How to know what an Index fund actually contains?

[jcc]

vis-a-vis backdating because I really think this is important for people to understand:

No, past returns is not the entire premise behind investing. Investing based on past returns is generally going to put you in the trap of buying high.

I think my example of gold is all you need to see the flaws in backdating(especially over only a single timespan). Backdating can be useful for portfolios, but it MUST be done over multiple timespans with varying start and end dates(lest it show results that are biased towards a specific type of device like anything behing backdated to the current epidemic will be)

In passive investing we diversify over multiple sectors to reduce our risk.

Just to demonstrate how this exact 20 year block has been poor for stocks with the S&P: it want from 1450 in april 2000 to 2500 april 2020. That's annualized returns of only 2.7%.

If we shift back an year, so we avoid the huge tech stock build up and coronavirus bust we're looking at 1300 -> 2900 that's a 4.1% annualized returns.

And if we look at the 10 year returns 1 year ago it was 890->2900, which is a whopping 12% annualized return!

40 year returns to present date are 8.5% but it's worth considering inflation was also higher then. Long term historic real returns(with inflation and dividends adjusted) are around 7% on average(http://www.simplestockinvesting.com/SP5 ... eturns.htm this is 1950-2009 so it's actually missing some of the best returns we've had in the last 10 years)

I hope that demonstrates how massively the range you backdate for can affect returns, and that you consider it carefully when comparing products. Unfortunately I could find no way on the myindex.jp site to adjust the range.

as to the stock split:

I didn't suggest 100% international stocks nor would I do so. I'm not entirely sure what the best mix is though I personally have a higher weighting for domestic than the market cap(just for that currency reason). I have far more developed than emerging though. So I do disagree on the split it has. My personal stock split is 1/4 domestic(higher than market cap for the currency), 1/8 emerging and 5/8 developed. You could just get a "whole world stock" thing though and not worry about the splits or rebalancing.

My fundamental problem with the "balance" index is in the sheer amount of bonds in it, as well as the tiny proportion of developed nations stocks(which is the MOST diversified part of the stock portfolio, has the most stability and has the best historic long term performance, though again, that is not guarranteed). It's an incredibly large amount for someone early in their career, and bonds are by their very nature lower risk and lower return. Also it's called the balance index, but in no way are the stock or bond allocations balanced to the actual market caps.

I'm unfortunately not a very skilled explainer of things. There are some books out there that go a lot deeper into the problems with backdating as well the value of market cap balanced portfolios. "Common sense on mutual funds" by Jack Bogle is one good place to go. It's a bit dry, but Bogle is the man behind Vanguard and he demonstrates this stuff in well explained examples.

edit: finally, curious as to the cause of the even-split 8's performance(outside of just the poor 20-year fit), it's also a lot down to REITS and emerging markets stocks and bonds which for the 20-year span performed extremely well(but again, there is no real guarrantee of this repeating). I can see how on paper this all looks great, but the flip-side of this as that everyone is now having doubts about all of those(both emerging markets and REITs): china trade wars and stock manipulations are looking fishy, and there's talk of another housing bubble. Since in this portfolio these represent oversized parts of it, it does little to protect from these real risks. I'm looking for another tool where I could alter the start and end dates but haven't had much luck :/

[fools_gold]

JCC,

I can't really disagree with this. I get the point about backdating, but unfortunately I can't find any decent tools giving returns in Japanese yen. I think the current investing environment is so different to anything we've seen in the past so it probably wouldn't be too helpful anyway.

Perhaps I should have qualified my first post by saying something like "I quite like it as part of a diversified portfolio" because that's how I use it. I put roughly just over half my money in this and half in an all world stock fund to give a portfolio with mostly stocks, some bonds and REITS, and a tilt towards Japan and emerging markets. It's an asset mix I'm happy with and I can achieve it just by using two funds.

I do think balanced funds have certain advantages and shouldn't just be dismissed as a gimmick. Firstly, they are the only way to invest in bonds and REITS in Tsumitate NISA, and they're also a good fit for regular NISA because of they rebalance for you. If you don't like the asset mix then you can pair them with other funds so that you arrive at something you like. They also have low ERs.

Anyway, it'll be interesting to see how things pan out. I think we may be in for a bumpy couple of years.

[jcc]

I do think balanced funds have certain advantages and shouldn't just be dismissed as a gimmick. Firstly, they are the only way to invest in bonds and REITS in Tsumitate NISA, and they're also a good fit for regular NISA because of they rebalance for you. If you don't like the asset mix then you can pair them with other funds so that you arrive at something you like. They also have low ERs.

This all makes a lot of sense! I'm actually surprised there's no options for bonds or reits in tsumitate. I'm using the standard nisa right now, but looks like I may not have the choice to do this soon(I think it's not getting renewed?)

I do think balanced funds have certain advantages and shouldn't just be dismissed as a gimmick. Firstly, they are the only way to invest in bonds and REITS in Tsumitate NISA, and they're also a good fit for regular NISA because of they rebalance for you. If you don't like the asset mix then you can pair them with other funds so that you arrive at something you like. They also have low ERs.

It's worth noting that balanced funds are a good thing for diversification and that my main issue with the fund in question is it's not balanced. It's overweight towards both domestic and emerging nations. I think there is two ways of expressing balance: normally balanced means "balanced by market cap". Which is generally a good thing. Or you can have "equal portions of multiple sectors", but that means that a small area has an inordinate amount of influence.

As you said you could always use this as part of a portfolio and jam in some extra developed nations stocks and such to achieve a more market cap balanced portfolio

[RetireJapan]

I'm using the standard nisa right now, but looks like I may not have the choice to do this soon(I think it's not getting renewed?)

Ordinary NISA is being renewed in a weird way (they are making a two-tier account with 1m a year in anything and 200,000 a year in mutual funds), but I get the feeling that will be a step towards getting rid of it altogether in favour of tsumitate NISA. A few years in the future though so not worth worrying about yet.

[Kanto]

I do think balanced funds have certain advantages and shouldn't just be dismissed as a gimmick. Firstly, they are the only way to invest in bonds and REITS in Tsumitate NISA, and they're also a good fit for regular NISA because of they rebalance for you. If you don't like the asset mix then you can pair them with other funds so that you arrive at something you like. They also have low ERs.

This all makes a lot of sense! I'm actually surprised there's no options for bonds or reits in tsumitate. I'm using the standard nisa right now, but looks like I may not have the choice to do this soon(I think it's not getting renewed?)

I do think balanced funds have certain advantages and shouldn't just be dismissed as a gimmick. Firstly, they are the only way to invest in bonds and REITS in Tsumitate NISA, and they're also a good fit for regular NISA because of they rebalance for you. If you don't like the asset mix then you can pair them with other funds so that you arrive at something you like. They also have low ERs.

It's worth noting that balanced funds are a good thing for diversification and that my main issue with the fund in question is it's not balanced. It's overweight towards both domestic and emerging nations. I think there is two ways of expressing balance: normally balanced means "balanced by market cap". Which is generally a good thing. Or you can have "equal portions of multiple sectors", but that means that a small area has an inordinate amount of influence.

As you said you could always use this as part of a portfolio and jam in some extra developed nations stocks and such to achieve a more market cap balanced portfolio

This is exactly the point. With Tsumitate it is either Stocks or mixed asset class. The heavy bond weighting of the "8 Asset fund" is a PLUS since you cannot directly buy bond indexes with Tsumitate.

Here is what I ended up doing in my attempt to create a more balanced portfolio. Though I am a novice.

The other possibility is to go 100% stocks and simply to buy a Emaxis Developed Country Bond Index and hold it in a regular account.

Does this seem sound?

[fools_gold]

This is exactly the point. With Tsumitate it is either Stocks or mixed asset class. The heavy bond weighting of the "8 Asset fund" is a PLUS since you cannot directly buy bond indexes with Tsumitate.

Here is what I ended up doing in my attempt to create a more balanced portfolio. Though I am a novice.

The other possibility is to go 100% stocks and simply to buy a Emaxis Developed Country Bond Index and hold it in a regular account.

Does this seem sound?

It looks reasonable to me. Some people prefer more Japanese assets, some prefer less. My wife's IdeCo book talks about going 50/50 between Japanese and foreign assets. I'm not sure if I'd like to do that though...

About the 8-way fund:
1. 37.5% of it is bonds, but EM bonds are a lot more volatile than US or Japanese treasuries. For that reason, I don't really count them towards my bond allocation. So, I would see the 8-way fund as having 25% bonds.
2. The fund should be less volatile than stocks, but it is still a lot more volatile than bonds. I wouldn't use it as a direct replacement for bonds.
3. If you're just after bonds, it might be worth considering a 4-way fund. You could pair one of these to an all world stock fund to get pretty close to your desired asset allocation using just two funds.

In theory, your stocks should grow the most, so keeping bonds outside your NISA maximises your tax-free allowance. If you have more money to invest than your NISA allowance, then it makes sense to hold the bonds outside the NISA. However, using a balanced fund within a NISA simplifies things and makes rebalancing easier.

Personally, I think the NISA system is unnecessarily complicated. In an ideal world we'd be given a yearly tax-free allowance within which we could rebalance as often as we liked (much like the IdeCo). The mixed asset funds just seem to be a fudge to get around this fundamental limitation.

[jcc]

In theory, your stocks should grow the most, so keeping bonds outside your NISA maximises your tax-free allowance. If you have more money to invest than your NISA allowance, then it makes sense to hold the bonds outside the NISA. However, using a balanced fund within a NISA simplifies things and makes rebalancing easier.

This point is important. Generally you want the assets with the greatest gains to not be taxed.

Kanto could get the developed country index, or you could get the all countries stock index and then buy enough bonds outside the nisa account to reach an overall balance.

I'm fortunate enough to have a lot of stocks outside my nisa so I still have plenty of space to rebalance without having to touch the nisa stocks.

Personally, I think the NISA system is unnecessarily complicated. In an ideal world we'd be given a yearly tax-free allowance within which we could rebalance as often as we liked (much like the IdeCo). The mixed asset funds just seem to be a fudge to get around this fundamental limitation.

I presume both nisa and tsumitate were designed to encourage what are generally good habits for users: buy and hold long term, rather than frequent trading(piddling away your assets on fees). I think the tsumitate also has restrictions on the management fees which is a pretty good idea to protect the average user from poor funds. It's not ideal for people that want to carefully work their portfolio, but I can see why it is the way it is.