Open Discussion - The Bear Market

[TokyoBoglehead]

The only thing I have changed recently is boosting my allocation to commodities. Commodities did nothing for a decade but last year did great (up like 100%).

Since commodities and equities historically moved in different ways (so I read from Jim Rogers) I thought it better to increase my exposure to them and reduce allocations to other stuff - bonds mostly. Bonds have sucked this year so I guess it worked ok. But this is just a fidget, commodities are still less than 10% of what I have.

Commodities have been selling off like everything in recent weeks though.

There is an eMAXIS Toshin if others want to consider it.

(I also play with commodity futures but this is more speculative in nature…)

1. Commodities are not an investment though, they are a hedge. You want to own them BEFORE a downturn. They will not grow your porfolio long-term. Look at the historic trends for the bigger indexes.

(I also play with commodity futures but this is more speculative in nature…)

Are commodity options available on Japanese exchanges? I have never gotten in to options (too complicated for my brain) but I am curious about funds or etfs that offer a managed futures strategy - something like: https://imgpfunds.com/im-dbi-managed-fu ... ategy-etf/ as it strikes me as potentially a better hedge than the bond and gold funds I own (which have offered poor protection in this market). THe fees are high and there are probably hidden risks that I am unaware of so I am hesitant.

Yes, they are. Here is a simulator that runs you through it. (I have not tried this yet.) https://www.fopstudy.com/main

Bonds provide return-free risk, not risk-free return. I avoid them completely.

What do you use in lieu of bonds in your portfolio or are you 100% stocks? Nothing is risk free but bonds are less risky than stocks and, if you are calculating in Yen terms, USD bonds are up on the year due to the currency exchange.

Bonds are only "safe" if two conditions are present: 1. you have a short-term investment horizon (<5yrs), and 2. you need to preserve capital at all costs during that time (i.e. you will need to cash out).

However, if you have a long-term investment horizon (>20yrs), like most of us who are saving for retirement, stock returns are incredibly consistent and stable. If fact, they actually have less volatility (lower standard deviation) than bonds over 20yr+ terms. That means they are more predictable (i.e. safer) in delivering returns than bonds are, counterintuitive as that may seem. Now obviously, over <5yr periods, equity is more volatile. At 10yrs, it gets pretty close however, and at 20yrs+, equity is superior.

You need to specify which type of bonds you are talking about here. US treasuries, for example, are the safest investment out there. However, currency risks is a big concern for those not paid in USD.

The current 2year rates is 4.3%. Nothing to shake a stick at. And IBonds (sadly American only) are pretty much they best guartenned investment available.

[sutebayashi]

Are commodity options available on Japanese exchanges?

Not sure about commodity options, but I think not… I have a futures account with Rakuten, and they do offer options on the N225, but I have never even considered to try trading those.
Never looked for managed futures products myself, either.

[JimNasium]

I just started investing last year, so I don’t have much experience here. It does seem like a strange time right now with stocks and bonds being down, the extremely weak value of the yen, but jobs are plentiful, and there’s still a strong demand for goods and services. Like people have said here, I’m just going to stay the course with my monthly NISA, IDeCo, and regular investments (and not look at my portfolio).

[beanhead]

1) How is your portfolio doing?
2) Have you considered making any changes to your portfolio?
3) Are you buying the dip, keeping dry powder, or simply staying the course?
4) Do you think this will be a short term bear market or are you expecting more pain for longer?

1)Not well this year at all.
2)Not really. This experience may make me lean towards tsumitate NISA rather than regular for next year. Lump-summing in early 2022 was not such a successful strategy
3)Staying the course, buying as regularly as I can.
4) No idea, crystal ball is not working so well at Bean Towers.

[mighty58]

You need to specify which type of bonds you are talking about here. US treasuries, for example, are the safest investment out there. However, currency risks is a big concern for those not paid in USD.

The current 2year rates is 4.3%. Nothing to shake a stick at. And IBonds (sadly American only) are pretty much they best guartenned investment available.

A few points:

• US Treasuries, as you point out, are subject to currency fluctuation risk for us in Japan, so they usually don't make much sense as an investment (i.e. the type of people that want a T-Bill, will not be comfortable with the currency risk).
• But let's assume zero currency risk for a moment. Current 2year rates @ 4.3% are guaranteed to underperform current inflation by about 4% (current inflation is around 8.5% in the US). Why on earth would you want an investment that guarantees you will make 4% less than even inflation? In order to actually make a real 4.3% return, you need 0% inflation.
• ibonds are a different animal as they are inflation protected, and "if" you assume zero currency risk, can make sense "if" your primary goal is to protect against principal loss in the short term. Otherwise, I stand by what I said: in the long-term, equity performs the "bond-like" functions better than actual bonds.
• Most investors here are buying bonds via a fund. These funds buy and sell bonds every day on the secondary market, mark their holdings to market everyday, and thus are volatile.

[TokyoBoglehead]

You need to specify which type of bonds you are talking about here. US treasuries, for example, are the safest investment out there. However, currency risks is a big concern for those not paid in USD.

The current 2year rates is 4.3%. Nothing to shake a stick at. And IBonds (sadly American only) are pretty much they best guartenned investment available.

A few points:

• US Treasuries, as you point out, are subject to currency fluctuation risk for us in Japan, so they usually don't make much sense as an investment (i.e. the type of people that want a T-Bill, will not be comfortable with the currency risk).
• But let's assume zero currency risk for a moment. Current 2year rates @ 4.3% are guaranteed to underperform current inflation by about 4% (current inflation is around 8.5% in the US). Why on earth would you want an investment that guarantees you will make 4% less than even inflation? In order to actually make a real 4.3% return, you need 0% inflation.
• ibonds are a different animal as they are inflation protected, and "if" you assume zero currency risk, can make sense "if" your primary goal is to protect against principal loss in the short term. Otherwise, I stand by what I said: in the long-term, equity performs the "bond-like" functions better than actual bonds.
• Most investors here are buying bonds via a fund. These funds buy and sell bonds every day on the secondary market, mark their holdings to market everyday, and thus are volatile.

Point 2 -Very simply because that 4% is guaranteed. The market could go down much more in that time period. Some people literally need that "fixed-income". For a retiree or those nearing retirement a guaranteed 4% during a volatile market is a pretty sweet deal.

Point 4 - The fluctuations of fund fund prices are basically irrelevant (reinvesting/accumulating trusts notwithstanding) . It is the Yield that matters in the long-term. Long term investor would not worry about the NAV of BND, they care about the yield.

Further, You can buy notes and and strips directly through virtually all brockers.. And many older investors prefer this (perfectly legitimate) method

[eyeswideshut]

1) How is your portfolio doing?
2) Have you considered making any changes to your portfolio?
3) Are you buying the dip, keeping dry powder, or simply staying the course?
4) Do you think this will be a short term bear market or are you expecting more pain for longer?

1)Not well this year at all.
2)Not really. This experience may make me lean towards tsumitate NISA rather than regular for next year. Lump-summing in early 2022 was not such a successful strategy
3)Staying the course, buying as regularly as I can.
4) No idea, crystal ball is not working so well at Bean Towers.

I had a fair amount of USD which I put into stocks late 2021 and early 2022 and also converted some of it to Yen. Both bad choices in hindsight - sigh.

[eyeswideshut]

Current 2year rates @ 4.3% are guaranteed to underperform current inflation by about 4% (current inflation is around 8.5% in the US). Why on earth would you want an investment that guarantees you will make 4% less than even inflation? In order to actually make a real 4.3% return, you need 0% inflation.

Sometimes losing less is more - what is the real yield of the S&P right now?

[mighty58]

Point 2 -Very simply because that 4% is guaranteed. The market could go down much more in that time period. Some people literally need that "fixed-income". For a retiree or those nearing retirement a guaranteed 4% during a volatile market is a pretty sweet deal.

Sometimes losing less is more - what is the real yield of the S&P right now?

Sure, I concede that -4% is better than -8.5%. And I understand that some people (less individuals, more institutional) may have needs for such a product. But as someone with a long-term horizon, and without liquidity needs in two years, these kinds of numbers don't interest me in the least. And nor should it interest anyone else on this board who is still in the accumulation phase of life, saving/investing towards retirement.

[eyeswideshut]

Sure, I concede that -4% is better than -8.5%. And I understand that some people (less individuals, more institutional) may have needs for such a product. But as someone with a long-term horizon, and without liquidity needs in two years, these kinds of numbers don't interest me in the least. And nor should it interest anyone else on this board who is still in the accumulation phase of life, saving/investing towards retirement.

The theory - debatable if it actually works in practice - is that having bonds is a ballast to your equities that allows you to rebalance into stocks whenever the market crashes. The problem this year is that long bonds are down almost as much as equities meaning there is no rebalancing premium. This is why I am re-considering my roughly 20% allocation to them and instead wondering if a managed futures hedging strategy might be better - or even just cash in a fixed term deposit. 100% equities is too much volatility for me - I need to sleep at night.