Investment Timing and Account Allocations?

[fools_gold]

I agree with everything you said generally, but when it comes to J-Reits it is worth pointing out this is a 2500% overweight compared to the index.

As op seems to be mostly investing in passive, market-cap-weighted indexes this is worth pointing out.

Here is the data from FTSE (All-Cap is the competitor to MSCI ACWI, OPs main fund (Emaxis All-country)). Look at the J-Reit percentage.

Yes, adding REITs does increase the sector risk, but the problem is that you are neglecting currency risk, which was the OP's reason for including JREITs in the first place. Given that the OP has no Japanese bonds, it seems reasonable to replace them with JREITs.

Neither sector risk nor currency risk are desirable because they don't increase expected returns. Allocating to JREITs reduces the currency risk, but does add some sector risk. It's up to the OP to decide whether the trade off is worth it.

It's fine to discuss these things and share opinions, but to be honest I don't think any of us are knowledgeable or qualified enough to recommend specific asset allocations.

[EmaxisSlim Cultist]

Yes, adding REITs does increase the sector risk, but the problem is that you are neglecting currency risk, which was the OP's reason for including JREITs in the first place. Given that the OP has no Japanese bonds, it seems reasonable to replace them with JREITs.

Neither sector risk nor currency risk are desirable because they don't increase expected returns. Allocating to JREITs reduces the currency risk, but does add some sector risk. It's up to the OP to decide whether the trade off is worth it.

It's fine to discuss these things and share opinions, but to be honest I don't think any of us are knowledgeable or qualified enough to recommend specific asset allocations.

This is a topic I am interested in, so forgive me if I seem argumentative.

“I don't think any of us are knowledgeable or qualified enough to recommend specific asset allocations.”

I agree with your point, which is why I think it is important to stick to market weight allocations.

*Neglecting currency risk*

I believe sector concentration is a much larger risk when it comes to the Yen. I am always looking for more data though to disprove this belief.

Those who are truly worried about currency risk can purchase hedged products. However, those seem to be extremely unpopular on this forum. There is indeed a hedged version of the bonds fund OP chose for instance. https://emaxis.jp/fund/252489.html

[fools_gold]

This is a topic I am interested in, so forgive me if I seem argumentative.

Why do I get the feeling we've been over this before?

I agree with your point, which is why I think it is important to stick to market weight allocations.

Then why allocate 5% to advanced market REITS? What's your rationale for that? Besides, the point of including JREITs is not as a sector bet, but as an alternative to JGBs to reduce the currency risk.

I believe sector concentration is a much larger risk when it comes to the Yen. I am always looking for more data though to disprove this belief.

Ok...so what data do you currently have to support this belief? We're talking about a 5% allocation here, so I'm not sure that it poses much of a risk. On the other hand, in all the investing books I've read, I've never seen seen such a high allocation to unhedged foreign currency products recommended. In fact, the standard Boglehead advice is to hold domestic bonds because of their lack of volatility. Nobody likes JGBs, but you can't just swap them out for foreign bonds and expect things to be the same. On top of the added currency risk, foreign bonds are more correlated with foreign stocks.

Also, we've had about 7 years of a fairly stable yen. It hasn't always been that way. In the 1980s the yen doubled in value over 3 years. Again, just after the Great Financial Crisis the yen gained 50% over a few years. That trend has been reversed by the BOJ's monetary policy, but there's no guarantee that a weak yen will continue.

Those who are truly worried about currency risk can purchase hedged products. However, those seem to be extremely unpopular on this forum. There is indeed a hedged version of the bonds fund OP chose for instance. https://emaxis.jp/fund/252489.html

You make it sound like it's somehow unusual to consider currency risk when investing.

[EmaxisSlim Cultist]

Why do I get the feeling we've been over this before?

I am just looking for a polite discussion, that is it. This is not an argument or confrontation.

I have not seen any significant data that makes a strong argument for Japanese investors structuring their investment plans in this manner just to avoid supposed negative currency risk. Especially when most hold Japanese pensions and yen savings, and would welcome foreign currency exposure.

You are recommending extra sector and location risk in order to reduce this potential currency risk and allocations way outside of the market cap.

....

When it comes to hedging, the general consensus says that it is not worth it for equity funds. There are some decent bond fund options. However, vanguard put out a paper that seemed to suggest hedged bond products perform like domestic country bonds.

Popular options include

1482 7-10年 ETF HEDGED
2621 20年 ETF HEDGED
Ｓｍａｒｔ-ｉ 先進国債券インデックス（為替ヘッジあり）
たわらノーロード 先進国債券＜為替ヘッジあり＞
eMAXIS先進国債券インデックス(H有)

Personally, I will probably split my allocation between these two when I do decide to buy bonds.
Emaxis Slim Advanced Government Bonds /ｅＭＡＸＩＳ Ｓｌｉｍ 先進国債券インデックス
Rakuten Total Bond Index 楽天・全世界債券インデックス（為替ヘッジ）ファンド

[fools_gold]

I am just looking for a polite discussion, that is it. This is not an argument or confrontation.

So am I. I would welcome a discussion about this. Apologies if I seem overly aggressive.

I have not seen any significant data that makes a strong argument for Japanese investors structuring their investment plans in this manner just to avoid supposed negative currency risk. Especially when most hold Japanese pensions and yen savings, and would welcome foreign currency exposure.

There are a few things here. Firstly, the amount of yen savings would depend on the individual. Personally, I'm pretty much full invested with most of my money in stocks and a little in REITs and bonds. I'll be getting half a Japanese pension and hopefully a basic state pension from the UK. I think I have more than enough currency exposure, especially considering all my financial obligations are in Japan.

Secondly, in my opinion, currency risk isn't just about the value of your investments suddenly falling. It's about uncompensated risk. Normally, you'd expect better returns for taking on more risk, like with stocks. However, currency risk doesn't necessarily add to your returns. It just means more volatility. The whole point of having bonds because they are less volatile and have a low correlation with stocks. However, unhedged foreign bonds are more volatile and more correlated with stocks...which kind of defeats the purpose of holding them really.

Finally, do you have any data to the contrary? That is, evidence that investors actually benefit from so much currency exposure.

You are recommending extra sector and location risk in order to reduce this potential currency risk and allocations way outside of the market cap.

I am not recommending anything at all! That's my whole point. You're the one doing the recommending. Holding a small amount J-REITs seemed reasonable to me and I was questioning why you thought it was a good idea to forgo them. I was also wondering why you thought it was ok to have developed market REITs in there seeing as you're a big believer in market cap allocation.

When it comes to hedging, the general consensus says that it is not worth it for equity funds.

Agreed.

There are some decent bond fund options. However, vanguard put out a paper that seemed to suggest hedged bond products perform like domestic country bonds.

That's why I have some JGBs instead of hedged foreign bonds. There are no hedging costs. I don't mind that the returns aren't so good so long as my portfolio as a whole does ok.

Personally, I will probably split my allocation between these two when I do decide to buy bonds.
Emaxis Slim Advanced Government Bonds /ｅＭＡＸＩＳ Ｓｌｉｍ 先進国債券インデックス
Rakuten Total Bond Index 楽天・全世界債券インデックス（為替ヘッジ）ファンド

That sounds like a reasonable compromise. Personally, I have a mix of JGBs, J-REITs and unhedged foreign bonds.

[EmaxisSlim Cultist]

.....In my opinion, currency risk isn't just about the value of your investments suddenly falling. It's about uncompensated risk. Normally, you'd expect better returns for taking on more risk, like with stocks. However, currency risk doesn't necessarily add to your returns. It just means more volatility. The whole point of having bonds because they are less volatile and have a low correlation with stocks. However, unhedged foreign bonds are more volatile and more correlated with stocks...which kind of defeats the purpose of holding them really.

Finally, do you have any data to the contrary? That is, evidence that investors actually benefit from so much currency exposure.

I am not arguing for a direct benefit, but a wash effect. That positive currency risk and negative currency risk will mostly balance out over time. And that the fees for hedged products might leave you in a worse position than being long-term unhedged.

The benefits of currency exposure can be seen currently, as foreign-held assets appreciate as the yen weakens.

I am not recommending anything at all! That's my whole point. You're the one doing the recommending. Holding a small amount J-REITs seemed reasonable to me and I was questioning why you thought it was a good idea to forgo them. I was also wondering why you thought it was ok to have developed market REITs in there seeing as you're a big believer in market cap allocation.

I did not want to reduce OPs suggested portfolio to a standard VT/BNDW model. A slight developed REIT leaning of 5% is not much of a risk factor, it is only a 2/3x overconcentration vs a 25x+ overconcentration.

That's why I have some JGBs instead of hedged foreign bonds. There are no hedging costs. I don't mind that the returns aren't so good so long as my portfolio as a whole does ok.

Is this really an argument for JGBs? Term deposits offer higher rates than JGBs, why would you select them? I see literally no upside unless you have 100s of millions of yen and are extremely risk-averse.

Us treasuries hedged or not seem like a much better bet. You might actually be able to keep up with inflation.

[fools_gold]

I am not arguing for a direct benefit, but a wash effect. That positive currency risk and negative currency risk will mostly balance out over time. And that the fees for hedged products might leave you in a worse position than being long-term unhedged.

So, are you saying that the overall net effect of currency fluctuations would be zero? Do you have a credible source for this?

My problem is that I've learned that currency risk is not good because it adds unwanted volatility. It is for precisely this reason that Vanguard only offer hedged foreign bonds. What you are saying seems to go against this.

The benefits of currency exposure can be seen currently, as foreign-held assets appreciate as the yen weakens.

This is not a benefit. You are now paying even more for already inflated assets.

Us treasuries hedged or not seem like a much better bet. You might actually be able to keep up with inflation.

Mmm....Let's say US 10 year bonds are yielding 3%. Are you saying that over the long term the currency fluctuations will cancel each other out and we can also expect to see a 3% yield in yen terms?

Also, as a thought experiment, what if I buy a 10 year Turkish bond yielding 15%? Assuming there is no default, can I expect to see 15% in yen terms too?

[EmaxisSlim Cultist]

So, are you saying that the overall net effect of currency fluctuations would be zero? Do you have a credible source for this?

My problem is that I've learned that currency risk is not good because it adds unwanted volatility. It is for precisely this reason that Vanguard only offer hedged foreign bonds. What you are saying seems to go against this.

What might be right for USD investors in America is not the same for YEN investors in Japan. Americans with their access to Ibonds, and other TreasuryDirect products have so many fantastic options.

You cannot generalize one countries currency to another. I believe you need to look at each specific situation.

Over time there does not seem to be much volatility at all -> https://www.macrotrends.net/2550/dollar ... ical-chart An average annual change of about 1%.

The benefits of currency exposure can be seen currently, as foreign-held assets appreciate as the yen weakens.

This is not a benefit. You are now paying even more for already inflated assets.

Not so for those DCAing in. Ben himselves talked about the portion of his growth that has come from the positive-currency risk.

Mmm....Let's say US 10 year bonds are yielding 3%. Are you saying that over the long term the currency fluctuations will cancel each other out and we can also expect to see a 3% yield in yen terms?

Also, as a thought experiment, what if I buy a 10 year Turkish bond yielding 15%? Assuming there is no default, can I expect to see 15% in yen terms too?

You cannot compare EM/FM markets to developed markets.

[fools_gold]

What might be right for USD investors in America is not the same for YEN investors in Japan. Americans with their access to Ibonds, and other TreasuryDirect products have so many fantastic options.

Firstly, Vanguard's foreign bond offerings in Japan (through Rakuten) are also currency hedged. Secondly, the range of options open to US investors isn't really relevant. What we're talking about here is whether we should be concerned about currency risk or not.

You cannot generalize one countries currency to another. I believe you need to look at each specific situation.

I'm not sure if I follow your logic. Surely currency risk is a concern for all investors wherever they are based.

Over time there does not seem to be much volatility at all -> https://www.macrotrends.net/2550/dollar ... ical-chart An average annual change of about 1%.

I think you're looking at a relatively short timeframe. You can see in the charts that there have been periods of high volatility, followed by a relatively stable period since the introduction of Abenomics. Do you think these conditions will continue indefinitely?

Not so for those DCAing in. Ben himselves talked about the portion of his growth that has come from the positive-currency risk.

I also DCA, but I'd much prefer it if the yen were stronger while I'm still accumulating. Wouldn't you?

Mmm....Let's say US 10 year bonds are yielding 3%. Are you saying that over the long term the currency fluctuations will cancel each other out and we can also expect to see a 3% yield in yen terms?

Also, as a thought experiment, what if I buy a 10 year Turkish bond yielding 15%? Assuming there is no default, can I expect to see 15% in yen terms too?

You cannot compare EM/FM markets to developed markets.

That's why I labeled the Turkish bond question "a thought experiment." I was hoping you'd take the time to try and answer these questions.

My answers to both are "I have no idea." I think the Turkish bonds will yield less than 15% because of the high inflation there devaluing the currency. Not sure about the US bonds at all. What do you think?

[EmaxisSlim Cultist]

Firstly, Vanguard's foreign bond offerings in Japan (through Rakuten) are also currency hedged. Secondly, the range of options open to US investors isn't really relevant. What we're talking about here is whether we should be concerned about currency risk or not.

I view it as relevant. When you are weighing your risks and options, you need to do so based of what is available to you. American investors would be making different choices, as they have different options.

For example this is why Bogleheads tend to be wary of REITs as they are very tax-inefficient in America, but not so in Japan with reinvesting-funds.

I'm not sure if I follow your logic. Surely currency risk is a concern for all investors wherever they are based.

You cannot make generalizations about currency risk, but must look at it in terms of specific currency pairs.

I think you're looking at a relatively short timeframe. You can see in the charts that there have been periods of high volatility, followed by a relatively stable period since the introduction of Abenomics. Do you think these conditions will continue indefinitely?

A 50 year timeframe is not short when it comes to back-testing. Policies come and go. There are always periods of volatility. Passive investors are not too worried by this.

I also DCA, but I'd much prefer it if the yen were stronger while I'm still accumulating. Wouldn't you?

Because your gains through positive currency risk are balancing out your reduced buying power.

Mmm....Let's say US 10 year bonds are yielding 3%. Are you saying that over the long term the currency fluctuations will cancel each other out and we can also expect to see a 3% yield in yen terms?

Also, as a thought experiment, what if I buy a 10 year Turkish bond yielding 15%? Assuming there is no default, can I expect to see 15% in yen terms too?

Yes, historically the volatility averages out to be quite low. I would be buying 20 years myself though.

Turkey> -> The country is run by a Dictator who believes MMT is counter to Islam. Now there is currency risk, and then there is political risk. When you visit Turkey you see a lot of half-constructed houses. These are the people's banks. They do not trust their currency or their government, so they spend their spare cash on real-estate and construction, slowly contributing what they can, when they can. No one believes in the stability of the Turkish Lira. I do not think the Lira has seen the bottom yet.