RetireJapan

Hi guys,

Sorry I have another dumb question.

I recently opened my NISA and iDeCo is on the way, but I'm looking around since about 1 year ago to learn stuff about the market. I was afraid to invest too fast so I kinda took my time (I do regret it now though).
If this is useful to help me:
- I'm a 29 year-old woman, French and Italian, planning to retire in Japan (never come back in Europe), getting married next year, no kids.
- I manage to save 60-70% of my salary.
- Currently have 1.5 million emergency fund and being seishain in a big company
This year I plan to max NISA and iDeco and keep the rest of the saving in cash to get my house loan next year. Then once I got the loan from the bank I'll also trade in Interactive Brokers because I think I'll be able to invest 3-3.5 million a year if things continue like this without kids.

Regarding NISA, I planned to invest 3 times 400 000 JPY or 400 000 and then 800 000 the next month with the good repartition already which would be:
1/ 70% Stocks
Inside this
60% World ex-Japan
25% JP
15% emerging

2/ 20% Bonds
inside this
70% foreign bonds
30% JP bonds

3/ 10% REITs
50% Overseas REITs
50% J-REITs

I didn't manage to find overseas REITs funds so I might use the 10% fully for J-REITS (if you know overseas REIT funds for NISA please tell me hehe)

Regarding the 2/ 20% bonds part...
I looked and looked again to the bonds funds, especially:
ニッセイ 外国債券インデックスファンド (Nissei Foreign bond fund)
三井住友・日本債券インデックス・ファンド (Mitsui Sumitomo Japanese bonds)
たわらノーロード 先進国債券

I might be super dumb, but I don't manage to understand the positive point investing in one of these, especially in NISA.
The performance seems super bad, I always thought that Bonds are used to equilibrate a portfolio because they're safer but I don't feel safe at all looking to the stats, I kinda feel I would rather lose money on it.

Also, with NISA we can have tax-free profits, isn't it better to invest everything in dividend ETFs and individual dividend JP stocks to maximize the tax-free gains than buy that kind of products which seem to have negative returns?

If the portfolio have to include some kind of "safe" part, I'm wondering if it's not just better to keep the cash in my bank account :/

If someone could explain me how you find some of these bonds funds attractive it would help me a lot taking my decision! Maybe I just don't understand well how to read bonds stats, I don't know... If you have another one that looks good according to you I would also be happy to know

My understanding of bonds is that they are likely to be less profitable than stocks over the long run but also less volatile (they will go down by less during a stock market crash). They may also have a yield (like a dividend).

The reason you would want to own them is to reduce your losses in a stock market crash and possibly use them to rebalance (sell bonds and buy the super cheap stocks).

Keeping the bond component in cash would be another way to achieve both of these, although cash is more vulnerable to inflation than bonds are.

A lot of the time in times of volatility people run from stocks to bonds so bond prices may go up. If there was a market crash now, bonds may well protect from part of the volatility.

Then when you rebalance, you're able to use your overbuyed bonds to buy severely discounted stocks at the bottom of a dip.

Now, it's not ideal, as a perfectly timed trader could do better. But no-one consistently perfectly times their trades because you simply can't know.

I personally would not touch Japanese bonds though. They pay out so very little, and are only bought up because of weird nationalism, laws requiring banks to hold a certain % of "safe" assets and Japanese investors who are terrified of stocks and anything foreign. So really the ecosystem around them is bizarre and does not inspire me with confidence.

As to bonds vs cash? Well bonds still outperform cash by a long shot in general. https://www.investopedia.com/walkthroug ... bonds.aspx Includes the real returns (that is return minus inflation) on bonds. Most of them are positive. For cash, if there is any inflation, the real returns are negative

Hi RetireJapan and Jcc,

Thank you very much for your messages!

It's a little more clear for me now.
So basically the goal of bonds isn't to keep them whatever happens, but rather to sell them when there's a crash to benefit from cheap stocks with the money?
And protect ourselves from inflation.

The funds I put in my first post don't provide dividends it seems and go more and more down it seems though, that's what made me worry that much...
I'm OK with the logic of protecting the cash value from inflation but like this it just seems that I'll lose X% by year which is not good too :/

@jcc When you say japanese bonds you also include the ones targeting overseas markets?
I found this vanguard Bond fund called BND
https://investor.vanguard.com/etf/profile/overview/bnd
It gives out dividends each month and seems a little more stable with reasonable metrics.

The USD-JPY rate will increase risks and I'll have the US taxation though.
Does it still seems better to invest in this fund according to you?

Kiyora999 wrote: ↑Fri Jul 06, 2018 8:24 am So basically the goal of bonds isn't to keep them whatever happens, but rather to sell them when there's a crash to benefit from cheap stocks with the money?

Kind of. Let's say that you commit to a certain portfolio allocation (e.g. 70% stocks, 30% bonds). Then a stock market crash happens, stocks drop significantly and people turn to bonds as a refuge, increasing their values. Even though you haven't sold anything, your allocation is now 55% stocks and 45% bonds.

In order to keep your plan, you need to rebalance your portfolio by selling some of your bonds, and use the money to buy stocks so that your allocation is back to 70% stocks and 30% bonds. Doing so means that you will sell your bonds at a time when their price is high, and buy stocks when their price is low: exactly what you want to do as an investor!

Should the opposite happen (stocks grow while bonds stagnate or drop), you will rebalance by selling some of your stock to buy bonds, thus repeating this virtuous cycle.

This is part of the Bogleheads philosophy, a great read prior to doing any investing: https://www.bogleheads.org/wiki/Boglehe ... philosophy

Kiyora999 wrote: ↑Fri Jul 06, 2018 8:24 am I'm OK with the logic of protecting the cash value from inflation but like this it just seems that I'll lose X% by year which is not good too :/

Once you start investing you will very likely see numbers you don't like on your account, possibly for an extended period of time. All your investments will also not work well. It is very tempting to try and mess with things, selling the bad performers to buy more of the top ones, but that's precisely the opposite of what you should do. Decide on a plan, and stick to it, especially when the situation looks bad (and it will quite a few times!). As your time in the market increases, you will start reaping the benefits.

Kiyora999 wrote: ↑Fri Jul 06, 2018 8:24 am @jcc When you say japanese bonds you also include the ones targeting overseas markets?
I found this vanguard Bond fund called BND
https://investor.vanguard.com/etf/profile/overview/bnd
It gives out dividends each month and seems a little more stable with reasonable metrics.

The USD-JPY rate will increase risks and I'll have the US taxation though.
Does it still seems better to invest in this fund according to you?

I do own some BND, but on a US account. Because of the way taxes work, you will probably prefer local Japanese funds like the ones from Tawara or eMaxis Slim. All my holdings on Japanese accounts are from these two providers because of their low fees. They also automatically reinvest dividends, which is what I do with my BND anyway.

N00bster wrote: ↑Sat Jul 07, 2018 4:39 am

Kiyora999 wrote: ↑Fri Jul 06, 2018 8:24 am So basically the goal of bonds isn't to keep them whatever happens, but rather to sell them when there's a crash to benefit from cheap stocks with the money?

Kind of. Let's say that you commit to a certain portfolio allocation (e.g. 70% stocks, 30% bonds). Then a stock market crash happens, stocks drop significantly and people turn to bonds as a refuge, increasing their values. Even though you haven't sold anything, your allocation is now 55% stocks and 45% bonds.

In order to keep your plan, you need to rebalance your portfolio by selling some of your bonds, and use the money to buy stocks so that your allocation is back to 70% stocks and 30% bonds. Doing so means that you will sell your bonds at a time when their price is high, and buy stocks when their price is low: exactly what you want to do as an investor!

But you can't rebalance within NISA, right? So if you have maxed out your allocation for the year, do you just have to leave as is and hope for the stocks rise again?

goodandbadjapan wrote: ↑Sat Jul 07, 2018 5:24 am

N00bster wrote: ↑Sat Jul 07, 2018 4:39 am

Kiyora999 wrote: ↑Fri Jul 06, 2018 8:24 am So basically the goal of bonds isn't to keep them whatever happens, but rather to sell them when there's a crash to benefit from cheap stocks with the money?

Kind of. Let's say that you commit to a certain portfolio allocation (e.g. 70% stocks, 30% bonds). Then a stock market crash happens, stocks drop significantly and people turn to bonds as a refuge, increasing their values. Even though you haven't sold anything, your allocation is now 55% stocks and 45% bonds.

In order to keep your plan, you need to rebalance your portfolio by selling some of your bonds, and use the money to buy stocks so that your allocation is back to 70% stocks and 30% bonds. Doing so means that you will sell your bonds at a time when their price is high, and buy stocks when their price is low: exactly what you want to do as an investor!

But you can't rebalance within NISA, right? So if you have maxed out your allocation for the year, do you just have to leave as is and hope for the stocks rise again?

Ah, good point. In the case of NISA, you can rebalance the next time you pour money into it, either because you have some allowance left for the year, or you wait until next year and your new allowance.

Kiyora999 wrote: ↑Fri Jul 06, 2018 6:25 am...
- I'm a 29 year-old woman, French and Italian, planning to retire in Japan (never come back in Europe), getting married next year, no kids.
- I manage to save 60-70% of my salary.
...

I envy your position/situation.

Tho things could change in your future (30s, 40s), if I had a do-over and was 29 with those numbers, I'd be heavy into stocks, small caps in particular. Buy and hold low-fee ETFs and just wait.

I'd hold some cash back in case of a dip, but for the next 10-20 yrs, I'd avoid bonds. YMMV.



disclaimer: I'm 66 and don't own any bonds, my safety net after equities is that I'm just over 30% cash. IMO inflation is not a worry these days.

(edit: with cash on hand in japan, that 30% goes up quite a bit.)

Kiyora999 wrote: ↑Fri Jul 06, 2018 8:24 am Hi RetireJapan and Jcc,

Thank you very much for your messages!

It's a little more clear for me now.
So basically the goal of bonds isn't to keep them whatever happens, but rather to sell them when there's a crash to benefit from cheap stocks with the money?
And protect ourselves from inflation.

Normally that happens organically as a result of regular rebalancing. You don't sell all the bonds, just enough to bring your stock/bond allocation back in line. I strongly recommend reading a couple of books for a good explanation of this(and plenty of other topics). Random walk down walk street is probably a good place to start.

The funds I put in my first post don't provide dividends it seems and go more and more down it seems though, that's what made me worry that much...
I'm OK with the logic of protecting the cash value from inflation but like this it just seems that I'll lose X% by year which is not good too :/

A lot of the japanese funds internally reinvest dividends(or in the case of bonds, coupons) increasing the value of the bond items.

This year hasn't been great with the values of most things fluctuating. But Japanese bonds(that is, those put out by the japanese government, or funds packaging them) have very very low coupon rates(basically like dividends) so I personally don't bother with them.

@jcc When you say japanese bonds you also include the ones targeting overseas markets?
I found this vanguard Bond fund called BND
https://investor.vanguard.com/etf/profile/overview/bnd
It gives out dividends each month and seems a little more stable with reasonable metrics.

The USD-JPY rate will increase risks and I'll have the US taxation though.
Does it still seems better to invest in this fund according to you?

BND is a fund packaging US bonds. That's fine. Personally I use a japanese fund that buys developed nations bonds, gives me a bit more diversification and lower currency risk.

You seem to be looking at past returns to try to predict the performance of stocks. It's worth noting that the script "Past performance is no guarantee of future results." is not a joke. 2018 has been a bit of a rough year where most things have just been treading water. There's a concept of reversion to mean which states that things with a long good run will eventually come back down(the reverse too, but sometimes bad funds are just bad because they have absurd costs, so I wouldn't just buy a bad fund expecting it to go up eventually). You really just need to look at the fundamentals, and understand why you design your portfolio a certain way. The savings/earnings you can make by reading a couple of good books on this are huge, and it will stop you from selling out when things look bad, instead adopting a strategy that allows you to remove the emotional component from investing.

Hi Noobster, jcc, captainspoke and goodandbadjapan!

Thank you very much for your messages! I read some stuff about bonds and books about investing already but it's really the performance of the bonds funds that made me doubt + the fact that I have a huge possibility to waste my tax-free allowance in my NISA.

You seem to be looking at past returns to try to predict the performance of stocks. It's worth noting that the script "Past performance is no guarantee of future results."

Yes, I do agree with that, but a product that was -1 to -8% for the last 3 years doesn't give me confidence about its future, especially in a tax-advantaged account :/
I mean, why buying some stuff for NISA that is already bad since a long period and shows no signs of improvement at the current moment?

I tried to talk about this with some guys of a French speaking investing forum too and they kinda agree with you but not 100% (they agree more with Captainspoke actually).
Some told me that I since I have 3-4 decades in front of me, I should just ignore bonds for at least 10 years depending of my risk tolerance in case of a market crash (because I should always recover from that with at least 30-40 years to go) because the bonds funds I showed them indeed look terrible and it's just a waste. I don't know to what extend I'll panic, but when I read about this in books and internet I should indeed recover if history repeats itself...

They all seem rich though ahahaha! 1.2M tax benefit account is too small to be wasted according to them, and if I really wish to build a dividend portfolio in the long term I should already focus on that according to them.
But I don't feel confident enough with the financial/accounting analysis of the companies yet, I'm doing some kind of simulation from next month until next year to see what would have happened if I followed my logic, but I still prefer ETFs with real money for the moment.

They thought that I should definitely keep my REIT part though if I don't take bonds to diversify a little more, since I don't have any rental income or plan to get rental income in the next 10 years. So maybe I'll allocate 20% in REITs, I have to think a little more about that.

Since I plan to invest 3M/year + still have 1M/year in cash until I get my house loan, I think I'll just avoid to put the bonds in the NISA. Could be nice if there's a crash, but as someone else said, I wouldn't be able to rebalance anyway if I already used my allowance...
And if that really happens I can just kiss my fiancee and tell him to pay the rent and food alone to grab 1-2M more even though I don't like the idea of making him pay for everything because of my risky investments ahah >.>

I let myself a few months to mature that idea but I think I'll still buy 10% of foreign bonds in a separate account and will increase to 20-25 in 5-10 years.
I think you're all right and I won't consider japanese bonds for the next years.
So for the moment I'll do something like this for the next 2-3 years:

1/ 70% Stocks - NISA + ideco + separate account
Inside this
60% World ex-Japan
25% JP
15% emerging

2/ 20% REITs - NISA+ ideco
50% Overseas REITs
50% J-REITs

3/10% Bonds - separate account only
inside this
100% foreign bonds