If there is one thing I have learned in all of my years of financial planning, it is this: people are way more focused on product than on what to invest in within the product. People will spend hours comparing investment accounts to find the one with the best tax advantages, lowest fees, and most comfortable user interface. Then once they decide, they just chuck all their money into the first global stock fund they find on the list. Somebody once said, “people will spend more time deciding on a pair of jeans than on what to invest their retirement fund in.” What follows is far from the definitive guide to investing in NISA, but it should provide some angles to consider it from.
Before that, I have a simple security tip for you. A friend of mine realised recently that someone was trying to change the email address on one of his financial accounts. They knew his email, and had figured out that he had an account with this particular institution, and were trying to get the institution to change his email address so they could get access. Scary, huh! Luckily my friend caught it in time, and rather than responding to emails/chat messages, he set an appointment to talk to a representative. (don’t get phished!) That representative gave him a great security tip: make an email address that no one (except maybe your immediate family) knows about, and only use it for your financial accounts. I thought that was pretty good advice and am implementing it myself. It may be a bit of a pain, but not as painful as having one of your accounts drained – this particularly goes for crypto accounts!
Ok, back to NISA. Obviously, I can’t give blanket advice that works for everyone. The investments you choose will depend on your base currency, attitude to risk and timeframe. Another big factor to consider is that NISA itself is changing from next year, which perhaps affects your strategy for this year. Given the above, I will try to provide a general guide with some helpful ideas:
Yes, this again…Currency may seem irrelevant in a Japan-based account such as NISA, but I would argue that you have to at least think a little about when and where you will spend the money. If you are living and working in Japan, I would assume you at least have some need for yen as a base currency. However, if you plan to move or return home in five or ten years’ time, should you really be building assets in yen? I can’t speak to all of the NISA products out there, but my SBI account allows me to buy US-listed stocks and ETFs through their international site, and you can buy these for your NISA account too. Now, given that NISA is not a good fit for US citizens, why would you buy USD assets? Well take a look at my previous article on the yen and think if you really want to build all of your assets in yen. Yes, when you cash out you will have to cash out to your Japan yen account once, but you can then quickly convert to the currency of your choice. You can also buy yen-denominated funds / ETFs that invest in global assets, so even if the investment is priced in yen your underlying exposure is to other currencies.
So, if you are going to spend the money in Japan, should you only buy Japan-based assets? That would depend on your overall asset allocation and whether you have some exposure to overseas assets through other investments. Compared to the rest of the world combined, Japan is not such a big market and it would seem like a risk in itself to only have Japan exposure, but I would still aim to keep a reasonable amount in yen, just in case it’s 80 yen to the dollar when you want to sell the assets and spend the money. Personally, I already have global exposure, so am mostly buying JPY assets in my NISA account.
Managing risk
Knowing your own tolerance for risk is important. No one wants to be lying awake at night worrying about their investments. The only thing I go on about more than base currency is diversification. The problem with Japan-based accounts is it is hard to diversify well if you are investing in yen. Japanese government bonds? No yield and more risk than anyone at the BOJ wants to admit, hmmm. I think REITs offer an opportunity for diversification and a quasi-bond type profile. Also, diversification across styles can help: don’t just buy a Nikkei 225 tracker – look at high dividend stock ETFs, look at value ETFs and growth ETFs. You can also buy individual stocks if there are companies you know well, or that fit your risk profile. Warren Buffet is buying Japanese trading companies. Maybe he knows a thing or two? Also, perhaps put 5-10% in a gold ETF.
What about the new NISA?
You may have heard that NISA is changing in 2024. From next year you will be able to allocate up to ¥3.6 mill per year. You have to put ¥1.2 mill in mutual funds, but you are free to allocate the remainder as you wish. The maximum total contribution limit is ¥18 mill, but you can leave this invested tax-free for life!
This has led me to decide that for this year’s contributions, I am going to focus more on dividend-paying stocks for my NISA and I will re-evaluate when the rules change next year.
Tax-free growth or tax-free dividends?
Here’s an interesting way to look at things. If you only have a limited allocation that is free from tax on capital gains or dividends, which do you try to maximise? Do you go for all-out growth and try to increase the value of your investments as much as possible over time, and take those gains tax-free? Or do you focus on more stable, dividend-generating stocks and REITs, whereby you get a more predictable annual yield with no tax on the dividends?
This again depends on your attitude to risk and how your other investments are allocated. Already have a broadly diversified portfolio elsewhere and NISA is a relatively small part of your overall allocation? Why not go for growth and try to shoot the lights out? On the other hand, if NISA is an important part of your long-term plan, perhaps you should take a more balanced, diversified approach and try to maximise dividends?
How do you actually go about allocating the money in your NISA? Do you dump it all in during January? Or do you allocate a little every month? If you are investing monthly you are taking a lot of the timing risk out of the allocation process, so you can lean more heavily into higher-growth stocks. This works great for Tsumitate NISA. If they go down, you buy more next month. If you are allocating in one go, you might try to diversify a little more.
Do your own research
I was considering putting a list of interesting funds, ETFs, and stocks at the end of this post for people to do some reading/research on, but I don’t want to be seen as recommending particular investments over others. Plus, that’s what my paid coaching sessions are for! The fact is, it doesn’t matter so much which global stock fund you choose. It’s more important that your overall allocation fits your personal situation, time frame and medium to longer-term goals. Putting in the work will lead to a better understanding over time. Don’t be afraid of making mistakes, but do spend a little more time deciding your investments than you would over buying a pair of jeans!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Smart Money Asia 