Investment vehicles / products and cleaning toilets for wifi

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Over the coming weeks we are going to take a look at the pros and cons of various investment vehicles. Before doing so, let’s just clarify what we mean by this. When talking about an investment vehicle or an investment product, what we’re really talking about is a box – a box for holding assets. These assets could be cash, bonds, stocks, funds, ETF’s etc. The box may be structured as a directly owned account, a nominee account, or even an insurance product. The main point here is to separate the box from the actual investment strategy – i.e. what assets you hold inside the box and how you manage them over time.

I often hear people say “I’ve got a …….. product / account and it’s not performing well.” This requires some clarification as it’s unclear if it’s the account itself that is not performing well, or the investments inside it. You can have a really great vehicle that is secure, tax efficient, and reasonably costed, but if your asset allocation is poor and the investments are not performing you will not be happy with the result. Equally, you could have picked great investments that have performed very well and suffer because the vehicle you are using is inefficient, not secure, or the fees are excessive. For some of you this will be obvious, but many people fail to distinguish between the investment vehicle and the investments themselves.

Another thing people often fail to do is read the instructions on the box! It’s amazing how many people own investment products without having any idea of how they work, what restrictions there are, what fees they are paying or how they will be taxed. In many cases they have bought the product through an adviser or salesperson, based on their presentation, and not actually read the terms and conditions themselves. While we are on the subject of reading the small print, I recently came across this rather amusing article about a public wifi company’s campaign / publicity stunt, whereby thousands of people agreed to clean toilets for wifi because they didn’t read the terms.

Now I’m as guilty as anyone of not reading the terms I agree to in order to get access to public wifi, or download songs from iTunes for that matter, but when it comes to investing money we should all take responsibility for understanding what we are getting into. While I truly feel for people who get duped, or simply get unlucky, investors need to do their own due diligence before investing their money.

20 years in Japan!

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July 21st 2017 marked exactly 20 years since I moved to Japan. I’ve made plenty of memories during those years that are fun to look back on, and it made me wonder what it’s been like for investors in Japan over that time frame. So here is some data from 21st July 1997 to 21st July 2017:

USD/JPY

USD:JPY 20 yrs

There have been some large currency fluctuations over the last 20 years, and it’s interesting to note that at around 111 today we are probably near the average for the period. I remember going to the UK many years ago and £1 was around 240 yen! If the Brexit vote has done nothing else, it has at least made my trips back home cheaper!

Nikkei 225

Nikkei 225 20 yrs

Interesting to note that if you had bought the Nikkei exactly 20 years ago and held it, you are pretty much back where you started! This is excluding dividends, which would have outperformed cash at least. (average dividend yield is 1.68%) Regular investors would have fared better due to the averaging effect of buying regularly and accumulating more during the bad years. (see article on Regular vs. Lump Sum investing) Investors who loaded up during the lows of 2003 and 2009 will have done very well for themselves. Remember, if you see the Nikkei at those levels again you should be buying as much as you can, not panicking and running for the hills.

Interest rate

Japan interest rate 20 yrs

Anyone who has lived in Japan in the last 20 years will know that cash in the bank does not earn anything by the time you have deducted ATM and transfer fees. For homeowners it does make Japan a borrowers paradise though. Buying our own home was a great move for my wife and I, with monthly mortgage payments lower than we were previously paying in rent.

10 year JGB Yield

JGB 20 yrs

Not much to see here I’m afraid, and the next chart explains why:

Inflation

Japan inflation 20 yrs

Japan is still battling deflation, and Bank of Japan governor Haruhiko Kuroda has just pushed back the expected timing for hitting the 2% inflation target for the sixth time, with the new target being fiscal 2019. All this despite a mammoth stimulus effort of debt purchasing and an ultra-easy monetary policy. So far this effort has failed to budge the stubborn inflation rate, although it has certainly impacted the next two charts:

Bank of Japan balance sheet

BOJ Bal Sheet 20 yrs

Japan debt to GDP

Debt to GDP 20 yrs

With the US Federal Reserve already raising interest rates and the European Central Bank possibly looking to tighten from September, all eyes are now turning to Japan, which certainly has the most daunting task ahead when it comes to how to exit this ultra-easy monetary policy. It’s probably safe to say that this is unlikely to begin for some years yet, but it should certainly make the next 20 years an interesting time to be in Japan.

(Charts from Trading Economics – a great source of data if you’re interested in this kind of thing)

Golf in Japan

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It’s here! The first golf post! Ok if you are not into golf then please feel free to tune out right now. And yes, I’m aware that this post has absolutely nothing to do with personal finance, but if that’s all we talk about then it’s going to get boring.

You can’t just save all of your money to secure your financial future after all. You have to spend some of it on what you enjoy in the here and now, which for me tends to be golf. The aim of this post is to provide expats in Japan with links to useful information to feed their golf addiction. I won’t try to fit it all into one post, so expect more on this at a later date. I apologise that it is very Kanto focussed, but that’s what I know. I always welcome an exchange of information with people in other parts of Japan.

Firstly, if you are new to Japan, I have to tell you that you are living in a paradise full of wonderful golf courses, but things are a little different from back home. Basically golf in Japan takes all day. If you are planning to pop out for a round early in the morning and be back in the office by lunchtime, you are likely to be disappointed. Although even that can be done if you know where to look! Mostly though you are going to need to plan for the day: up early, travel to the course, bit of practice, tee off, finish the front nine and take a break for lunch (I kid you not), back nine, hot bath, maybe a drink or two, and back home for dinner. It’s simple, you can fight this routine, or you can embrace it.

Many people have the image that golf in Japan is prohibitively expensive. While it certainly is on the pricy side compared to what we may be used to, we are well out of the bubble era where golf memberships were changing hands for tens of millions of yen.

My best advice it this: If at all possible, take a day off and play on a weekday. It’s cheaper, less crowded, you have more control over tee times, and of course the knowledge that everyone else is in the office while you are on the golf course! Typically you can expect to pay between 8,000 and 12,000 yen on a weekday including lunch, while weekend prices average somewhere between 15,000 and 20,000 yen.

If you are looking for people to play with, here are a couple of expat friendly groups you can consider joining:

Tokyo Beer and Golf Society – I think the name explains this one well enough. Always fun, well organised days out, and always a beer within easy reach. (the photo at the top of this post is me in one of their snazzy uniforms)

Tokyo Golfers – another relaxed, friendly group that plays often on Fridays and weekends.

For researching places to play, here are some useful sites:

Air Golf – lot’s of useful info here, including that elusive early bird round that gets you back to the office by lunchtime!

Golf in Japan – great for course reviews.

If you can read Japanese, then Rakuten Gora is essential for booking your round – lot’s of deals and promotions going on, and they also have a single player booking system (一人予約), whereby people looking for playing partners can meet up and organise a round.

Hopefully that will help to get you started. As always feel free to ask questions and look out for the next random golf post.

 

 

 

 

 

Inflation – The Evil Twin

 

Inflation erosion

We touched on the subject of inflation before in a previous post on benchmarking, but I would like to return to it briefly just to stress how important it is in your planning.

In the short term, inflation can seem harmless enough. If you leave $100 under your mattress and the rate of inflation is 3%, then next year your $100 will buy 3% less goods and services. In other words, in order to buy the same amount of goods and services you now need $103. When you extend this to 10 years you may think that you now need $130, but the effects of compounding mean that you actually need $134.39. Yes, as wonderful as compound interest is when working in your favor, compound inflation, it’s evil twin, is working against you over time.

So how can inflation affect your long term financial planning? Well first of all it will affect the targets you set. Let’s take an example of someone who wants to have an income of $50,000 per year in retirement in 25 years time:

If you can find a miracle low risk product that generates a 10% annual return, then you need $500,000 in capital at retirement. Then you can live off the interest without spending your capital and it doesn’t matter how long you live.

If we are more realistic and think in terms of a 5% return, then you need $1,000,000 in order to generate $50,000 per year.

What if you can only get 2.5% in retirement? Well then you need $2,000,000.

The problem is that all of these numbers are in today’s money. The table above tells us that over 25 years at 3% inflation, our spending power will more than halve. (it actually goes to 46.70% but let’s keep the numbers simple) That means that with a 5% return we actually need $2,000,000. And with a 2.5% return we need $4,000,000.

This is why it’s important to start saving and investing early. If we are not taking advantage of compound interest on our savings, our nest egg will be getting eaten away by its evil twin inflation!

Property Investing Part Two – Know Your Area

 

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Following our interview on property investing with Graeme, here is a second post from him with some practical advice on how you can actually get started and research your investing area:

In the previous post we discussed SAP (Strategy, Area, Property) and how a serious investor starts by identifying a clear strategy. We will return to the topic of strategy, however you’re probably saying “OK, strategy is important, but for now just give me some actionable advice to help me get into my investing area and find good rental properties and good agents to manage my houses.”

Know your Area! – The Green Pen/Red Pen Game

To make money from property you need to know your area because if you buy in the right area, most likely good tenants will move in, pay the rent on time, take care of your house and stay a long time. Needless to say, buying in the wrong street is more likely to result in voids, bad tenants and arrears. So how can you learn about your area quickly?

The average investor goes to the estate agent and asks them for info on the local area. The problem is that the estate agent will sell you almost anything, regardless of whether the area is going up, down or stagnating. Estate agents just want to sell and only focus on a property’s good points so that they make money. Instead, first go to a lettings agent and bring a photo-copied map of the area, a green pen, and a red pen. Get the lettings agent to highlight in green all the streets on the map where property can be easily let, i.e. the desirable streets.

The exact words to say to your lettings agent are:

“If I were to bring you a house in a decent street, that you could rent today, where would it be”?

Notice the language we are using. The phrases make it sound as if you are helping them. Agents get time wasters everyday who ask random questions but take no action, so you want to separate yourself and make it clear from the start that you are here to do business.

Also ask the lettings agent specifically what type of house is in demand? (2 bedrooms, 3 bedrooms, apartments, properties with gardens etc) and why?

After they have shown you the good streets then ask them to highlight any dodgy streets with the red pen so you know the places that are best to avoid. Even if there are no rough streets in your area, it is still worthwhile getting to know which are the most desirable and least desirable streets and why.

I suggest doing the green pen/red pen game with 2 or 3 lettings agents to cross check you are getting the right info. You are also interviewing the lettings agent to see how much they know and whether you want to work with them in the future. In short you are quickly gathering accurate information about your area while doing a job interview.

So, now you should know which properties are renting fastest, in which streets and why.

Next, go to your local estate agents, show them the green streets and ask “What properties do you have for sale in these streets?” Once you have the estate agent’s list of good properties, take that list back to the lettings agent and say “Is this the kind of property you mean?”

How much rent will I get for it?

What kind of tenant (unemployed, student, family, young professional, retired) will want this property?

Is there anything I need to do to the property to get the maximum rent?

What are your fees as a lettings agent?

By doing this you are double checking your information and gleaning extra nuggets of wisdom about your investment area.

There are 2 Ps in the word property

In the previous post we talked about using the bank’s money to buy property and this is called OPM (other people’s money). In this article we are using other people’s knowledge (OPK), and this expert knowledge can be gleaned in a single day, preferably face to face but, if necessary, by phone.

OPM and OPK when combined are very powerful tools for building a successful property portfolio. From OPM and OPK comes one of the most important property investor mantras and it is this:

“There are 2 Ps in the word property. The first P is for property and the second P is for people.”

The importance of having the right people on your team cannot be underestimated to your net worth. Property is a people business. It’s all about the people we interact and transact with. Build good relationships with the right people, understand how they operate and know how to talk with them.

If you want to have a good relationship with your agent, you need to understand their system. For example, when you go into the estate agent, ask specifically to speak with the agent who deals with investors. Usually the young, inexperienced, agent is put front of shop. You want to navigate around them and talk with the experienced agent who knows the area and the business inside out. They may well be at the back of the room or have their own office off the main shop floor. It is this person you want to do business with and make your offers to.

This post has provided advice on how to build your area knowledge and how to work with agents. You might not be ready to put in offers but for now grab your pens and maps and get out there asking the right questions!!

In the next post we will examine the goal of any serious investor. How can you buy property without using your own money and how do you calculate what the right offer is?

The Lifelong Expat

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So you’re a lifer? Congratulations! For some people expat life is so good, they never intend to go home. Also of course, many people make their lives in their country of choice: they have a home, family, kids in school, perhaps a business, things that they never plan to leave behind to “return home”.

So, sticking with Japan as our example, how should you adjust your planning if you are staying here for life? Many of the basics do not change, but everything will have more of a Japan focus. We will look at each of these in more detail later but here is a summary of things to consider for now:

  • Protection – this is of course the first place to start. See the protection review here for the basics. This probably means taking care of some of your insurance needs with a Japanese insurance policy, which of course means policy documents and explanations in Japanese. It’s worth looking around for a local insurance agent you can communicate well with, and exploring hospitalisation insurance, income protection, and life insurance if you need it. You will find that Japanese policies come with all kinds of add ons, fixed rate guarantees, and other bells and whistles. Start by looking for the simplest policies that cover your particular requirements, and beware of over-paying for things you don’t need.
  • Buying a home – owning versus renting becomes a bit of a no-brainer if you are going to be in Japan forever. You will likely find that you end up with more space for a lower monthly cost if you own your own home. Ultra low mortgage rates are, of course, an attractive factor. Whether you buy a house or an apartment is down to your own preference, but we will look at the pros and cons of each later.
  • Retirement planning – if you work in Japan you will already be paying into the Japan national pension. Once a year it is worth reviewing how this is going and what your pension is likely to be. If you are paying into the national pension scheme, you are also eligible to start a Japanese 401k, which is a self managed pension. This offers significant tax savings over time and is worth considering.
  • Savings – another tax efficient way to save is NISA, which is based on the UK ISA. NISA is relatively new and, although it does have its drawbacks, dividends and capital gains are tax free. Once you have exhausted ways to save that carry a tax benefit, you should look at opening a local brokerage account. This is a great way to invest in stocks and low cost ETFs.
  • Investment property – from one room apartments to whole buildings, there are excellent opportunities for property investment in Japan.
  • Lastly, consider if you have other base currencies? Keep in mind that if you are planning to send your kids to university overseas, for example, you should save for that need in the currency you will be spending in. Also, for general investment purposes, remember that Japan only accounts for around 8% of world stock market capitalisation. Investing too narrowly in Japan concentrates your risk in one area, and you also miss out on the opportunity to diversify into world markets.

The long-term expat

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Last time out we looked at the opportunity for short term expats. Today we move on to the long-termers. This is quite a loosely defined group, and will cover a broad section of the expat community. What we really mean by long term is:

  • You are not here on a short term expat posting – or you are but it is likely to renew many times before you move on.
  • You plan to leave the country you reside in at some point in the future, whether to go home, work somewhere else, or retire somewhere else.

This means you will spend a significant part of your life in your current country of residence. Let’s assume it’s Japan for clarity, but it could just as easily be Hong Kong, Singapore or elsewhere.

Once again, your number one financial planning issue is going to be base currency, and it’s quite possible you will have more than one. So you need to ask yourself what are the things you need to save for in the future, and what country are you planning on them taking place in? So if you are saving for retirement in Europe, you may have Euro as your base currency for that need. If you are planning on sending your child to college in the United States, you may have USD as your base currency for that. If you may actually end up staying in Japan forever you may need to keep some assets in JPY just in case.

My main point here is that currency risk can be a killer. I just found this interesting site that monitors national debt, and here is Japan’s debt clock. Now Japan may manage this well over the next 20 years, or it may not. What do you think will happen to the value of JPY if it doesn’t? If you are retiring in Europe, do you really want to be saving your money in JPY with a view to converting it later, when you move back?

Other than base currency, here are a few other things to consider:

  1. Protection – we have covered this in the protection review earlier. You should also have a plan for repatriation to your home country in case something goes wrong with your current employment and you have to leave in a hurry.
  2. Property – if you are going to be here for a long time then have you considered buying a property in Japan? Thanks to the developed world’s lowest interest rates, it can be very cost-effective when compared to renting. If you have the means, buying a property back home can also give you some extra income while you are away and a place to either go back to or sell to generate capital.
  3. Structuring – deciding where and how to hold particular investments is going to be important. You may have limited options for investing in Euros in Japan for example. It may be more tax effective to use an offshore structure or a structure back home. US citizens cannot escape worldwide taxation and need to think carefully about how to report assets. If you were to die, you probably want your assets be passed smoothly to your designated family members. Skilled advisers can add significant value here, just choose them carefully. (more on structuring in future posts)

The Expat Opportunity

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There are many different types of expats: some are posted overseas by their employer and do 2-3 year stints in a couple of countries and then return home. Some come as travelers, students or teachers and end up living and working overseas for a longer period. And some, like me, come for an adventure for a couple of years and never end up leaving! Whether you are a short term contractor, a long termer, or a lifer, the need to plan for your financial future is a constant. However, the method will vary depending on your circumstances. Over the next few posts we will consider each of these expat types and the opportunities available to them.

Today we will start with the shorter term expat contractors. If you belong to this group then I’m sure you are aware that you have an incredible opportunity to secure your financial future. You will probably never have as much disposable income as you have as an expat, and what you do with that income can really impact the rest of your life.

I recently spoke to someone who spent several years as an expat in Asia before returning to his home country and he told me: “I realise now that the investing I did in those years as an expat really set me up for a life of wealth.”

So what are some things you should be doing if you are here in Asia and enjoying the benefits of an “expat package”? Here are a few ideas:

  1. Make sure you understand what your base currency is. If you are unsure then this post will help you define it.
  2. Max out contributions to anything that gives you tax free growth first. This is most likely going to be pension type assets, such as a 401K or IRAs in the US, or ISAs in the UK.
  3. If you are paid in your base currency and receive a housing allowance in the country you are posted to, then you have a significant opportunity to invest back home or offshore. You may want to consider talking to an adviser both in your home country and a qualified expat adviser based in the country you are living in.
  4. Consider buying property in your home country, if you haven’t already. You have the option of renting it out while you are away, and you may achieve considerable capital growth over time too.
  5. Have a plan for how you are going to repatriate yourself and your family in case your employment comes to an unexpected end – you will need to plan for plane tickets, shipping belongings / furniture, and a place to live when you get home.

Most of all,  be sure to set aside some time for financial planning while you are away. The expat lifestyle can not only be fun and rewarding, but also incredibly busy. Make sure you don’t forget to make the most of the saving and investing opportunity of a lifetime.

 

 

How to Buy and Store Bitcoin

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Following my previous post on investing in Bitcoin, here are a few pointers on how to go about actually buying it if you have decided to do so. Obviously this is not investment advice, it’s meant as a practical guide:

Firstly, beware! Cryptocurrency is still relatively new and it is not well regulated. Scams abound and many people have seen their hard-earned money disappear simply from choosing the wrong place to buy and store it. Make sure you do your research!

Buying Bitcoin

The easiest way to purchase Bitcoin is to open an account with a reputable Bitcoin exchange. If you are expecting to be able to do this nearly anonymously and with a minimum of ID documentation, I’m sorry to disappoint you. You will need to submit a copy of your ID, passport is the usual but other government issued ID’s will work, and a copy of a utility bill or bank statement to prove your residential address. If you live in Japan and are using an exchange outside Japan, then this document will need to be in English. Although paper statements are a little old fashioned, I recommend having your bank at home send you one every quarter so you have an English proof of address available. You will need it for pretty much any international financial transaction these days.

If you are looking for an exchange in Japan, Bitflier seems to be the largest.

If you prefer to buy your coins overseas, then some of the well known exchanges that will accept residents in Japan and other parts of Asia are Kraken, Gemini, and Xapo. I was recommended Bitstamp as a popular European exchange but they took two weeks to “review” my application and then came back and said they hadn’t received the documents I had uploaded…

Buy Bitcoin Worldwide is a useful resource for finding exchanges in your country, along with a list of pros and cons for each exchange.

If you are looking to invest over $20,000 then Genesis Trading has a well connected OTC desk.

Storing Bitcoin Securely

It is not advisable to leave your Bitcoins sitting on the exchange after purchasing them. Although security is improving, almost none of them are insured against theft and hacks still happen fairly regularly. Online wallets are convenient for shopping with Bitcoin but they are also not a safe place to store your coins.

I stored mine with Xapo, whose vault service is currently free of charge. They store their private keys in multi-signature form in vaults in Asia, the United States and South America.

Hardcore Bitcoin enthusiasts will tell you to keep your private keys completely offline. Probably the most popular hardware wallet is the Trezor device. With this device a pin code gives you access to your coins, and if you lose it you can regenerate your wallet using the 24 word recovery code.

If you don’t trust any storage solution that can be plugged into a computer, or are looking for a near indestructible back up for your hardware wallet then take a look at Cryptosteel.

I hope this is useful. The prospects for Bitcoin going forward are certainly exciting, but as I’m sure you are aware, the potential upside comes with significant risk. Don’t invest more than you can afford to lose is still the number one rule.

 

 

 

Bitcoin – a worthy investment?

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“All I ever seem to hear about these days is Bitcoin.”

Someone said this to me the other day and I had to agree. Particularly in Japan, after Bitcoin was recognised as a legal payment method 3 months ago, resulting in a huge spike in trading, not to mention in price. So, if you’re sick of hearing about Bitcoin I apologise, but it’s hard to ignore it when discussing money and investments these days.

The purpose of this post is to consider Bitcoin, or other cryptocurrency, from a longer term investment perspective. Firstly, cryptocurrency is obviously a satellite holding. If you don’t understand what I mean by that, you may want to check out this post on Core vs Satellite.

As by far the dominant digital currency, there is incredible potential for Bitcoin technology to compete with existing infrastructure such as:

  • $2 trillion annual market for electronic payments
  • $1 trillion annual e-commerce market
  • $514 billion annual remittance market
  • $7 trillion gold market
  • $4.5 trillion cash market
  • $16.7 trillion offshore deposit market

There are also some significant risks associated with Bitcoin. The four most prominent being:

  • a better digital currency emerging and stealing the market lead
  • an undetected bug in the system
  • a hard fork (when some nodes in the network upgrade to software that is incompatible with previous versions) causing the Bitcoin payment network to split in two
  • a sustained attack by an organisation with substantial financial resources (e.g. a government)

Bitcoin enthusiasts have rebuttals for each of these risks, but they have to be taken seriously. That said, there is no sign of Bitcoin going away any time soon. If you think the potential upside is worth the risk, here are some simple investment guidelines:

  • Start with Bitcoin rather than other, less prominent cryptocurrencies
  • Don’t invest more than you can afford to lose. 1-2% of your total assets is a good guide.
  • Expect volatility – even people used to stock market volatility will find this a rollercoaster. Don’t invest if it’s going to prevent you sleeping at night.
  • Plan to hold for the long term
  • Consider dollar cost averaging to begin with
  • Study up on how to store your Bitcoins safely – don’t leave them sitting on an exchange