Should one put their bonds in Nisa/iDeco or in a Taxable Account? Strategies...

[Kanto]

I read that Pinebridge article, but came to the opposite conclusion. Interesting that the investment company recommends that you should buy their hedged funds (which they can charge fees for), and then also buy an FX product from them to add back in the currency exposure (which they can charge some more fees for). "The transaction cost of currency hedging should not be much of a concern in today’s market". But we want to invest for tomorrow's market, and we don't know what that will look like.

Look at this graph, from the document:



Their conclusion is that hedging reduces volatility, thus is good. But in this graph, it's the unhedged version that most closely represents the performance of the index. As mentioned earlier in the thread, hedging makes the international bonds behave more like domestic ones.

So I guess the real question is: Do you want your bond portfolio to represent domestic bond performance, but want to diversify in case the local government defaults? Hedge. Do you want your bond portfolio to represent global performance? Don't hedge.

Am I missing something here?

Considering the performance of Japanese bonds, do you really want your international bonds to mirror them?

Would it not be better just to buy the unhedged version?

All of our savings are in Yen anyways. So is it not better to expose ourselves to a different currency?

Or split the difference 75/25% between Unhedged Internation and Domestic?

I just have questions here, no real answers. However, I am leaning towards unhedged.

[TokyoWart]

I think the longer term effect of hedging (also supported by the Vanguard article) is to make the return on the foreign bond similar to the return for your domestic bond. That doesn't seem very attractive for a yen investor who has extremely low domestic bond yields. As I understand it, there would still theoretically be a diversification benefit (if you worried about the solvency of Japanese bond issuers compared to those in the foreign countries you had diversified to) and you could have shorter periods of time where even with the hedge you don't quite create the same yield because of changes in currency volatilities but I think in that case you want an unhedged instrument.

I thought that Vanguard article was a nice summary; thanks for posting it.

[adamu]

The problem is that while unlikely, if Japanese bonds suddenly become better performing than international ones, hedging would have made you better off.

So practically, you can go unhedged because based on performance it looks like it will pay off better. But fundamentally, you should choose hedging by whether you want a domestic performance bias or not.

[TokyoWart]

The problem is that while unlikely, if Japanese bonds suddenly become better performing than international ones, hedging would have made you better off.

So practically, you can go unhedged because based on performance it looks like it will pay off better. But fundamentally, you should choose hedging by whether you want a domestic performance bias or not.

adamu,

This might be beside the point but I don't think you capture events after the time of purchase for a bond or bond fund. The yield at purchase will be the yield for whatever the duration (in the technical sense of bond fund duration) of the fund is. If Japanese bonds "become" better performing then you have to purchase them at that new interest rate to get the new performance. I understood the effect of hedging a foreign bond fund for yen to mean that we bring the return down to the current equivalent Japanese fund return. Have I misunderstood?

[Kanto]

There were a lot of good points made here. I appreciate everyone's interpretation and input.

I personally am leaning toward purchasing the regular, unhedged Tawara Fund
https://www.rakuten-sec.co.jp/web/fund/ ... 90C000CML2

I will consider also purchasing some domestic bonds as well.

Perhaps a 75% Developed 25% Japanese split.

Perhaps this overweights Japan a bit, but there are just more domestic products to chose from.

[adamu]

This might be beside the point but I don't think you capture events after the time of purchase for a bond or bond fund. The yield at purchase will be the yield for whatever the duration (in the technical sense of bond fund duration) of the fund is. If Japanese bonds "become" better performing then you have to purchase them at that new interest rate to get the new performance.

I've never really understood bonds. That's part of the reason I don't have many. What you said makes sense for individual bonds, but I'm not sure when it comes to a fund that continuously trades bonds.

I understood the effect of hedging a foreign bond fund for yen to mean that we bring the return down to the current equivalent Japanese fund return. Have I misunderstood?

I'm just going off the information in this thread. I thought the same originally - hedging just negated the exchange rate. But now I think it's as you said in your previous post, it moves the performance closer to domestic bond performance.

And sorry to Kanto for completely hijacking his bond taxation thread to learn about hedging.

[Kanto]

NP! It was a great discussion.

Going back to the original question.

Should one put their bonds in Nisa/iDeco or in a Taxable Account?

There is a lot of information on this subject, however, I thought I would share this piece.

https://news.morningstar.com/classroom2 ... onclusions.

The suggestion is that for those of us who are investing for 15 years+ it makes more sense to hold our stock in our iDecos and Nisas and our bonds in our taxable accounts due to higher yields from ETFs. This is especially true considering the low bond yields over the last few years.

I do not know what this strategy would say about Bond-> stock conversation in iDeco. Or would it matter?

Consider a yearly maxed-out iDeco/Tsumitate would it make sense to rebalance yearly by buying more bonds in your taxable account and not by conversting holdings in your iDeco?

I am unsure about the best strategy here.

[TokyoWart]

NP! It was a great discussion.

Going back to the original question.

Should one put their bonds in Nisa/iDeco or in a Taxable Account?

There is a lot of information on this subject, however, I thought I would share this piece.

https://news.morningstar.com/classroom2 ... onclusions.

The suggestion is that for those of us who are investing for 15 years+ it makes more sense to hold our stock in our iDecos and Nisas and our bonds in our taxable accounts due to higher yields from ETFs. This is especially true considering the low bond yields over the last few years.

I do not know what this strategy would say about Bond-> stock conversation in iDeco. Or would it matter?

Consider a yearly maxed-out iDeco/Tsumitate would it make sense to rebalance yearly by buying more bonds in your taxable account and not by conversting holdings in your iDeco?

I am unsure about the best strategy here.

Regarding asset allocation as you approach retirement there is the concept of a “bond tent” to increase the portion of your portfolio in safe bonds in the years immediately before retirement then decrease it (ie increase equity allocation) as retirement progresses and you no longer face a sequence-of-returns risk. Kitces has written about this a lot but there are also less detailed descriptions you can find by Googling “bond tent”:

https://www.kitces.com/managing-portfol ... -red-zone/

[fools_gold]

I do not know what this strategy would say about Bond-> stock conversation in iDeco. Or would it matter?

I think the problem is that with iDeCo you have to cash out within a certain timeframe. So, to me it makes sense to start moving over to bonds within your iDeCo as this time approaches so that you don't face a big drawdown when you come to withdraw.

Otherwise, if you're investing more than your tax free allowance, bonds outside NISA seems to make sense.

[adamu]

it makes sense to start moving over to bonds within your iDeCo as this time approaches so that you don't face a big drawdown when you come to withdraw.

You mean to avoid selling stocks low? You could just buy them back immediately in a taxable account. Although with the sluggish transaction speed of iDeCo, that might be a bit risky because there could be a few weeks out of the market.