Bond Allocation

[graben]

Do you think living in Japan makes investing in bonds unneeded or less important? I've always followed the Bogle way of having a diversified portfolio with a worldwide stock index fund and bonds for diversification.

I was surprised to see so many people in Reddit Japan finance subreddit saying they are not needed for people living in Japan. There were similar comments listed in the Euro finance subreddit as well.

Is this just a case of Reddit users being younger and not needing bonds or are they on to something to and the strong social support systems in Japan and Europe make bonds unneeded?

https://www.reddit.com/r/JapanFinance/s/dlZqmaguCa

https://www.reddit.com/r/eupersonalfinance/s/GOuum47481

[Tsumitate Wrestler]

The attraction of bonds in many countries is that they offer "risk-free" return.

This is only real true for sovereign bonds.
(For "Developed Countries": Treasuries, Gilts etc).

Japanese bonds offer almost no yield, and therefore very little risk free return.

If you buy foreign bonds you introduce a lot of risk, in the form of currency risk. The same risk you accept with foreign equities, but with far far less upside. As bonds basically have a capped upside. You could find yourself underwater for awhile if the yen appreciates.

So....why bother? Most new research data supports a 100% equity, buy and hold, strategy.

....

{It may be worth considering an index that tracks inflation linked government bonds}

[sutebayashi]

I live in Japan like most readers, but I don’t think about my investments from a yen based perspective so much. I personally see the yen as the currency risk - just me.

I was watching the “futures edge” podcast the other day and their guest had this thing called the “awesome portfolio”. Nice name.

What is it?

20% in each of, equities, bonds, cash, real estate, and gold - iirc.

Wow I thought - so little in equities, right?

That’s a US centric podcast, so I plugged these allocations into myindex.jp’s portfolio tool, and actually it did look like a decent portfolio to me - return versus risk.

I have about 20% in foreign bonds myself, and I’m happy with it. I’m not going for maximum returns and maximum risk. But different people will have different objectives. If you use a tool like myindex.jp based on actual data, you have a basis for whatever portfolio allocation you might choose. If you are making your own decision, I think you’re golden.

[RetireJapan]

I was watching the “futures edge” podcast the other day and their guest had this thing called the “awesome portfolio”. Nice name.

What is it?

20% in each of, equities, bonds, cash, real estate, and gold - iirc.

This is Harry Browne's permanent portfolio more or less. Recently Ray Dalio has also been recommending it.

[graben]

So....why bother? Most new research data
{It may be worth considering an index that tracks inflation linked government bonds}

Thanks I I have now moved part of my emergency fund out of cash and into JGBi.

[graben]

I have about 20% in foreign bonds myself, and I’m happy with it. I’m not going for maximum returns and maximum risk. But different people will have different objectives. If you use a tool like myindex.jp based on actual data, you have a basis for whatever portfolio allocation you might choose. If you are making your own decision, I think you’re golden.

I think you are right they are still good to keep for diversification but keep the percentage lower then a Bogle head would suggest.

[ChapInTokyo]

I do think that even in Japan it makes sense to have a balance of equity and bonds so that the volatility doesn't get too scary.

In terms of currency risk, why not buy a worldwide basket of bonds with Vanguard's BNDW or a combination of BND and BNDX so that things even out in terms of exchange rate fluctuations? There's no telling what's around the corner either in terms of equity prices, bond prices, or inflation or exchange rates so getting the volatility down seems like a good idea to me unless you have a very very long time horizon!

I try to keep a 60% equity, 40% fixed income portofolio (currently much higher on fixed income because I was worried about the effect of covid19 and end of QE2). In hindsight, I was lucky I sold off my REIT ETFs and bought bond ETFs, but I would have been fine to keep the equity ETF holdings since they bounced back up after a rough ride during 2022/23.

[Deep Blue]

I live in Japan like most readers, but I don’t think about my investments from a yen based perspective so much. I personally see the yen as the currency risk - just me.

Fully agree. An overly narrow prism of only thinking about yen based returns shuts off many investment opportunties, and also locks you in to a single currency. I much prefer my assets to be earning returns in a variety of currencies. Buying equities is a good way to achieve this, but it can be augmented with bonds too. I picked up some long duration UK gilts (via an index fund) last year and considering some long duration US Treasuries soon too.

I do agree currency risk would keep me out of shorter duration soverign bonds, but then I don't buy equities with less than a ten year time horizon either.

[ToushiTime]

So....why bother? Most new research data
{It may be worth considering an index that tracks inflation linked government bonds}

Thanks I I have now moved part of my emergency fund out of cash and into JGBi.

Are you going to hold them 10 years until maturity?

I thought about parking some of my spare cash there but the debt-to-gdp ratio of 260% is a bit off-putting.

I know the Japanese government has plenty of foreign reserves if hit the fan, but I’m not sure whether it could immediately dump a big chunk of its US Treasuries without causing a stampede and fall in the rest of its holdings as it has overtaken China again as the largest foreign owner of US debt.

Dunno. Just wondering why others on here and elsewhere don’t go for JGBi…

[Deep Blue]

Dunno. Just wondering why others on here and elsewhere don’t go for JGBi…

Can’t speak for others but the returns are not attractive enough for me.