My draw-down phase Asset Allocation

[ChapInTokyo]

So, starting this year I'll be able to start drawing my pension. Hooray!

In keeping with the fact that my portfolio has now transitioned to its draw-down phase, I have been increasing the yen denominated assets in the portfolio in order to reduce the exchange rate risk therein.

Here is the target allocation that I am aiming for (based on the current GPIF allocation as explained here in the Daiwa Securities Life Plan article on the thinking behind GPIF's super conservative allocation).

I will need to increase my inflation linked JGB fund holdings to get the Japan bonds position anywhere close to 25% of the total though! Any advice would be most welcome, as always.

[TokyoWart]

I cannot imagine JGB playing a major role in an individual investor's portfolio. The inflation-linked JGBs would at least not have the negative real yield that most JGBs have but even that is not something I would consider for 25% of my portfolio at the start of retirement.

Regarding the equal 25% allocations for Japanese and foreign stocks I would keep in mind that currently Japan makes up about 5.36% of MSCI World while the US is now up to nearly 74%. When a US investor has 100% of their equity position in US stocks they are distorting the actual allocation by about a third (i.e. they have around a third more of their portfolio in the US than they should if they were taking a market-neutral approach). A Japanese investor who has 50% of their equity position in Japanese stocks instead of the 5.35% is making a much larger, 9-fold, over-allocation to Japan. That might be a reasonable approach because everyone needs some home bias, Japanese stocks are much less expensive than US stocks as measured by P/E, P/B or dividend yields, etc, but I think it is worth keeping in mind that the degree of distortion is much greater for that domestic Japanese investor who has half their equity position in Japan than for a US investor who has ignored the rest of the world entirely.

https://www.msci.com/documents/10199/17 ... fc565ededb

[Deep Blue]

I wouldn’t even start to consider the GPIF target allocations as being in any way shape or form a suitable reference for an individuals pension planning.

[Tsumitate Wrestler]

Just copy a target date fund that matches your personal risk preference, or better yet just invest in said fund.

You seem to be a bit all over the place, and copying the GPIF is no way to go about retirement.

[ChapInTokyo]

Just copy a target date fund that matches your personal risk preference, or better yet just invest in said fund.

You seem to be a bit all over the place, and copying the GPIF is no way to go about retirement.

Well, a target date fund allocation is going to be even more conservative than the GPIF's one.

For example, the DC Nissay Target Date Fund 2025 had the following allocation as of December 2023 which is the latest figure I could find for the fund (judging by the allocation transition chart in the fund's prospectus, this is likely to have become 100% short term money market instruments now that the fund's reached its target date and transitioned to its stable state).

Compared to a target date fund in its actual post-retirement phase, the GPIF allocation is positively gung ho. Back in the day, they used to have something like 60% JGBs, until they actually increased the equity allocation and reduced the Japan bonds allocation a few years back in order to aim for higher returns.

[Tsumitate Wrestler]

Just copy a target date fund that matches your personal risk preference, or better yet just invest in said fund.

Did you just select a fund at random?

https://investor.vanguard.com/investmen ... file/vttsx

The asset allocation projections can be seen here.
https://acrobat.adobe.com/id/urn:aaid:s ... 5baec6f0dc

[ChapInTokyo]

I cannot imagine JGB playing a major role in an individual investor's portfolio. The inflation-linked JGBs would at least not have the negative real yield that most JGBs have but even that is not something I would consider for 25% of my portfolio at the start of retirement.

Regarding the equal 25% allocations for Japanese and foreign stocks I would keep in mind that currently Japan makes up about 5.36% of MSCI World while the US is now up to nearly 74%. When a US investor has 100% of their equity position in US stocks they are distorting the actual allocation by about a third (i.e. they have around a third more of their portfolio in the US than they should if they were taking a market-neutral approach). A Japanese investor who has 50% of their equity position in Japanese stocks instead of the 5.35% is making a much larger, 9-fold, over-allocation to Japan. That might be a reasonable approach because everyone needs some home bias, Japanese stocks are much less expensive than US stocks as measured by P/E, P/B or dividend yields, etc, but I think it is worth keeping in mind that the degree of distortion is much greater for that domestic Japanese investor who has half their equity position in Japan than for a US investor who has ignored the rest of the world entirely.

https://www.msci.com/documents/10199/17 ... fc565ededb

Well, up until I started re-allocating my portfolio, I had a sort of a slightly customized version of a market cap weighted balanced fund type portfolio. A clone of the allocation that Saison Vanguard Global Balance Fund uses, but built using the Vanguard ETFs so I had basically the same thing at lower cost. This has worked very well for me since around 2011, especially since the USD was strengthening against the yen all the time, thus turbo charging my gains.

The reason I am now moving away from market cap weighting, and making a big swing towards home country currency bias is largely due to having learned that asset classes such as US Equities and US Treasuries which exhibit negative correlation in the US, don't retain that characteristic when currency exchange rate risk enter into the picture (see the following tables, taken from this explainer article '分散投資実践編⑥ ～日本の投資家のためのアセット・アロケーション～' on the Pictet Japan website).




As for US Treasuries and other international bonds, I found that they have a much higher volatility than I had expected (see this Risk table from the GPIF's site) so although I will have them for the higher returns, I will be very aware that they have high volatility due to currency rate fluctuations, and also are more correlated with equities than you might expect:



According to the GPIF site, apparently they count yen hedged international assets as Japanese bonds and Japanese equities, so I guess I might also follow their lead in that. At the same time, I think that the reason for having a good sized Japan bonds and Japan equities in the mix is for the negative correlation between those asset classes, when denominated in yen.



My retirement portfolio asset allocation is still a work in progress, and I don't know whether I'll go as far as 25% of the total into JGBi (and yen hedged developed market bonds), but I do want to have a good chunk of my assets in yen.

[ChapInTokyo]

Just copy a target date fund that matches your personal risk preference, or better yet just invest in said fund.

Did you just select a fund at random?

https://investor.vanguard.com/investmen ... file/vttsx

The asset allocation projections can be seen here.
https://acrobat.adobe.com/id/urn:aaid:s ... 5baec6f0dc

I would choose a Vanguard fund if I was living in the US, spending my money in USD...

[captainspoke]

If you haven't heard of it, google "bucket strategy for retirement" and read a little. Usually three buckets for short term, intermediate, and long term time horizons. The short term bucket might be 0-5yrs, intermediate 5-10, long is 10+. (and the year schemes vary a little depending on who is doing the writing, so you might also read 0-3, 3-7, and 7+, etc.)

Bucket 1 is cash and maybe CDs/short term bonds. Bucket 2 might be longer bonds and some conservative equities. Bucket 3 is all equities. As time goes on, you top off each from the next bucket up.

Vanguard gives a brief description of this here (scroll down, it's brief).

[ChapInTokyo]

If you haven't heard of it, google "bucket strategy for retirement" and read a little. Usually three buckets for short term, intermediate, and long term time horizons. The short term bucket might be 0-5yrs, intermediate 5-10, long is 10+. (and the year schemes vary a little depending on who is doing the writing, so you might also read 0-3, 3-7, and 7+, etc.)

Bucket 1 is cash and maybe CDs/short term bonds. Bucket 2 might be longer bonds and some conservative equities. Bucket 3 is all equities. As time goes on, you top off each from the next bucket up.

Vanguard gives a brief description of this here (scroll down, it's brief).

Thanks for the heads up. I was aware of the bucket thing, but until now had been thinking of the buckets as being sort of like rainy day money to tide you over during market crashes. The idea of topping up each bucket stage from sales of the equities and bonds in the core buckets was an interesting one.

I might still go with such a portfolio rather than a more traditional diversified asset classes one. In a way, JGBi funds will be a good component of the cash bucket since it is inflation insurance at the same time.