Why do my iDeCo funds seem to be performing so badly??

[MyTime]

So... I have been paying into iDeCo for about a year now. I have three funds in my Rakuten iDeCo account. The figures in parentheses are their performances for the year since I started buying them.:

Tawara No-Load Developed Countries (+2.5%)
Nikko Emerging Markets Fund (-9.2%)
Mitsui Sumitomo DC Tsumitate Japan Index Fund (-3.3)

In my NISA I have (as I think many here do) mostly a combination of:

1550 (world) (+7.81)
1343 (emerging) (-4.97)
1348 (Japan) (+2.62)

Although it is a similar allocation, the iDeCo funds seem to be performing much more poorly. Even around the start of the year when all of my NISA funds were showing massive increases, the iDeCo funds were lagging behind by quite a lot.

I have no idea why this is. I would have expected similar funds to perform similarly. Can anyone enlighten me? I don't think I picked bad funds for my iDeCo--I just chose the cheapest funds in the three asset classes. Is there something I am missing?

[goodandbadjapan]

Could it just be because of when you bought them? Were the ideco ones bought at a high price, but the NISA at a time when they were lower?

[MyTime]

Could it just be because of when you bought them? Were the ideco ones bought at a high price, but the NISA at a time when they were lower?

Thanks for the response. I'm not sure... I bought my first NISA Funds at the beginning of August last year and I started my monthly iDeCo payments two months later. but even when the prices were rising at the end of the year, the percentage that the iDeCo fund values rose was much smaller. I don't know if that can account for it.

Do most people see a similar different performance from their NISA and iDeCo holdings??

[jcc]

Could it just be because of when you bought them? Were the ideco ones bought at a high price, but the NISA at a time when they were lower?

Thanks for the response. I'm not sure... I bought my first NISA Funds at the beginning of August last year and I started my monthly iDeCo payments two months later. but even when the prices were rising at the end of the year, the percentage that the iDeCo fund values rose was much smaller. I don't know if that can account for it.

Do most people see a similar different performance from their NISA and iDeCo holdings??

No. As goodandbad said it's just a question of market timing along with the things you happened to buy.

My NISA stuff is not doing great compared to my tokutei stuff. It's just because I got most of my nisa at the beginning of the year while everything else was dollar cost averaged afterwards. Most of my nisa account was bought before the corretion, and most of the tokutei was after. There's no major difference between the performances in etfs or funds(so long as you're not paying high fees)

If you bought a nikkei based index in august 25 and the same thing on october 25 and you compared the two, you're buying at 19450 and 21700. Of course the ones you bought two months earlier would be way ahead, you missed out on 2 months of great returns.

The same thing stands true for the emerging markets and developed markets indices. Those 2 months were pretty solid

[MyTime]

Thanks jcc. I guess that must be the reason. It's only been about a year since I started paying into my iDeCo, so hopefully it will all even out over time.

My wife starts paying into her iDeCo this month--on my recommendation. Hence my sudden attack of nervousness...

[Akatani]

it's not such a big deal but there's also the initial 3000yen set up cost which they count in the totals. If you're only putting in 2,3000/month then it takes a while for the gains to overcome that initial 3000yen.

[zeo]

What jcc said is spot on. In Sept 1st, 2017 Nikkei was at 19,691. Where is it today? 22,351. All your purchases from Nov-Feb 2017 and May-Oct 2018 were higher than that so of course, you show a paper loss.

This year there was also a major shift of investment out of emerging markets in to more mature markets so your allocation made that loss a bit worse. Last year there was a lot of uncertainty in the market and whenever that happens money flows out of high risk/high return investments in to safer ones. In addition, the US Federal Reserve signaled they were going to raise interest rates 4 times this year, they've raised at least 3 times, can't remember if they did the 4th yet. Anyway, higher interest rates mean bonds start to look more attractive since there is less risk with bonds compared to stocks and this pulls money out of equities markets and pushes prices lower. Next year it looks like they'll raise 3 times, so bonds and bond funds will continue to look a better in the short term.

Also of note, right now there is an inverted yield curve in the US bond markets, that means that short term interest rates are higher then long term rates. Inverted yield curves usually portend a recession and in recessions growth stocks, like emerging markets, don't do as well. This doesn't mean I'm suggesting to move money out of emerging markets. I'm just giving the information on what generally happens, it's not advice, nor am I an adviser.

[MyTime]

Thanks for those insights Zeo!

[captainspoke]

...higher interest rates mean bonds start to look more attractive since there is less risk with bonds compared to stocks and this pulls money out of equities markets and pushes prices lower. Next year it looks like they'll raise 3 times, so bonds and bond funds will continue to look a better in the short term.
...

What am I missing here with regard to interest rates? From what I've read, the price of bonds is inversely related to interest rate moves--so falling rates mean increasing bond prices, while rate increases mean falling bond prices. I would think that when rates have peaked would be the best time to buy, not when looking at further increases.

With all the QE since 2009, bonds prices have generally been in an uptrend, tho with some burps, while on the sidelines there have been plenty of articles speculating about the end of the run in bonds (all wrong, so far).

I do understand that maturity makes a difference, that short term bonds (1-3 yrs) are almost unaffected, and that with increasing maturity there is more interest rate risk. (And not only bonds, but utilities, REITs, even preferreds are affected by interest rate changes.) Perhaps a 'flight to safety' could push bond prices up in spite of rising rates?

I guess I'm missing something, so ELI5 (explain it like I'm 5).

[zeo]

You're right that bond prices and interest rates move in opposite directions. I should have been specific short term bonds are doing well.

This idea has more to do with money flows and psychology than bond yields. Money is always flowing in to the system. Some of it is new money, some of it is reinvestment, but the idea is the same, think of it as cash. You can basically consider it all new money and it always needs to be invested. This is simplifying greatly, but generally the investment options are bonds or stocks. Money has to flow in to one of those buckets. As a new money holder, which do you choose the riskier stocks or the safer bonds. It depends on which is offering the better return based on your risk tolerance usually.
Investors will usually allocate a portion in to each bucket, but when stocks enter a bear market they'll take there gains, or losses and move them to safer harbor investments like, you guessed it, bonds. As interest rates rise, the coupons start too look better in comparison to the stocks for new money. So new money flows will be in to bonds because it has to go somewhere.

Ok, so that is the what happens on a more abstract level, here's what happens on the micro level.

If you're a bond holder and rates rise, you're bonds are worth less so as your bonds mature you need to look for other investments, but as long as the stock market is doing what it's currently doing and a recession looks like it's coming, investors will likely reinvest in short term bonds waiting for things to change. This creates excess demand in the short term bond market, thus pushing prices higher.

If you look at the short term bond funds this year, this is exactly what has happened. I'm no guru though, the degree to which things have moved in this direction have surprised me. Uncertainty is the most difficult thing to deal with and as long as there is a lot of uncertainty (things like the trade war, elections that result in populist nationalist leadership) a higher percentage of investment money will flow in to short term instruments. Did that make any sense?