Sequence of returns risk and the 4% rule

[ChapInTokyo]

Rather than "I lost this much," or "I'm down this much", another way to look at it is when was your portfolio last at the present level? Was it six, nine, 12 months ago, or what?

For me, that was may 7-8 last year (the august dip is now a little above where I am now).

So another way to see it is that the market has been flat (or choppy, or moving sideways) for 11 months. Like, so what.

*

And IMO, what has just happened has nothing to do with sequence of returns. Yet. This downturn is only a couple months old--far from being even a year old, let alone a sequence of years.

Sequence of returns, everything I've read on it, is framed in years, not any two month period.

To be honest, last year when the markets dipped due to the inflation and interest rate expectations, I was not overly worried even though my portfolio lost over 100,000 usd at one point. This time it's different since the American tariffs are not a short term event like inflation and interest rate expectations. I for one am looking to gradually shift more of my assets to fixed income funds, since it looks like the world is likely to head to a recessionary phase of the business cycle. Of course, you will probably have a different take on it and that's all part of the fun...

What duration are you thinking of for your fixed income?

I am kinda nervous about holding too much of intermediate and longer term bonds.
Leaving aside the Cederburg paper, I would be worried about duration and inflation risk, given that we might be heading for stagflation rather than a deflationary recession. Either could happen as it is so hard to predict anything right now.
Longer term bonds can have quite long drawdowns. The WGBI ex-Japan (6-7 year duration) bond fund still hasn't recovered when excluding support from the fall in the yen. Look at the hedged and unhedged versions here https://www.google.com/finance/quote/25 ... TYO%3A2511

Duration is a headache for me too, as it's become unclear whether the Fed and BoJ respectively will be able to cut and raise their interest rates as had been the expectation. Since it's difficult to say which way they will go, I will probably go with SGOV or BSV once the yen has strengthened to something like 130 yen to the dollar which seems likely. To be clear though, I already have something like 60% of my portfolio in a cocktail of bonds of various durations.

[ChapInTokyo]

Just could do without the richest nation in the world tearing down the world economic order and taking us closer to recession.

If it weren't that concern it'd be the Deepseek shock or whatever, no? The market was due for a correction.

The tariff negotiations have commenced; it's looking good to me. Will probably look back fondly on this time, when all is said and done.

Not really. I'd been waiting for the IT bubble to pop, so kept away from the market weighted indexes to a large extent.

As for the tariff negotiations, I am less optimistic.

[ToushiTime]

Duration is a headache for me too, as it's become unclear whether the Fed and BoJ respectively will be able to cut and raise their interest rates as had been the expectation. Since it's difficult to say which way they will go, I will probably go with SGOV or BSV once the yen has strengthened to something like 130 yen to the dollar which seems likely. To be clear though, I already have something like 60% of my portfolio in a cocktail of bonds of various durations.

Yes, we discussed this before, I think. Short duration individual JGBs don't yield enough. However, most of the 1-3 years bond funds that I would want only contain US Treasuries, which would expose me to dollar-yen fluctuations. I think the yen will depreciate over the long term but don't want to bet on that for bonds which I use along with some gold for diversification to hedge different short-term risks (I don't have much gold but it is nice to see it doing better than everything else at the moment )

So, what is in your bond portfolio now and what are the weightings for each bond fund?

I had the SBI AGG+IAGG ETF wrap but replaced it with eMaxis SLIM Developed Nation Bonds as the wrap is all hedged to the dollar, has a fixed US (AGG) to non-US (AGG) ratio, and includes corporate bonds and MBS.
I also bought a small amount of the TMAM inflation-linked JGB fund you have, just to hold for the long run, partly out of curiosity and partly as a hedge.

[Tsumitate Wrestler]

Duration is a headache for me too, as it's become unclear whether the Fed and BoJ respectively will be able to cut and raise their interest rates as had been the expectation. Since it's difficult to say which way they will go, I will probably go with SGOV or BSV once the yen has strengthened to something like 130 yen to the dollar which seems likely. To be clear though, I already have something like 60% of my portfolio in a cocktail of bonds of various durations.

Yes, we discussed this before, I think. Short duration individual JGBs don't yield enough. However, most of the 1-3 years bond funds that I would want only contain US Treasuries, which would expose me to dollar-yen fluctuations. I think the yen will depreciate over the long term but don't want to bet on that for bonds which I use along with some gold for diversification to hedge different short-term risks (I don't have much gold but it is nice to see it doing better than everything else at the moment )

So, what is in your bond portfolio now and what are the weightings for each bond fund?

I had the SBI AGG+IAGG ETF wrap but replaced it with eMaxis SLIM Developed Nation Bonds as the wrap is all hedged to the dollar, has a fixed US (AGG) to non-US (AGG) ratio, and includes corporate bonds and MBS.
I also bought a small amount of the TMAM inflation-linked JGB fund you have, just to hold for the long run, partly out of curiosity and partly as a hedge.

You are mistaken, the Slim Developed bond fund is unhedged.

https://www.rakuten-sec.co.jp/web/fund/ ... 90C000END3

実質組入外貨建資産については、原則として為替ヘッジを行わない。

[Tsumitate Wrestler]

Well, I'm definitely living in my sequence of returns risk phase now. 8 million yen down and counting... not from the peak, but from the total amount I invested.

What with being hit by a 300,000 yen repair bill on the car (unbudgeted for!), and the world's economy heading for negative growth due to the American tariffs, The idea we had of a Christmas holiday in Kyoto is definitely off the menu for the forseeable future.

So people, sequence of returns risk is real! Who knows when the market will recover from this covid level spanner in the works?

How do you budget out your emergency funds?

Do you have a separate house repair/car repair fund , separate from living expenses?

Maybe more of a cash buffer?

To be honest, I simply have an allocation to bank accounts, separately from my investment portfolios. Since I'm still at the start of my retirement, I still have a good amount in the banks so I decided to bite the bullet and have the car repair done. As for house repair, I have so far remained shy of buying real estate, since prices are very high in Tokyo, and I don't want to buy an older property which may fall on top of me when the big earthquake hits. I do worry about when to buy and where though, as I guess that renting will become more difficult as I age.

The only problem with this approach is you have lost access to cheap financing, which requires regular Japanese employment. Purchasing a property in cash, or with a higher interest loan in retirement does seem a bit more daunting.

There is a sweet spot for 15-20 year old detached houses in wards like Ota that allow easy commuting to central Tokyo, and are very safe under current earthquake standards. It is worth a look.

[ChapInTokyo]

How do you budget out your emergency funds?

Do you have a separate house repair/car repair fund , separate from living expenses?

Maybe more of a cash buffer?

To be honest, I simply have an allocation to bank accounts, separately from my investment portfolios. Since I'm still at the start of my retirement, I still have a good amount in the banks so I decided to bite the bullet and have the car repair done. As for house repair, I have so far remained shy of buying real estate, since prices are very high in Tokyo, and I don't want to buy an older property which may fall on top of me when the big earthquake hits. I do worry about when to buy and where though, as I guess that renting will become more difficult as I age.

The only problem with this approach is you have lost access to cheap financing, which requires regular Japanese employment. Purchasing a property in cash, or with a higher interest loan in retirement does seem a bit more daunting.

There is a sweet spot for 15-20 year old detached houses in wards like Ota that allow easy commuting to central Tokyo, and are very safe under current earthquake standards. It is worth a look.

Thanks for the heads up. I will certainly do some research into that. What I'm vaguely hoping for is that in a number of years' time I shall no longer need to be in the Tokyo metropolitan area and will be able to search for good real estate in less expensive areas, and with low earthquake/tsunami and volcano risk.

But of course it's difficult to know when we'll be free to move away from this area, and so I shall definitely have a look at Ota-ku and perhaps over on the other side of Tama river! Thanks again.

[ChapInTokyo]

Duration is a headache for me too, as it's become unclear whether the Fed and BoJ respectively will be able to cut and raise their interest rates as had been the expectation. Since it's difficult to say which way they will go, I will probably go with SGOV or BSV once the yen has strengthened to something like 130 yen to the dollar which seems likely. To be clear though, I already have something like 60% of my portfolio in a cocktail of bonds of various durations.

Yes, we discussed this before, I think. Short duration individual JGBs don't yield enough. However, most of the 1-3 years bond funds that I would want only contain US Treasuries, which would expose me to dollar-yen fluctuations. I think the yen will depreciate over the long term but don't want to bet on that for bonds which I use along with some gold for diversification to hedge different short-term risks (I don't have much gold but it is nice to see it doing better than everything else at the moment )

So, what is in your bond portfolio now and what are the weightings for each bond fund?

I had the SBI AGG+IAGG ETF wrap but replaced it with eMaxis SLIM Developed Nation Bonds as the wrap is all hedged to the dollar, has a fixed US (AGG) to non-US (AGG) ratio, and includes corporate bonds and MBS.
I also bought a small amount of the TMAM inflation-linked JGB fund you have, just to hold for the long run, partly out of curiosity and partly as a hedge.

My target bond allocation is 1/3 Japan bonds and 2/3 yen-hedged international bonds, but because of the still high rates of yen hedging against the dollar, I have not been able to execute this bit of rebalancing yet.

So currently I have maybe 1/2 Japan bonds (mostly the TMAM JGBi fund that you mentioned with a small amount contributed by the Japan component of BNDX), and 1/2 International bonds (of which around 2/3 is US bonds included in VPLS and a little bit of VGIT and 1/3 is ex-US ex-Japan bonds included in BNDX).

Unlike you, I think that the yen will strengthen against the dollar for the next few years since this seems to be what the Americans seem to want Japan to offer up in exchange for lower tariffs. This will make Japanese exports more expensive everywhere not just in the US, so it will put a drag on Japanese firms' profitability, but I guess the negotiation will be all about how much the US wants the yen to strengthen against how much value the Japanese government puts on lower US tariffs in exchange for a stronger yen. In any case, the BoJ wants to raise interest rates to get into positive territory in real terms so a bit of gaiatsu for a higher Japanese interest rate might actually be just what Japan needs.

If this pans out, I think it will be important to have moved into yen-hedged international bonds before the yen starts to strengthen in earnest.

[ToushiTime]

Yes, we discussed this before, I think. Short duration individual JGBs don't yield enough. However, most of the 1-3 years bond funds that I would want only contain US Treasuries, which would expose me to dollar-yen fluctuations. I think the yen will depreciate over the long term but don't want to bet on that for bonds which I use along with some gold for diversification to hedge different short-term risks (I don't have much gold but it is nice to see it doing better than everything else at the moment )

So, what is in your bond portfolio now and what are the weightings for each bond fund?

I had the SBI AGG+IAGG ETF wrap but replaced it with eMaxis SLIM Developed Nation Bonds as the wrap is all hedged to the dollar, has a fixed US (AGG) to non-US (AGG) ratio, and includes corporate bonds and MBS.
I also bought a small amount of the TMAM inflation-linked JGB fund you have, just to hold for the long run, partly out of curiosity and partly as a hedge.

You are mistaken, the Slim Developed bond fund is unhedged.

https://www.rakuten-sec.co.jp/web/fund/ ... 90C000END3

実質組入外貨建資産については、原則として為替ヘッジを行わない。

I said the "wrap" is hedged. The SBI fund wraps the AGG and IAGG ETFs. The eMaxis SLIM Developed fund does not.
To be more precise, the IAGG part of the SBI fund hedges the non-US investments to the dollar. You end up having 100% dollar exposure.
https://search.sbisec.co.jp/v2/popwin/i ... 000051.pdf

[ToushiTime]

My target bond allocation is 1/3 Japan bonds and 2/3 yen-hedged international bonds, but because of the still high rates of yen hedging against the dollar, I have not been able to execute this bit of rebalancing yet.

So currently I have maybe 1/2 Japan bonds (mostly the TMAM JGBi fund that you mentioned with a small amount contributed by the Japan component of BNDX), and 1/2 International bonds (of which around 2/3 is US bonds included in VPLS and a little bit of VGIT and 1/3 is ex-US ex-Japan bonds included in BNDX).

Unlike you, I think that the yen will strengthen against the dollar for the next few years since this seems to be what the Americans seem to want Japan to offer up in exchange for lower tariffs. This will make Japanese exports more expensive everywhere not just in the US, so it will put a drag on Japanese firms' profitability, but I guess the negotiation will be all about how much the US wants the yen to strengthen against how much value the Japanese government puts on lower US tariffs in exchange for a stronger yen. In any case, the BoJ wants to raise interest rates to get into positive territory in real terms so a bit of gaiatsu for a higher Japanese interest rate might actually be just what Japan needs.

If this pans out, I think it will be important to have moved into yen-hedged international bonds before the yen starts to strengthen in earnest.

I don't disagree with you. By long term I was thinking more like where the yen will be in 10 to 15 years or so. As you say, the yen could strengthen over the next few years depending on interest rate differentials and whether Japanese companies/investors return more of their overseas earnings/investments to Japan. I am younger than you and still accumulating, which hopefully gives me more time to ride out that problem without spending indirectly on currency hedging.

[ChapInTokyo]

My target bond allocation is 1/3 Japan bonds and 2/3 yen-hedged international bonds, but because of the still high rates of yen hedging against the dollar, I have not been able to execute this bit of rebalancing yet.

So currently I have maybe 1/2 Japan bonds (mostly the TMAM JGBi fund that you mentioned with a small amount contributed by the Japan component of BNDX), and 1/2 International bonds (of which around 2/3 is US bonds included in VPLS and a little bit of VGIT and 1/3 is ex-US ex-Japan bonds included in BNDX).

Unlike you, I think that the yen will strengthen against the dollar for the next few years since this seems to be what the Americans seem to want Japan to offer up in exchange for lower tariffs. This will make Japanese exports more expensive everywhere not just in the US, so it will put a drag on Japanese firms' profitability, but I guess the negotiation will be all about how much the US wants the yen to strengthen against how much value the Japanese government puts on lower US tariffs in exchange for a stronger yen. In any case, the BoJ wants to raise interest rates to get into positive territory in real terms so a bit of gaiatsu for a higher Japanese interest rate might actually be just what Japan needs.

If this pans out, I think it will be important to have moved into yen-hedged international bonds before the yen starts to strengthen in earnest.

I don't disagree with you. By long term I was thinking more like where the yen will be in 10 to 15 years or so. As you say, the yen could strengthen over the next few years depending on interest rate differentials and whether Japanese companies/investors return more of their overseas earnings/investments to Japan. I am younger than you and still accumulating, which hopefully gives me more time to ride out that problem without spending indirectly on currency hedging.

Ah yes I must say that I think that the dollar could very well be much stronger in the long term than it what I am guessing will happen in the next few years. On the other hand, if the US continues decoupling from the international trade ecosystem, the use of the dollar as the world’s key currency might undergo some changes some way down the line. I think that if a mad US president can wreak so much havoc in just a couple of months in office, anything is possible…

As for the question of hedging, I think that with a long time horizon, holding unhedged international funds is probably the better bet. At least, the GPIF’s bogging seem to have reached such a conclusion and their bet is much larger than any of us.