10 Q&As about the new NISA

[TokyoBoglehead]

However, for me, as I mentioned, I don't want to have just cash and equities.
I am thinking of having cash, bonds and equities.

Hopefully, my tone here is coming across as "seeking a pleasant and amicable debate" and not like I'm cross-examining you. It's one of my failings.

....

Now that you understand the downsides, and the poor risk-free ward case for YEN investors why do you continue to pursue bond investments?

Diversity itself is not "better" automatically. Introducing commodities or futures would not necessarily improve your CAGR, but it would definitely increase your risk.

Are you mainly consuming American sources of investing info?

Anyways, if I were 100% set on more diversity than global stocks offer, I would look at Emaxis Slim REIT products personally. Those are tempting

To answer your questions:

No, I’m not convinced it is necessarily a poor risk-free reward case for bond investments.

Yes, I see near-term downside risk for yen-based investment in bonds if the yen strengthens due to the Bank of Japan raising rates.

But surely there is also potential upside over the longer term from dollar appreciation, based on the differing long-term outlooks for the US economy versus Japan’s. That assumes that currencies reflect the strength of economies over the long term, and it assumes the US has a better economic future than Japan over the long term. I'd be open to arguments against both those assumptions.

I know you can get the same benefits from long-term dollar strengthening if you buy US equity funds instead of Treasuries, but surely government bonds are useful to diversify risk (and safer than other alternatives such as futures , commodities etc)?

Isn't that why most/many investors have bonds as part of their portfolio, hence the 60/40 cliché, which is a one-size fits all concept but has become common parlance because most investors hold some level of bonds. In my case I would be thinking of 10-20% bonds 80-90% equity.

For Japan based investors with yen to spend, are you against bond investments per se, or just against buying one nation’s government bonds?

Do you own bonds yourself? From your profile/tag, I think no. I was considering a bond-free portfolio too. It doesn't seem like a clear-cut issue, as northSaver seemed to imply. There again most of this stuff isn't

I thought you recommended the eMaxis Developed Nation Bond to me the other day, but maybe that was just as an alternative if I insisted on buying bonds?

I bought Emaxis Slim REITs on your recommendation. Thanks for that.

I was considering bond investments,but ultimately was convinced against them. Debates like this help me check my preconception etc, Emaxis would be a good choice if one was set on bonds, or the various cheap Treasury etfs!

To simplify my argument: Western Norms about Bond Investments do not apply here in Japan.

A. Buying home currency (developed- country) bond = very low risk, fixed return, guaranteed return of principle

B. Buying foreign currency (developed or other) bond = riskier, fixed return, but may have a negative return due to currency fluctuations.

It does not matter that the 60/40 portfolio is popular with Americans, it does not matter what Canadian or UK investor do or prefer. They have access to yield without currency risk, we only have sad sad JGBs. This is reality for the yen investor.

Risng us interest rates are pretty much universally understood to be the main reason for the current yen. By locking in a USD rate long term via bonds, you are betting against the FED stopping rate rises and betting on them not lowering interest rates. That is going to happen..... eventually. When it does the yen is "expected" to appreciate vs the dollar.

Now, it would need to be pretty bearish on the yen to bet against that established cause and effect. Myself, I don't bother either way.

Did you you for developed REITs or domestic? The Emaxis Slim Developed REITis ex-Japan fyi.

[sutebayashi]

I don’t see it being the case that bond investments is an American perspective.

I’m a fan of Asakura Tomoya, and he is an example (of many I think) Japanese sources that say there is a place for foreign bonds depending on your objectives.
https://diamond.jp/articles/-/299626
Come to think of it I have probably got most of my financial education reading Japanese sources, but perhaps they were in turn influenced by foreign advice…

Still, if anything bonds make more sense to me these days, given their prices have come down.

A tsumitate style of monthly investments will also see that currency risk work in one’s favour overtime.

As for the “Emaxis Slim REIT”, I recall the slim is only available for the developed nation REIT fund. Previously I had a 50/50 split between developed and emerging, but the emerging markets eMAXIS REIT fund is relatively limited in the countries it covers. From memory I was surprised to see I was so exposed to South Africa and Mexico through it, so I sold most of it and now am about 5% developed market REITs and 1% developing markets REITs fund.

[ToushiTime]

To simplify my argument: Western Norms about Bond Investments do not apply here in Japan.

A. Buying home currency (developed- country) bond = very low risk, fixed return, guaranteed return of principle

B. Buying foreign currency (developed or other) bond = riskier, fixed return, but may have a negative return due to currency fluctuations.

It does not matter that the 60/40 portfolio is popular with Americans, it does not matter what Canadian or UK investor do or prefer. They have access to yield without currency risk, we only have sad sad JGBs. This is reality for the yen investor.

Risng us interest rates are pretty much universally understood to be the main reason for the current yen. By locking in a USD rate long term via bonds, you are betting against the FED stopping rate rises and betting on them not lowering interest rates. That is going to happen..... eventually. When it does the yen is "expected" to appreciate vs the dollar.

Now, it would need to be pretty bearish on the yen to bet against that established cause and effect. Myself, I don't bother either way.

Did you you for developed REITs or domestic? The Emaxis Slim Developed REITis ex-Japan fyi.

I bought eMaxis bond funds as Treasury ETFs had higher fees and possibly triple taxation (I found out later on this forum that there is a way to claim the US tax back).

Yeah I bought the eMaxis Developed REITs. Thanks again for that.

As for the bonds vs no bonds issue:

Surely the currency risk is the same if you hold bonds and stocks for the same period of time and dollar-average?

If you only consider the limited upside (bond face value + coupon payments, when holding to maturity as I intend to do), yes the risk-reward is bad for bonds.

But what about the reduced intrinsic volatility of Treasuries (relative to stocks) and the diversification due to bond investment (government bonds tend to have a low correlation with share prices)?

Are you sure the limited upside of bonds cancels out these benefits?

You might be right. I just want a long-term counterweight to my equity/REIT investments, other than cash.

[sutebayashi]

No one can predict the future, but one can refer to the recent past.

https://myindex.jp/user/myaa.php?cj=0&e ... &mg=0&mo=0

I am not sure if that url is gonna work, but I am plugging in 100% foreign bond allocation at myindex for the past 20 years, and it says the return was 3.5% per year.

One could do worse. I have a penchant for commodities, but those would have performed worse than foreign bonds over the same period. Not so suitable for long term buy-and-hold, but bonds seem more reasonable.

Personally I have a bias against Japanese assets, even though I know there are at least some good ones that I would be happy to own. A Toyota or a Sony maybe, or what Buffett has been investing in. But I don’t want to own stinky Toshiba or Olympus etc etc, so it’s out with the baby and bath water for me there.
But if you play with the asset allocations at myindex, and see whether the portfolio allocations you like look like they should produce an adequate return for you, for an acceptable level of risk, then it’s all good I think. IMO.

[TBS]

But I don’t want to own stinky ... Olympus etc etc, so it’s out with the baby and bath water for me there.

This quote is glorious. It highlights how our perceptions of a company influenced by its media coverage can create viewpoints utterly disconnected with reality.

Olympus has been an absolutely stellar performer on the Tokyo Stock Exchange over the past 20 years. It has grown 8.4% per year over that period, almost as good as the S&P500's 8.7%/year return. Looking at the past 10 years, Olympus has grown 15.6% per year, smashing the S&P500's "mere" 10.0%/year return.

Much of Olympus's success has been driven by its medical devices business. This is a business sector that is out of sight and out of mind of the general public, but a sector that can be hugely profitable for corporations.

[sutebayashi]

Interesting. I still don’t want to own it. Oh yeah I don’t want to own Nissan either.

Edit thinking about this I guess it could be like ESG investors avoiding traditional energy businesses.

[TokyoBoglehead]

To simplify my argument: Western Norms about Bond Investments do not apply here in Japan.

A. Buying home currency (developed- country) bond = very low risk, fixed return, guaranteed return of principle

B. Buying foreign currency (developed or other) bond = riskier, fixed return, but may have a negative return due to currency fluctuations.

It does not matter that the 60/40 portfolio is popular with Americans, it does not matter what Canadian or UK investor do or prefer. They have access to yield without currency risk, we only have sad sad JGBs. This is reality for the yen investor.

Risng us interest rates are pretty much universally understood to be the main reason for the current yen. By locking in a USD rate long term via bonds, you are betting against the FED stopping rate rises and betting on them not lowering interest rates. That is going to happen..... eventually. When it does the yen is "expected" to appreciate vs the dollar.

Now, it would need to be pretty bearish on the yen to bet against that established cause and effect. Myself, I don't bother either way.

Did you you for developed REITs or domestic? The Emaxis Slim Developed REITis ex-Japan fyi.

I bought eMaxis bond funds as Treasury ETFs had higher fees and possibly triple taxation (I found out later on this forum that there is a way to claim the US tax back).

Yeah I bought the eMaxis Developed REITs. Thanks again for that.

As for the bonds vs no bonds issue:

Surely the currency risk is the same if you hold bonds and stocks for the same period of time and dollar-average?

If you only consider the limited upside (bond face value + coupon payments, when holding to maturity as I intend to do), yes the risk-reward is bad for bonds.

But what about the reduced intrinsic volatility of Treasuries (relative to stocks) and the diversification due to bond investment (government bonds tend to have a low correlation with share prices)?

Are you sure the limited upside of bonds cancels out these benefits?

You might be right. I just want a long-term counterweight to my equity/REIT investments, other than cash.

No, I would say a bet with a capped upside and high potential downside would not be an good investment.

Bonds being uncorrelated? Hmmm that's highly debatable, less correlated perhaps. This is one of the worst periods on record for 60/40.

The math is pretty clearcut here in my opinion.

,......

When it comes to Japanese equities I don't believe in stock picking, but I do enter IPO lotteries. That's a different animal though, basically you spin the wheel for free and hope you get lucky.

[ToushiTime]

To simplify my argument: Western Norms about Bond Investments do not apply here in Japan.

A. Buying home currency (developed- country) bond = very low risk, fixed return, guaranteed return of principle

B. Buying foreign currency (developed or other) bond = riskier, fixed return, but may have a negative return due to currency fluctuations.

It does not matter that the 60/40 portfolio is popular with Americans, it does not matter what Canadian or UK investor do or prefer. They have access to yield without currency risk, we only have sad sad JGBs. This is reality for the yen investor.

Risng us interest rates are pretty much universally understood to be the main reason for the current yen. By locking in a USD rate long term via bonds, you are betting against the FED stopping rate rises and betting on them not lowering interest rates. That is going to happen..... eventually. When it does the yen is "expected" to appreciate vs the dollar.

Now, it would need to be pretty bearish on the yen to bet against that established cause and effect. Myself, I don't bother either way.

Did you you for developed REITs or domestic? The Emaxis Slim Developed REITis ex-Japan fyi.

I bought eMaxis bond funds as Treasury ETFs had higher fees and possibly triple taxation (I found out later on this forum that there is a way to claim the US tax back).

Yeah I bought the eMaxis Developed REITs. Thanks again for that.

As for the bonds vs no bonds issue:

Surely the currency risk is the same if you hold bonds and stocks for the same period of time and dollar-average?

If you only consider the limited upside (bond face value + coupon payments, when holding to maturity as I intend to do), yes the risk-reward is bad for bonds.

But what about the reduced intrinsic volatility of Treasuries (relative to stocks) and the diversification due to bond investment (government bonds tend to have a low correlation with share prices)?

Are you sure the limited upside of bonds cancels out these benefits?

You might be right. I just want a long-term counterweight to my equity/REIT investments, other than cash.

No, I would say a bet with a capped upside and high potential downside would not be an good investment.

Bonds being uncorrelated? Hmmm that's highly debatable, less correlated perhaps. This is one of the worst periods on record for 60/40.

The math is pretty clearcut here in my opinion.

,......

When it comes to Japanese equities I don't believe in stock picking, but I do enter IPO lotteries. That's a different animal though, basically you spin the wheel for free and hope you get lucky.

Just to clarify something: I didn’t say bonds and equities are “uncorrelated”. From what I found, there has been a slight negative correlation over the past 10 years, though I agree that is not a given at all.

More importantly, you didn’t address my point about the risks other than currency rates i.e. Treasuries guarantee you coupons + face value if you hold to maturity, which I am thinking of doing, while share prices can fall to zero.

You seem to be ignoring the downside for stocks based on what has happened over the past 20 years.

Isn’t the risk reward calculation for someone holding Treasuries to maturity this?

Foreign equities:
more price upside + more price downside + currency risk

Foreign bonds:
(face value + coupons) + limited price downside (if held to maturity) + diversification + same currency risk

If equities had no price downside, I would say a no-bond portfolio would be a no-brainer, but that isn’t the case.

You wrote: “This is one of the worst periods on record for 60/40.”

To repeat: I am not thinking of going 60:40 for stock versus bond holdings, more like 80:20 or 90:10.

I agree, bonds have been useless compared to stocks, based on what has happened over the past 15 years or so.
But the past is no guarantee of the future, as the cliche goes.
With hindsight, it is easy to say no-bond portfolios worked best.
If I could tell the future, I would put everything in equities, and throw in heavy leveraging to boot

I don’t think the argument for avoiding bonds entirely is that clear-cut.

I get the impression that other people on here have government bonds in their portfolios through various means.
I would be very interested to know what others actually do on this.

And I would be interested to know what you and others think would happen to Treasuries and developed nation stocks (excluding Japan) respectively in a black-swan event, e.g. China invading Taiwan, or Japan having a fiscal collapse.

I respect your policy. You are convincing me to reduce my exposure to bonds, but I am not convinced enough to go zero-bond.

[TokyoWart]

To repeat: I am not thinking of going 60:40 for stock versus bond holdings, more like 80:20 or 90:10.

...

And I would be interested to know what you and others think would happen to Treasuries and developed nation stocks (excluding Japan) respectively in a black-swan event, e.g. China invading Taiwan, or Japan having a fiscal collapse.

Sorry to intrude from the side but I think you two are having an interesting conversation and I can't help myself

Personally I am only around 0.02% bonds (remaining 90% equities and 10% in alternatives related to real estate) but I think it's very hard to criticize a 10-20% bond holding if the primary purpose of a portfolio is to sustain a certain withdrawal percentage until death. Bengen's papers and the Trinity study tended to show higher failure rates when bonds are lower than 30-40% albeit that is the allocation at the time you start relying on the portfolio for retirement so it's relatively late in life.

I of course don't know what would happen but my worry for a black swan event that was a war or a fiscal collapse for Japan is that it would be highly inflationary which is going to devastate the real return of bonds but would also cut stock values by enormous amounts. For instance, the Japan Securities Exchange closed from 1945-49 and government bonds became effectively worthless during the hyperinflation that followed the world war. During black swan events of the magnitude you are mentioning there is no safe haven and entire financial markets can collapse (sometimes forever as they did for Cuba or Russia after their respective revolutions).

[adamu]

During black swan events of the magnitude you are mentioning there is no safe haven and entire financial markets can collapse (sometimes forever as they did for Cuba or Russia after their respective revolutions).

Thanks for the reminder to live a little too