Domestic stocks vs international

[northSaver]

I've just calculated my current stock fund allocation and it seems that 33% of the total is domestic (Japanese stock market). So 67% is international, mostly US. This is roughly what I was aiming for, since I live, earn and will probably retire in Japan. But I'm now wondering if this is a good allocation or not, especially since it's time to choose my funds for the New NISA. I know a lot of people here invest solely in Emaxis All Country, which gives them roughly a 6% exposure to the Japanese stock market. Is this enough I wonder, considering we live here? If not, how much is enough? I don't think I want to go higher than about 30%, but I'm not sure why.

Does anyone have any thoughts about this? Will you continue to buy only All Country in the New Nisa or will you buy some Japanese funds too, for example TOPIX? Will it really matter over the long term? I should add that I'm nearing retirement but I'm not sure if that's relevant or not.

[sutebayashi]

There is a great portfolio simulator tool here if you want to explore what different asset allocations have done in the past: https://myindex.jp/

It depends on the time frame you look at, but Japanese equities historically don’t seem to have as good returns as foreign equities, while demonstrating a similar degree of risk.

This data is from a recent vantage point where the yen is weak, and shows where we’ve been, not where we are going.

A big question is what returns you want to achieve and for how much risk.

Since you are close to retirement you might like to plug in some sort of bond exposures, and see how it would affect returns and risk. (Reducing both probably - which may or may not be what you are comfortable with)

(Personally I have almost zero exposure to Japanese equities, but my Monex account is always suggesting to me that the risk in my portfolio is too high, and I could reduce risk by buying more Japanese equities. Not sure I believe that though.)

[northSaver]

There is a great portfolio simulator tool here if you want to explore what different asset allocations have done in the past: https://myindex.jp/

Thanks. I'm already a big fan of myindex.jp I agree that Japanese stocks haven't been as good as international ones in the past, especially while the yen has been weakening, but as you point out this may or may not hold true in the future. I'm not sure what will happen to the Japanese stock market if/when USD.JPY falls, but it won't be very good for international stocks denominated in yen.

Since you are close to retirement you might like to plug in some sort of bond exposures, and see how it would affect returns and risk. (Reducing both probably - which may or may not be what you are comfortable with)

Bonds are a separate issue, I already have plenty of those. I'm only talking about the stock portion of my portfolio here.

Especially, I don’t want additional exposure to Japanese companies benefiting from the strong dollar currently as their results may be up for a rough ride when/if ¥/$ gets back to more balanced level.

Thanks, that's an interesting perspective. I'm beginning to think that 30% is too high. Google searches suggest that 30% domestic stocks is too low, but they are usually from the perspective of a US-based investor whose main market is the S&P500.

At the end of the day all I want is diversification and a bit of a cushion from exchange rate risks. I don't want to buy a hedged ETF so the only other choices seem to be keep it as cash or buy Japanese stocks.

[Tkydon]

but Japanese equities historically don’t seem to have as good returns as foreign equities, while demonstrating a similar degree of risk.

... don't seem to Have Had as good returns as foreign equities, In The Past...

As the disclaimers say, past returns are no guaranty of future performance...

Who knows about the future?

I think my views are well known on current Market Risk and Exchange Rate Risk...

Many pundits are predicting that future returns in the base currency may not be as good as in the past, and that does not include the exchange rate risk if the Yen strengthens...

[northSaver]

I think my views are well known on current Market Risk and Exchange Rate Risk...

Many pundits are predicting that future returns in the base currency may not be as good as in the past, and that does not include the exchange rate risk if the Yen strengthens...

Thanks. So based on your views of market risk and currency risk in the near future, may I ask what you are doing with new yen savings? Do you keep them as cash, or invest them in local markets or hedged funds, or carry on investing them in unhedged international stock funds despite the perceived risks?

[beanhead]

Thanks. So based on your views of market risk and currency risk in the near future, may I ask what you are doing with new yen savings?

Buying SoftBank stocks? Or Toshiba?

Hopefully neither.
(written by someone who does buy individual Japanese stocks, despite knowing the risks.)

[northSaver]

Buying SoftBank stocks? Or Toshiba?

Hopefully neither.
(written by someone who does buy individual Japanese stocks, despite knowing the risks.)

I was talking to a Japanese friend yesterday and he invests 100% in Japanese stocks. He tries to buy companies that don't have much international exposure. He seems paranoid about currency risk. I think there are quite a few Japanese who only buy Japanese stocks, just as there are Americans who only buy US stocks and British who only buy UK stocks. Overweighting your portfolio with domestic stocks is called "home country bias". It lacks diversification but it certainly reduces currency risk.

I think I read somewhere that the ideal allocation of domestic stocks is between 10% and 80%. Quite a large range! In this respect my 33% doesn't look too "wrong", though I'm thinking of reducing it a bit using New NISA.

[sutebayashi]

“It lacks diversification but it certainly reduces currency risk.”

I struggle with this, because it seems rather to concentrate risk into a single currency, rather than diversify it.

My home country is a minnow, and I hear my remaining parent there has quite a concentration of assets in the local region, which makes me squirmy. Similar logic, “oh don’t want to take too much risk (on far away places like America)”

People have a tendency to assume that bad stuff only goes down in far away places.

[northSaver]

“It lacks diversification but it certainly reduces currency risk.”

I struggle with this, because it seems rather to concentrate risk into a single currency, rather than diversify it.

Yeah, I hear you. I suppose I should have said "exchange rate risk". His thinking is that if he lives in Japan, earns yen and nothing else, spends yen and nothing else, and will retire in Japan with Japanese pensions and investments, then why bother investing in other currencies?

Personally I don't agree with him and would never invest 100% in my home country, even if I weren't an expat. I should add that about 15% of my stock portfolio is in emerging market funds, so about 50% is in developed countries ex-Japan. Time will tell whether this is a good allocation or not

[beanhead]

I was talking to a Japanese friend yesterday and he invests 100% in Japanese stocks. He tries to buy companies that don't have much international exposure.

Strange strategy.
I have a relative who only invests in Japanese companies as well. He has done very well over the years.
But I think he gets a bit of diversification by including a decent amount of global Japanese companies. The likes of Toyota, Astellas, Daikin etc.

I wouldn't be comfortable investing in only one country. Even less so if buying only companies focusing on the domestic market.