

    And I totally agree with other posters that hearing others’ stories, and in plain English, is probably the best way for noobs with finance phobias, like me, to actually take the plunge and try and get their finances in order.