Passive Investing -> Beyond NISA and iDeCo

[Kanto]

Incredibly low-interest rates on term deposits and government bonds in Japan make them extremely unattractive to most individual investors. Government bonds, Municipal bonds and GICs/Term deposits that are offered western countries offer returns that at least compensate for inflation.

This seems to push a lot of investors towards Index funds and beyond that direct investment with ETFs whether through a managed portfolio or via a Robo-advisor.

Are there any overlooked passive investment opportunities in Japan?

[adamu]

I don't think your logic of "returns for bonds are bad, so people are pushed into index funds" is correct.

I also think there are a bunch of conflated concepts in your post. I'm sure you know already but for the benefit of others:

• NISA and iDeCo are regulated types of investment accounts in which you make investments.
• Term deposits are a type of cash savings where you lock your money away for a fix interest rate.
• Government bonds are basically the same thing, except you lend your money to the government. Buying bonds directly is not very practical, so most people invest via a 3rd party fund.
• Mutual funds are a group of people that pool their money to buy a larger variety of investments than they could buy individually. It can be managed by someone that picks the investments, or pegged to an index.
• Index funds are a type of mutual fund that tries to follow the value of a specific market index.
• ETFs are a type of mutual fund that is traded as a stock on the stock market, instead of you making a contract with the fund directly. ETFs can be index funds, or any other type of fund. The only difference is that you buy it on the stock exchange, rather than directly from the provider.

Probably the better way to think about it is different investments have different risk profiles.

• Term deposits = slightly less liquid cash
• Bonds = Riskier than cash, less risky than stocks, usually returns in-between cash and stocks
• Stocks = The riskiest, with the most reward. Buying a single stock is very risky, so people tend to buy a collection of stocks. Mutual funds and ETFs allow you to buy many more different stocks than would be feasible if you bought them individually, by pooling your investments with other people.

People invest in different assets because of the risk/reward profiles. If you want more returns, you need to take more risk. If you don't want to take the risk, you have to accept lower returns.

iDeCo and NISA generally restrict you to mutual funds (although the normal 5 year NISA also allows you to buy individual stocks). So I think what you are asking is: After you've maxed out your tax-free investments, what should you do with the money?

I think maybe instead of thinking "I've filled up the NISA, now what", it would be better to think "What do I want to invest in over-all? What should my asset allocation between different types of assets be?" and then decide how to allocate that across your investment accounts, of which your iDeCo and NISA are a part. Instead of looking for "overlooked" opportunities, work out what your objectives are, how much risk you're willing to take, and invest in assets that fit that risk profile.

[Kanto]

I don't think your logic of "returns for bonds are bad, so people are pushed into index funds" is correct.

I also think there are a bunch of conflated concepts in your post. I'm sure you know already but for the benefit of others:

• NISA and iDeCo are regulated types of investment accounts in which you make investments.
• Term deposits are a type of cash savings where you lock your money away for a fix interest rate.
• Government bonds are basically the same thing, except you lend your money to the government. Buying bonds directly is not very practical, so most people invest via a 3rd party fund.
• Mutual funds are a group of people that pool their money to buy a larger variety of investments than they could buy individually. It can be managed by someone that picks the investments, or pegged to an index.
• Index funds are a type of mutual fund that tries to follow the value of a specific market index.
• ETFs are a type of mutual fund that is traded as a stock on the stock market, instead of you making a contract with the fund directly. ETFs can be index funds, or any other type of fund. The only difference is that you buy it on the stock exchange, rather than directly from the provider.

Probably the better way to think about it is different investments have different risk profiles.

• Term deposits = slightly less liquid cash
• Bonds = Riskier than cash, less risky than stocks, usually returns in-between cash and stocks
• Stocks = The riskiest, with the most reward. Buying a single stock is very risky, so people tend to buy a collection of stocks. Mutual funds and ETFs allow you to buy many more different stocks than would be feasible if you bought them individually, by pooling your investments with other people.

I appreciate the detailed breakdown.

Essentially what I was trying to say is that traditional forms of passive investment such as term deposits and bonds in Japan are not attractive products because of the incredibly low-interest rates they offer.

I was wondering if I overlooked any investment vehicles in Japan. There does not seem to be much available.

To clarify as a general scale of passive<--> active investing this is how I view it as it associates to risk.


< Passive (less-risky) ----------------------------------------------------------------------------------------------(more-risky)-Active >

Term Deposits - Municipal Bonds - Federal Bonds - Bond Index - Mixed Index - Stock Indexes - ETFs - Commodities/FX etc...

[RetireJapan]

You've also got peer to peer lending (social lending in Japanese), REITs (index funds for real estate), investing directly in real estate (the tax write-offs can be helpful, especially for higher earners).

How 'risky' ETFs and mutual funds are is going to depend entirely on what is in them, and how they are run.

Contast a Japese government bond ETF with some triple leveraged Russian stock ETF, for an extreme example. I used to own a triple leveraged Russian stock ETF, by the way. It didn't end well

[Beaglehound]

One of my very first stock market investments was a Russia fund about 15 years ago, simply because it had gone up SO MUCH in the previous couple of years. The old adage about what goes up having to come down certainly proved to be true. It was a good and not too expensive lesson really, I had only invested £1000 and by the time I baled it had lost 15% or so of that but I had learned about past returns being no guarantee of future performance.

[Kanto]

You've also got peer to peer lending (social lending in Japanese), REITs (index funds for real estate), investing directly in real estate (the tax write-offs can be helpful, especially for higher earners).

How 'risky' ETFs and mutual funds are is going to depend entirely on what is in them, and how they are run.

Contast a Japese government bond ETF with some triple leveraged Russian stock ETF, for an extreme example. I used to own a triple leveraged Russian stock ETF, by the way. It didn't end well

I definitely agree with your assessment of risk, I was generalizing too much.

So safer, passive investments in Japan usually just come down to Funds, whether they are mixed assets, stocks, bonds or REITs unless you want to settle for .1% interest in a Japanese savings account, or lock your money away with a 30 year Japanese Government bond for .6%?

I may be just buying more Emaxis Slim funds until I retire.....

There is something tragic about keeping money in an account knowing that you are losing money year over year due to inflation. Especially those of us with Japanese spouses who grew up being taught that is the correct method to save.

[adamu]

I may be just buying more Emaxis Slim funds until I retire.....

That's what I'm doing (although I'm not wedded to eMaxis SLIM, should be ready to be able to start comparing its performance to the likes of Vanguard soon enough).

Passive investing is really a use for surplus funds. If you really want to make money, I think you have to forget about passive, and do something that creates value. Start a business, invest in your career, mine bitcoin...

[stevendorrans]

One of my very first stock market investments was a Russia fund about 15 years ago, simply because it had gone up SO MUCH in the previous couple of years. The old adage about what goes up having to come down certainly proved to be true. It was a good and not too expensive lesson really, I had only invested £1000 and by the time I baled it had lost 15% or so of that but I had learned about past returns being no guarantee of future performance.

Judging on the data in the link below it seems the Russian stock market (MOEX) has been amongst the best performing in the last two decades. Am I reading it right, it has increase 10-fold since 2020? I doubt any other markets would have performed better than that unless someone knows different.


https://tradingeconomics.com/russia/stock-market

[Beaglehound]

True enough. My fund was not an index tracker and the performance was not as good as that. I also bought high and sold low after a few years. Pretty much a case study of what not to do. Holding an index tracking Russia fund over the past twenty years would clearly have been a decent investment.

[TokyoWart]

One of my very first stock market investments was a Russia fund about 15 years ago, simply because it had gone up SO MUCH in the previous couple of years. The old adage about what goes up having to come down certainly proved to be true. It was a good and not too expensive lesson really, I had only invested £1000 and by the time I baled it had lost 15% or so of that but I had learned about past returns being no guarantee of future performance.

Judging on the data in the link below it seems the Russian stock market (MOEX) has been amongst the best performing in the last two decades. Am I reading it right, it has increase 10-fold since 2020? I doubt any other markets would have performed better than that unless someone knows different.


https://tradingeconomics.com/russia/stock-market

That seems wrong. Here's a link to the MSCI Russia index report. It shows a 10 year annual return of 0.77% with a Sharpe ratio of 0.14. Since 1994 the annual returns are 10.2% so the last decade has been especially bad (which makes since given the poor performance of oil and Russia's heavy concentration in energy and materials on a capitalization-weighted basis).

https://www.msci.com/documents/10199/60 ... c435a5f2ae