10 Q&As about the new NISA

[ToushiTime]

10% in alternatives related to real estate)

REITs and/or something else?

highly inflationary which is going to devastate the real return of bonds but would also cut stock values by enormous amounts.

Definitely in some cases, but it looks like the US had deflation during the Depression, so not always
https://www.macrotrends.net/2497/histor ... te-by-year

I think bonds beat the S&P 500 around then (during each downtrend in the top graph)
https://www.longtermtrends.net/stocks-vs-bonds/
https://pages.stern.nyu.edu/~adamodar/N ... retSP.html

The past is the past, not the future, etc etc. but overall they seem to work differently to stocks and are generally less volatile.

Do you go for that 10% of real-estate related investments for diversification reasons or for other reasons?

[TokyoBoglehead]

I feel that it's important to look at example from the perspective of a YEN investor.

I would not question the safety of American, or say Canadian government bonds.I would probably own some if I was paid in either currency.

Simple put, I'm referring to the extra currency risk.

Buying a domestic government bonds in your domestic currency offers a basically risk free investment, it creates a folid floor, with a guaranteed return

Buying a foreign governments bond in your domestic currency offers the same return, but with no floor for risk.

That's a bad deal for a long term investor. What does that offer you? The attraction of bonds is the security. How is that a secure investment?
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Black swans events are not worth considering I say, but make sure you're prepared for the very real disasters we can face here in Japan. If an earthquake hits you'll need cash in hand and food, not stocks, bonds, and bullion.

As far a diversification goes, global stocks are pretty darn diversified. I see little need for anything else, just derisk into cash as you approach retirement.

[TokyoWart]

ToushiTime posted:

10% in alternatives related to real estate)

REITs and/or something else?

...

The past is the past, not the future, etc etc. but overall they seem to work differently to stocks and are generally less volatile.

Do you go for that 10% of real-estate related investments for diversification reasons or for other reasons?

I would agree that the future is unpredictable and I don't know what will happen. The one question I can sort of answer is what that 10% allocation is in my portfolio. I have some private REITs, direction joint ownership of investment real estate through limited partnerships and positions in "hard money" lending to real estate developers. I only started this a few years ago and did so for diversification and to find out to what extent these instruments generate tax-advantaged income flows.

[sutebayashi]

To ToushiTime,

I have about 10% each in developed and developing market bonds (the rest is mostly foreign equities). I accumulated with eMAXIS Toshin funds for those. Recently I took those funds and invested into similar US ETF products, but I continue to accumulate with the Toshin funds. (Actually one of the US ETFs I am in actually invests a little in JGBs, whereas the eMAXIS slim developing bond fund is ex-Japan).

I feel that it's important to look at example from the perspective of a YEN investor.

To be sure, I am assuming that Yen investor refers to someone who is based in Japan and needing to have yen in order to buy food and stuff, eventually in retirement.

Simple put, I'm referring to the extra currency risk.

Currency risk includes, the value of the currency in question going down versus another currency, essentially, I think.

But if one says “I am a yen investor”, and acts with a great degree of home country bias, is that not taking on a lot of yen currency risk?

Yes, a dollar etc may depreciate relative to the yen. But the yen may depreciate relative to a dollar.

“Well,” one might say “I will need to have yen to buy my food and stuff in retirement”, but what if the inflation rate that prevails for the yen turns out to be higher than for a dollar? (This is one way in which the government here might be able to deal with reducing the large debt burden it has accumulated.) Those yen’s might not go so far as they used to, due to inflation risk.

Buying a domestic government bonds in your domestic currency offers a basically risk free investment, it creates a folid floor, with a guaranteed return

Agreed there. But this doesn’t mean to me that one has no currency risk. Rather it means one has selected to assume the yen currency risk implicitly, over alternatives.

Maybe it would be easier to consider the situation for a Turkish Lira investor. If you were living in Turkey would you prefer Turkish Lira bonds to dollars or yen ones? I think Turkish lira investors must have done spectacularly poorly over the past decade, due to the Lira’s large depreciation.

So I think there is currency risk, and one may be happy to take the yen currency risk, versus some other currency. But I believe there is an implicit speculation on the future value of the yen underlying that.

It seems to me that everything is relative in the end.

For the time being, I have a house and income denominated in yen, and for me that is enough to feel at ease with respect to foreign currency risk. Indeed if the authorities successfully adopted a strong yen policy (or foreign authorities trash their currencies), that would make my future income go up in value relatively and the house value too, so I would be a richer person in retirement than I might otherwise be. As I get closer to retirement that balance will shift, so maybe I would boost Japanese currency assets in future. I want to see what happens before making those decisions.

[ToushiTime]

To TokyoBoglehead and Sutebayashi, and anyone else who wants to chip in

I was not comparing foreign bonds held by a yen investor vs foreign bonds held by a dollar investor.
I was comparing the relative risks and upsides of foreign bonds held by a yen investor vs foreign bonds equities held by a yen investor.
During the Depression, stocks plunged around the world while bonds performed relatively well, according to data I provided.
That's no guarantee of what would happen next time, but I feel that doing something like Sutebayashi does could be the way to go i.e. 10% bonds. I own a home in Japan paid for with a fixed rate loan, and will maintain cash savings, which together might be a sufficient counterweight to my equities holding, instead of the 10% or more of bonds. I'm still weighing my options. I don't want the hassle and risks of investing and managing housing overseas.

[ToushiTime]

I have some private REITs, direction joint ownership of investment real estate through limited partnerships and positions in "hard money" lending to real estate developers.

Are these Japan based? Are they doing well?

[TokyoWart]

I have some private REITs, direction joint ownership of investment real estate through limited partnerships and positions in "hard money" lending to real estate developers.

Are these Japan based? Are they doing well?

No, I have not found anything very attractive in Japan for real estate and of course a REIT domiciled in Japan would probably be a PFIC (tax nightmare for US expats).

They have done remarkably well but there's a general question about how accurate private REIT valuations have been in the last year since they are diverging from public REITs. What's being reported to me on paper is returns of 0-10% for 2022 but these are not liquid investments and I would not be able to sell at will. Even that 0% NAV return is better than the roughly negative 20% return I had in general in 2022 for anything publically traded that is based in the US.

[ToushiTime]

Interesting, thanks

[TokyoBoglehead]

I have some private REITs, direction joint ownership of investment real estate through limited partnerships and positions in "hard money" lending to real estate developers.

Are these Japan based? Are they doing well?

No, I have not found anything very attractive in Japan for real estate and of course a REIT domiciled in Japan would probably be a PFIC (tax nightmare for US expats).

They have done remarkably well but there's a general question about how accurate private REIT valuations have been in the last year since they are diverging from public REITs. What's being reported to me on paper is returns of 0-10% for 2022 but these are not liquid investments and I would not be able to sell at will. Even that 0% NAV return is better than the roughly negative 20% return I had in general in 2022 for anything publically traded that is based in the US.

It's important to remember private real estate concerns and syndications, value themselves. They are not publicly traded, so true price discovery isn't really happening.

Valuations are often extremely optimistic.

To TokyoBoglehead and Sutebayashi, and anyone else who wants to chip in

I was not comparing foreign bonds held by a yen investor vs foreign bonds held by a dollar investor.
I was comparing the relative risks and upsides of foreign bonds held by a yen investor vs foreign bonds equities held by a yen investor.
During the Depression, stocks plunged around the world while bonds performed relatively well, according to data I provided.
That's no guarantee of what would happen next time, but I feel that doing something like Sutebayashi does could be the way to go i.e. 10% bonds. I own a home in Japan paid for with a fixed rate loan, and will maintain cash savings, which together might be a sufficient counterweight to my equities holding, instead of the 10% or more of bonds. I'm still weighing my options. I don't want the hassle and risks of investing and managing housing overseas.

Those concerns are definitely valid.

I would say, if one wants to speculate on currency foreign bonds are a poor choice. If one wants to diversify, foreign bonds are an option, but present more risk then is immediately apparent.

If one wants to diversify without extra risk one might split their bond allocation between a low-cost diversified hedged bond fund, and a non hedged bond fund. Or one could buy futures or options in the currency market.

I take it as read that we are all discussing developed sovereign debt here.

EM bonds and corporate debt are entirely diffent animals. ( In reference the early comment on Turkey).

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For full transparency I would love to be wrong here. I am also annoyed by the options abai to YEN investors. (Those who are paid in, and thus must spend, yen).

[sutebayashi]

I find myself in some agreement here - my guess is that currency market fluctuations do contribute a large proportion of gains or losses seen on foreign currency assets, be they bonds or equities. (This makes taking a tsumitate style approach to accumulating the assets attractive if one is going to invest over a long period of time.)

My Monex summary tells me that I have only around 1.5% of my portfolio in yen-based equities and bonds. So yes I am assuming 98.5% non-yen currency risk there. My yen currency risk is all in my house and future wage income, plus what yen I keep in the bank.

I was comparing the relative risks and upsides of foreign bonds held by a yen investor vs foreign bonds equities held by a yen investor.

At the myindex.jp site, there is a section on the 資産配分 page, if you scroll down to the bottom, see below 大暴落！ あの時のリターンは？
You can select your favorite financial crisis and it shows how different asset classes did in different cases.
Again there the currency fluctuations play a big role, but it seems to me that indeed bonds performed less poorly than stocks during those crises, and also performed worse in the subsequent recoveries.
One thing I would add here is that I aim to rebalance my portfolio at the end of each year. So if my equities had really sold off then I would probably find myself selling some foreign bonds (maybe at a loss due to currency fluctuations), and buying more equities.

But it’s interesting to look at the aforementioned data at myindex.jp - depending on the financial crisis non-yen bonds actually killed it in one case (IT bubble), but got killed in another (Lehman shock).