Asset allocations

[fools_gold]

I've noticed that a lot of Japanese balanced funds and recommended portfolios are quite heavy on Japanese stocks. I guess the main reason for this to balance risk and return because Japanese stocks don't carry the same currency risk as foreign stocks.

Originally I allocated my money with a 40:40:20 split between Japanese, international developed, and emerging markets. Lately I've been moving over to 10:80:10, which is more in line with the actual world stock market weightings. Now I'm thinking that might be a bit too low. Any ideas?

[Jamo]

I think 10~15% is a nice amount for Japanese stocks. Perhaps a little more in the lead up to the Olympics; I think the 1 to 2 year outlook for Japanese stocks is fairly good. After the olympics however, there's a bit of uncertainty around what will happen to the economy.

I also started off with around 40% in Japanese stocks, but recently have moved around 3/4 of that into emerging markets (China and India mainly). International developed funds tend to be too heavy on US stocks for my liking, so I also diversify into a European stock ETF.

[RetireJapan]

I have 20-30-50 in iDeCo (J-E-I), but much less in the overall portfolio. I am guessing the yen will be weaker in the future though, so am hoping to take advantage of the exchange rate.

I think a case could be made for many allocations.

[Ori]

Japan is something around 8% of global stock market and 12% of developed. I plan to allocate it accordingly (which would be 5% of my total portfolio).
I'm not that optimistic about Japanese economy and think that me working in Japanese company and paying nenkin here is already enough of investment in Japan risk-wise

[fools_gold]

Thanks everyone. I think I need to look into this a bit more. I'm not too optimistic about Japanese stocks either, which is why I decided to reduce my allocation. Japanese stocks are on a roll at the moment, but I can't imagine the knd of sustained growth the American stock market has seen happening here.

[robster]

This is addressing something which I am currently wondering about.
One of Andrew Hallam's recommendations is an allocation along the lines of

35% Total International Stock Market Index
35% Total US Stock Market Index (as the "home" market)
30% Short-term Govt Bond Index

and he makes the point that one should have a good chunk of one's money in one's "home" market.
All well and good if your home market is one with high earnings and long-term growth potential.

For those of us in Japan long-term, the "home" market of Japan doesn't seem so appealing, as few of us feel confident about Japan's economic future, and those views are well aired on this feed. So what do we do in this case? Is it a sound decision to use the US market as proxy for our home market, and just allow Japan to be proportionally represented as part of the International SM Index?

I understand his reasoning of investing plenty of your allocation in the currency of your home, to avoid potential currency exchange loss when you cash out ... but it seems to me equally likely that you could win or lose here.

Are there other reasons for allocating a good chunk to your home market that I am not aware of? Tax implications?

Thanks for any advice.

[RetireJapan]

Hi robster

I think the main reason is exchange rates/cost of living. Personally I just buy the international stock market, which gets me something like 50% US and about 10% Japan naturally. I can imagine an insanely strong yen scenario, but I don't think it is very likely (certainly seems less likely than relative Japanese underperformance over the next four decades or so)

[robster]

Thanks for that advice, RJ. it makes sense.
Would you say the same goes for bonds?
Thanks again.

[eyeswideshut]

Hi Robster,

I would also add that ""home market" would be the place where you plan to retire. Since I have no idea where I plan to retire I allot no more equity and bond exposure to Japan than its relative weight in a global fund. I also agree that Japan's growth potential is more limited than other countries (population decline, restrictive immigration, high government and corporate debt levels, etc.)

[Ori]

In order to minimize currency exchange risks, one can invests in funds doing currency hedging. There is a white paper at Vanguard homepage which concludes that countries like Japan might benefit from hedging of 20-40% foreign investments.
And also it is usually advised to hedge bonds because currency volatility is much higher than bond returns.
I, myself, am on a fence wrt hedging. And there is not so much decent funds to choose from.