Living With the Bear Market

We humans are a complex bunch. I have heard that there are five stages of grief: denial, anger, bargaining, depression and acceptance. With covid, entire countries seem to have gone through their own version of this, which may or may not have included these stages: zero covid, flattening the curve, lockdowns, mass vaccination, and finally living with covid. In the end, it seems, we have to accept and live with whatever pains us.

So are we in a bear market yet? Some would argue not – the S&P 500 is down some 18% from its January peak, and bear markets are defined as falls of 20%. So they are correct, but the NASDAQ has already passed 20%, so it sure does sound a lot like denial, don’t you think? I’m generally an optimist, but I’ve come to appreciate the value of time as I get older, and therefore think we can all save some of this valuable commodity by skipping past anger, bargaining and depression and moving to accept the bear! Grrrr…

Spotted in Marunouchi recently.

So what is it like living with a bear? Well, let’s take a look at some of the qualities of this charming beast: Historically bear markets occur every 3-5 years, and on average they last about a year. The S&P 500 typically falls around 33% during bear markets, although a third of these delightful periods have seen drops of over 40%. Bear markets typically end, and bull markets begin, when investor confidence is at a low point. In terms of character, although they may start with a crash, bear markets tend to be a slow grind down, peppered with the odd burst of optimism. Yes, bear market rallies are very much a thing, usually spurred by some piece of good news. However, the rallies are generally short-lived, and then the grind downwards resumes.

As you have probably already guessed, trading the bear is not as easy as you may think. Sure, we would all like to sell the top and then go to the beach, only to return to buy the beginning of the next bull run, but trying to do that can seriously damage your wealth if the market turns around quicker than expected. This is from a post of mine back in 2017:

In the years 1980 to 2015, the S&P 500 experienced an average intra-year decline of 14.2%. However, the market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time. You cannot afford to be sitting on the sidelines while this is happening. In fact, the opportunity cost of doing nothing will cost you far more than any of the corrections, bear markets, and flash crashes:

“From 1996 through 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year. Can you believe it? Your returns would have been cut almost in half just by missing the 10 best trading days in 20 years! It gets worse! If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!” (from Unshakeable: Your Financial Freedom Playbook by Tony Robbins)

So how do you make the most of the slow grind downwards without trying to be too clever and missing out on the best trading days? First of all you need to stay calm. Bear markets are not the time for panic and dumping investments out of hand. If you are taking the time to read this blog you likely have a long term plan and there’s no need to deviate from that. Know your risk profile, stay diversified, and take this as an opportunity to accumulate assets at lower prices. Dollar cost averaging is your friend in the bear market. Rather than trying to catch the absolute bottom, keep investing little by little at regular intervals and build up your holdings at a nice average cost. Buy quality, buy what you believe in – this is not the time for speculation on penny stocks.

As to how this particular bear will play out, my thoughts, for what they are worth, are as follows:

  • The Ukraine situation is obviously a factor in inflation, but the main driver here is the Federal Reserve and other central banks.
  • Stocks in general, and tech stocks in particular, did well in the low interest rate environment during covid – lots of stimulus!
  • Now inflation is 8.3% and the Fed funds rate is 0.75%, and it’s a similar story elsewhere in developed markets ex-Japan.
  • The Fed has to close that gap – they will keep raising rates until they close it / inflation cools down, or until something breaks…
  • Means pain for stocks while this goes on – we could still go lower and there will be a plenty of volatility. I don’t see capitulation yet.
  • I think it will be later in the second half of the year before things start to look better – there are already signs that inflation is cooling off a little. We either get out of this because inflation eases off, allowing the Fed some breathing space, or something breaks and the Fed starts cutting rates again to head off the crisis.

How about crypto?

Crypto bear markets are a rare beast, in that they are programmed into the code of the leading crypto asset and arrive with the regularity of a Japanese train. If you don’t understand the Bitcoin 4 year halving cycle, you will constantly be bombarded with narratives to explain the pain, from the Mt Gox hack to the Quadriga scandal, to the Luna / UST debacle of late, there will always be a narrative to explain something that is actually pre-programmed. 2014 was a bear market, 2018 was a bear market, and so here we are in 2022. As with stocks, in crypto bear markets you accumulate quality. That means Bitcoin and Ethereum. Keep your hands off those alts unless you are really confident in their long term value proposition. Even then, prepare to be burned as the LUNAtics have been this week. Bad things happen to alts in bear markets… Bitcoin is down some 60% from its high so far this time around. Keep in mind that peak to trough 80% is the norm. BTC fell from $20,00 to around $3,000 in 2018. In the 2021 bull market it reached $69,000. If you have the nerve, now is the time to accumulate, and 2025 is the when the next bull market train comes along. Act accordingly and embrace the bear.

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.

The Weak Yen Dilemma

If you watch Japanese news you will have noticed a new topic that is featured in almost every broadcast. Along with Ukraine and Covid, no news program is complete without discussion of 円安 or the weak yen. JPY has indeed taken a battering this last few weeks, slipping from the 112 range vs. USD to as low as 129. I also noticed a lot of discussion on Twitter as to the reasons for the drop and what to do about it, so let’s take a look.

Why has this happened? There is no limit to how deep you can go into exploring the reason for the yen’s fall, but the simple explanation is always best: Currently the US is raising interest rates, and Japan is not. That makes the USD a more attractive currency than JPY. It’s simply supply and demand at work.

What are the effects of a weak yen? The Japanese government and the Bank of Japan have been perfectly happy with a weaker yen for some time. It’s a big boost to Japanese exporters as it makes Japanese products cheaper overseas. However, you can have too much of a good thing. The current yen level is certainly doing more damage than good to the Japanese economy as businesses are hit with the double whammy of rising energy prices and a weaker currency. For the Japanese consumer, who is already facing rising prices, it means the cost of imported goods are going to rise even further. In a country with stagnant wages that means less money in the pockets of the populace, who in turn are cutting back on the little luxuries. This leads to a vicious circle where businesses must keep the cost of their products low, because low wages mean people won’t buy them otherwise, so those businesses make less profit and are therefore unable to raise wages… It’s not a pretty picture.

For the foreign resident in Japan a weak yen can bring either joy or pain, depending on your situation. Paid in dollars? Life is good! Paid in yen with expenses / debt overseas? Times are hard. Trips back home are certainly going to be more expensive. There are probably things you wish you had thought about earlier, which is why this financial planning thing is kind of important.

How long will this last? The simple answer to this is nobody knows. The last time the yen was anywhere near these levels was 2015. However in 2012 it was 76 yen to the dollar. So it’s unlikely it will go on forever – things move in cycles. That said, we are in a precarious place at the moment. Usually if the US is raising interest rates it is to keep pace with inflation. However inflation in the US is already almost 8% and the federal funds rate is only 0.25%. The Fed is well behind the curve, but is sharply aware that raising rates too rapidly will crash the economy. So expect the US interest rate to keep rising through this year, which means more pain for Japan. Also, as noted in this thread by Santiago Capital, what is happening now is the Bank of Japan is sacrificing its currency to save its bond market. Other nations should take note as they may end up doing the same thing further down the line…

What could reverse it? Firstly, what won’t reverse the current position is Japan raising rates, because that is not going to happen. That would sink the whole ship. The thing most likely to bring things back into balance is inflation starting to ease in the second half of the year, meaning the Fed is under less pressure to raise rates. So if you are looking for a ray of hope, keep an eye on that.

What can I do? Here is the crux of the matter. Obviously what you should do depends on your own situation, but now is as good a time as ever to make sure you understand what your base currency is. Your base currency is the currency you are planning to spend your savings in. If your BC is JPY, you don’t really have a big issue. Real inflation in Japan is probably running at around 2% so you should look at investing in some dividend paying Japanese stocks to beat that. (see my previous post) If you have money overseas that you would like to bring to Japan, now is a great time to do it!

If your BC is something other than JPY and your money is in yen, you have a dilemma: It’s not a good time to exchange your JPY for your base currency right now, but if you don’t you are losing purchasing power in your BC to inflation. I’ll use the US as an example: inflation in the US is 8% – if you have money in the bank in Japan you are losing 8% per year to inflation. If you switch that money to USD cash you are still losing 7.75%! So ideally you want to have that money invested in USD in something that will, on the average, generate an 8% p.a. return, which pretty much means US stocks. So you have to weigh the trade off – is it worth taking the currency hit to get into the correct currency and get the money invested? If that was me, I have to say I would be inclined to wait for now and see how things develop in the coming months, but I wouldn’t want to do nothing for too long.

If you have debt overseas, such as a student loan, which you are paying interest on, I would probably say you should bite the bullet and keep paying it, despite the poor exchange rate. That debt isn’t going to get any smaller if you leave it.

Finally, if you understand, or are learning Japanese I came across this video by Nakata Atsuhiko, which is both a wonderfully simple explanation of the current weak yen situation, and an excellent Japanese comprehension exercise where you will likely learn some new financial terms.

Hang in there everyone!

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.

2022 Investment Outlook

Wow, year two of the great covid saga is almost over! It may not feel like it, but from an investment perspective, we are coming to the end of one of the easiest years in recent history. How is your portfolio doing? The odds are it’s looking pretty good so far. This has been the kind of market where we all look like pros.

So can we expect more of the same in 2022? You are probably already getting the feeling that it’s not going to be that simple, and that has a lot to do with Mr. Powell, pictured above. There are a lot of tough jobs in this world, but trying to fight inflation during a pandemic, without crashing a stock market that you inflated, certainly has the difficulty level set to Precarious. Volatility is coming back and you better have a plan to deal with it.

Stocks: So how well have stocks actually done? Well if you look at the indices, everything looks fine: The S&P 500 is up some 26% year to date, with the NASDAQ up 17%. Bull market! The picture gets somewhat muddled though when you realise that 45% of the components of the S&P 500 are below their 50 day moving average, and 65% of NASDAQ components are below their 200 day moving average. What does that mean? Well a big chunk of the US stock market is actually in bear market territory. What’s holding up the average is the massive outperformance of big tech: Apple, Alphabet (Google) Amazon, Meta (Facebook), Microsoft, and Netflix literally are the bull market!

All this has happened in an environment nourished by the steady drip of liquidity in the form of zero interest rates and quantitative easing from Jerome Powell’s Federal Reserve.

This from a recent Zerohedge post: “So I submit the notion of a raging bull market is a myth. Indices propelled to constant new highs by still flowing central bank liquidity increasingly held together by a few stocks.”

No wonder things got choppy around the time of the FOMC meeting this week…

Bonds: The problem here is, of course, the emergence of inflation, which the Fed originally tried to write off as “transitory”, but have now decided they need to act on. That means no more drip drip, and interest rates must rise. Inflation is not good news for bonds, as it eats away at the purchasing power of the bond’s future cash flows. Why buy today’s issue when tomorrow’s will come with a higher yield? Bond yields go up = bond prices go down.

Commodities: Assuming inflation is here to stay for a while, what should go up is the price of “stuff”. There’s a reason for that 5% of your portfolio that’s been sitting in gold doing not very much all year. Just be aware that if there’s a panic à la March 2020, everything gets sold off initially, including the shiny metals. Oil is going to continue to be interesting next year if the scourge of Omicron doesn’t crush the reopening trade…

Crypto: It’s been one year since my Bitcoin: It’s About to get Loud post. Yes, I am now patting myself on the back for calling the most obvious bull market of all – the one that comes every four years! Crypto is never easy though, especially for newcomers. We have seen (I think) seven or maybe eight pullbacks of over 30% this year alone. We have been to an all time high of $69k and are now back at $46k with the fear and greed index indicating extreme fear. Meanwhile on Layer 1, Ethereum has outperformed Bitcoin and Avalanche and Solana have done crazy multiples. (ETH up about 420%, AVAX up 3,000%, SOL up 11,000%!) Have we seen the top of the mountain and we are already on the way down the other side, or is there one final push to the summit to come?

Dude, you mentioned having a plan?

A client of mine, who is a former economist once said to me: “Right or wrong, I always saw it as my job to have an opinion.” That comment has stuck with me, as I think it applies to all investors. You can’t always be right, but you should have a view, test it rigorously, and be prepared to change it if you find evidence you are wrong. So for what it’s worth, here’s my view for 2022:

The Fed, and other Central Banks are being forced to deal with inflation, but they have openly admitted that they are equally, if not more concerned, with not crashing the stock market. The words “rock” and “hard place” spring immediately to mind. So they taper now and plan to stop bond purchases by March. The market does not like this and corrects strongly, which basically means that those big tech stocks sell off dramatically. Then, central banks have to backtrack and slow or end the taper, and maybe rethink those rate hikes planned for later in the year. When the drip is turned back on, the market bounces back.

You get the idea.

How you plan for this depends on your investing style:

If you have a diversified asset allocation and your plan is to do nothing at all and ride it out, maybe continue dollar cost averaging every month: Congratulations! You are dismissed from class and free to go and play!

If you are not one of these people then please take note – staying sane is actually an option here. However, if you insist on trying to trade this, it is probably past time to start getting a little more defensive and raise some cash to deploy when things get rough. I would, however, be tempted to entertain the possibility that Omicron is also a little roller coaster like by nature, and the initial whoosh into the sky will return to earth equally quickly. This could precede the discovery in late Q1 that inflation actually was somewhat transitory, and caused mainly by supply chain disruption, and therefore the need to deal with it falls away. So be cautious, but it’s perhaps not time to lock yourself in the bunker.

Is the crypto bull market over? Crypto is more correlated to stocks than many crypto people like to think, so if anything is going to slay the bull it could be a dramatic stock market correction. That said, the level of adoption, or network effect, has increased significantly this year, and includes a good deal of institutional money. If your plan, like mine, was to sell the cycle top at $100k+ and then buy back in the bear market, it may be time for re-evaluation. I’m slowly becoming more open to the idea that the four year cycle could be smoothing out and, despite frequent mini crashes, we may not see a 2017 style blow off top followed by a grinding two year bear market. Don’t hold me to that, but a simple way to play it is to have a cold storage allocation that you hold longer term, and a tradable allocation that you look to sell at Extreme Greed and buy back at Extreme Fear, rinse and repeat.

However things play out, it is unlikely to be smooth sailing. So I wish you a peaceful holiday season. Here’s hoping Japan does a better job of holding off Omicron than my home country is doing so far…

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.

The Inflation vs. Deflation Debate

Inflation has been on a lot of investor’s minds recently. Every time the Federal Reserve’s Jay Powell speaks he us under intense pressure to clarify his expectations for inflation, and how the US central bank would react to it. Amidst the ongoing re-opening of America, and indeed much of the world, inflation seems to be the one thing that could derail the stock market. The massive stimulus following the 2008 Global Financial Crisis was just in the process of being tapered when Covid-19 hit, and since then we have seen some $10 trillion in government stimulus globally. That’s already triple the total stimulus for the 2008-2009 recession. When national debts and the supply of money are increased at this rate, there is always going to be an effect on the value of money somewhere down the line.

Inflation can be defined as the rise in the cost of goods and services over time, but a better way to understand it is the decline of purchasing power of a given currency over time. Simply put, the same money buys you less and less.

I came across this site, which is a great tool for understanding inflation. Take a look at the Japan Inflation Calculator and you can clearly see how brutal the effect of inflation has been on purchasing power here. 1 yen today is only worth 19% of a yen 60 years ago. And that is in a county that has been battling deflation for the last 30 years…

Japan’s example is a precursor to the ongoing debate as to whether the current scenario is inflationary or deflationary.

I recommend reading this excellent thread by Raoul Pal. Here’s an excerpt:

“In fact with global debts of all forms between $400 trillion net and $1.2 quadrillion gross – the collateral (assets) can NOT be allowed to fall or the system is wiped out. and so the merry game of systematic bailout MUST continue….”

What Raoul describes here will sound familiar to anyone who has been in Japan for a long time: interest rates held at zero and unable to rise, never-ending stimulus, wages stagnant. Official inflation is somehow measured at zero, but every year your money buys you less. What investors in many parts of Europe are facing is not only the devaluation of the currency, but also negative interest rates. Yes, for amounts over €100,000 depositors are paying up to 0.5% per year to keep their money in the bank. Imagine if that was implemented in Japan!

Raoul’s conclusion is that regardless of whether you sit in the inflation or deflation camp, the result is the same: the value of money is falling.

So where does that leave us? If we are working hard, earning as much as possible and trying to plan for our future, what should we be doing?

First of all, if your money is in cash, you are losing purchasing power year on year. If you want to escape this and maintain the value of your hard-earned money you need to invest. I don’t know any other way around this problem, other than making more money, which is great if you have a way to do so.

Invest wisely. Bonds might be a one year trade but over 5 years you WILL lose. Most equities just allow you to stand still. Tech does better. Crypto much better. Real Estate is a stand still too (except super limited supply). The rarer the asset, the more it rises.

I don’t disagree with Raoul’s quote above, however for a typical investor allocating to just crypto and tech stocks involves taking on way too much risk. Regardless of how each asset will perform over the next 5 years, diversification is the only way to protect yourself, whilst staying invested. I have covered the basics in numerous other posts: understand your risk profile, figure out your base currency, study up on asset allocation (also here), and, most importantly, take action! Sitting in cash is not a safe strategy over the longer term.

(This post on Japan inflation may be useful too)

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.

The Japan National Pension – How Much Can You Expect?

I just came across this Bloomberg Article which looks at a survey on the state of the world’s pensions. The Netherlands and Denmark are the only countries to come out of the survey with an A-Grade, and there is some concerning news for people planning to retire in Japan, which came in 32nd and received a D-Grade.

Japan’s replacement rate, which is the percentage of pre-retirement income that retirees can expect to receive, is just 37%. Given Japan’s high life expectancy, this is likely to result in the raising of the state pension age. This means that not only are those nenkin (pension) contributions going to be inadequate by the time you finish working, but you are likely to have to wait longer to get them back.

As a visitor to this blog, you are probably already well aware that the Japan state pension is not something you can rely on to cover retirement income needs, and that you really need to be saving and investing by yourself if you don’t want to be struggling to make ends meet later in life.

Here are a few things you can do to supplement your retirement savings:

  1. Consider contributing to iDeCo. iDeco is a tax-advantaged private pension you can use to boost your retirement savings. (eligibility is covered in the link above but generally it is open to anyone who pays into the Japan National Pension Scheme)
  2. Start a NISA. NISA is also a tax-advantaged savings account which is open to all residents of Japan over the age of 20.
  3. Open a brokerage account and start investing in stocks / ETFs. (update coming soon on available accounts)
  4. Start an offshore regular savings plan or overseas platform account.

As always the key thing is to develop a plan. Think about the income you want to have in retirement and work backwards to figure out how much you need to be saving and investing now in order to get there.

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.

Insurance: Is It Worth It?

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I first heard this story when a friend of mine posted about it the other day: The All England Lawn Tennis Association, which organises the Wimbledon tennis tournament, has been paying pandemic insurance for the past 17 years at a cost of around £2 million per year. That’s a pretty hefty premium for what people are calling a “black swan event”. My friend wondered if there was a person in their annual budget meeting who had to fight to get that paid every year.

Many people face a similar dilemma. Paying for insurance every year to cover an unlikely event can seem like a waste of money. The Japanese even have a term for someone who buys more insurance than they need and ends up poor for it: 保険貧乏 (hoken binbou)

Of course there are some risks that really do need to be considered. You are not even allowed to drive your car without proper insurance. The types of insurance that are important from a financial planning perspective are:

  • Health insurance
  • Income protection insurance
  • Critical illness insurance
  • Life insurance

Health insurance – if you pay into the Japanese national health insurance system, you are covered for 70% of the cost of medical treatment in Japan. That’s enough for visits to the clinic for a sniffle, but may leave you with a larger bill if you are hospitalised for a long period. Private health insurance is a good way to cover the other 30%. It can also be useful when you travel overseas, and could even end up covering totally unforeseen treatment later in life – see here.

Income protection insurance – what if you were sick or injured and unable to work for a long period? Your company may look after you for a while, but after that you are on your own. With income protection, you can cover up to 75% of your current income up to age 65 if you are unable to work. This is especially valuable when you think that the loss of your income would also prevent you from saving and investing for your future, making life even tougher after retirement age.

Critical Illness Insurance – unlike income protection, which pays a regular income, CII pays out a lump sum on diagnosis of a critical illness (cancer, heart attack, stroke etc). This money allows you to take time off, get treatment and get well again. We are lucky to live in an age where we are likely to make a full recovery from a serious illness and be able to go back to work, but it’s important not to go broke in the process.

Life Insurance – do you have any loans / liabilities? Life insurance makes sure you don’t leave those behind for your family if something happens to you. It also means you can continue to provide income to your family after you are gone. Health and income protection come first, but once you have a family and a mortgage, life insurance becomes an important part of your protection strategy.

If you are a short-term expat, it’s best to look for insurance with companies in your home country, or via an offshore provider. If you are long term, it would make sense to get something local. My experience with insurance in Japan is that the products are all very similar, so finding a salesperson who you get along with who isn’t pushing you to buy cover you don’t need is the most important thing.

If you think you might be missing some important coverage, it may be time for a protection review.  You never know when something unexpected might happen.

And by the way, when they cancelled Wimbledon this year, the payout to the Lawn Tennis Association for £34 million in pandemic insurance premiums over 17 years?

£141 million!!! 

If you insure yourself smartly, it’s worth the money.

2020 Investment Outlook

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And just like that, another year is gone! After a long wait for the 2019 Rugby World Cup to get started in Japan, the six-week tournament went by in a flash. And now here we are looking forward to the Olympics. I hope 2019 was a rewarding year for you.

When it came to markets, it was one of the best years for risk assets since the Global Financial Crisis with the S&P finishing +30.7%, MSCI Europe +27.1%, MSCI UK (despite Brexit) +16.4%, Japan Topix +18.1%, MSCI Emerging markets +18.4%. Crude oil was +22.7% for the year and Gold +18.3%. This appetite for risk meant that safe haven government bonds were subdued, while US High Yield and Emerging Market bonds returned +14.3% and +12.6% respectively. Bitcoin once again refused to die and posted an impressive return of +95% for the year.

Looking forward to this year “Don’t expect a replay of 2019” seems to be a recurring message, particularly when it comes to equities. Once again Bloomberg have compiled a thorough Wall Street round up for people who have the time:

For those who like to keep it simple, here is a list of key themes to look out for:

  • The end of the bull cycle is getting nearer, but it is still not here yet…
  • Equity and bond market valuations are significantly higher than they were a year ago.
  • Central banks are likely to continue pursuing ultra-loose monetary policy.
  • Smart investors remain invested but are staying alert and perhaps reducing risk.
  • The recent escalation between the US and Iran highlights the potential for sudden geopolitical shocks.
  • There is still potential upside for gold if/when things get rough.
  • Don’t let the US election distract you too much. Politics are not necessarily a good indicator of market returns.
  • Trade is again likely to dominate headlines and unsettle markets from time to time.
  • The Bitcoin halving occurring in May is likely to dominate crypto talk – here’s a detailed and rather bullish post on that for those interested.

At risk of repeating myself year after year, planning and strategy don’t need to be complicated:

  • Have a plan! Read this post if you don’t have one.
  • Stick to your guns. Don’t let the noise divert you from your commitment to saving and investing. (the Japan market made most of its returns in the last third of 2019. If you weren’t buying in the first two thirds then you missed it)
  • Diversify and rebalance – particularly if you are heavily invested in stocks and coming off a good year.
  • Max out tax advantaged investments such as NISA.
  • Look for Japan stocks that are likely to benefit from the Olympic buzz (see what happened to The Hub stock price around Rugby World Cup time)
  • Keep an eye on what the bank of Japan are buying – see post here.

With that I wish you all the best for 2020 and hope you enjoy the Tokyo Olympics!

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.

International Health Insurance

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If you live and work in Japan, you are probably quite satisfied with your health insurance coverage. The Japanese national health insurance system is super-efficient and covers 70% of medical costs. Unless you have a serious injury or illness, you are unlikely to get any nasty surprise medical bills.

This is how I’ve thought of my own health insurance until recently. I bought a little extra cover in case of an extended stay in hospital and figured I’m good.

Then a friend of mine got a critical illness. Without going into too much detail, the doctors in Japan told him to get his affairs in order, there’s nothing they can do. He then returned to his home country and found that actually there is an option to undergo immunotherapy. The cost, however, is around 2 million yen equivalent per month…

Thankfully, many years ago he took out some international health insurance with a UK insurance company. He faithfully paid his premiums for years and now, when he actually needs it, they have agreed to cover the full cost of his treatment.

I don’t think I need to spell this out much further. Google international health insurance, do a bit of research to find a policy that fits you, and sign up. If you are choosing from a well known provider the terms and costs are likely to be pretty similar. The one choice you will need to make is whether you want US cover or not.

You may pay your premiums for years and feel like you are wasting money. Hopefully you’ll never need the cover. However, like my friend, there may come a time when you will be glad you had it.

Investment Fees – Am I Paying Too Much?

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I came across an interesting article this week – see here. JP Morgan are launching a US Equity ETF with a fee of just 0.02%. That makes it the lowest fee ETF available at the moment, beating Vanguard, Schwab, and iShares on cost.

This is great news for long term investors, as long as they make money. Now why wouldn’t they make money with a fee of only 0.02% you ask? With the rise of ETFs, there’s a lot of talk these days about how much investors are paying. Fund managers and financial advisers are frequently criticised for charging too much.

But here’s the thing: it doesn’t matter how cheap your investment is if you buy it when the market is doing well and then sell it during a downturn. You are going to lose money!

Here are a couple of excerpts from Tony Robbins’ “Money Master the Game” book:

For the 20 year period from December 31,1993, to December 31 2013, the S&P returned 9.2% annually. However the average mutual fund investor averaged just over 2.5%, barely beating inflation. They would have been better off in US Treasuries.

Another fascinating example is that of the Fidelity Magellan mutual fund. The fund was managed by Peter Lynch, who delivered an astonishing 29% average annual return between 1977 and 1990. However Fidelity found that the average Magellan investor actually lost money over the same time period. How can that be? Well, quite simply, they bought and sold the fund at the wrong time!

So what can we learn from this? Simply that if you focus too hard on fees, be careful not to lose sight of the big picture. If you are prone to making emotional investment decisions when markets are swaying, maybe it’s worth paying for a good adviser who can help you make sound decisions?

If you are able to buy that JP Morgan ETF, hold it forever, and add to it when markets are bleeding, then good for you! You are going to be very happy with the result over the long run.

If watching your investment value go up and down makes you nervous, maybe you are better off paying for a diversified managed fund with a blend of asset classes that is adjusted tactically by the manager. Then you don’t have to worry about buying and selling at the wrong time.

I guess what I am saying is; if you are a disciplined investor you should absolutely be conscious of fees, and minimise them where possible for best results. If discipline is an issue for you, or you simply don’t have the time, it may be worth paying for some help.

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.

Japan Inflation Watch

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It’s been a long time coming… 27 years in the case of a well known soft drinks company. Japan’s top Coca-Cola distributor recently announced that they will be increasing prices by between 6% and 10% as soon as April this year. (article here) They are certainly not the only ones, as spring will see price increases in many of your favourite restaurants, as well as on specific foods such as instant ramen, canned mackerel and even ice cream! Coupled with the planned October increase in sales tax from 8-10% this means that your yen isn’t going to go as far as it has for the last three decades.

This will come as a shock to the Japanese public and long-time Japan residents. We’ve all got used to the size of food and drink portions getting incrementally smaller, so called “shrinkflation”, but it’s really quite a jolt to see the actual price of things going up. Even my barber is raising his prices from next month!

What is this going to mean for us all financially? Well, put simply, the massive debt bubble created by the Bank of Japan means we are unlikely to see a rise in interest rates any time soon. So, money languishing in our Japanese bank accounts is going to be losing spending power. I have talked about base currency over and over, but it still bears repeating: If you are planning to spend the money you make in Japan in the UK, then UK inflation is your minimum benchmark for investments. Holding cash in JPY at zero interest in this case means you are not only losing spending power in your base currency, but taking currency risk as well. Up until now, if you were planning to spend the money in Japan, then holding JPY cash was both safe, and good enough to at least preserve your spending power. Regardless of what government inflation statistics might say, this is clearly no longer the case.

So what action should Japan residents be taking here? Here are a few things you can do:

  1. Review your base currency / currencies – if you are saving to pay for your kids education overseas, or your retirement abroad, you should be saving and investing in the currency you are planning to spend the money in. JPY cash is not the place to be.
  2. That said, if you live and work in Japan, your emergency cash reserve should be in JPY. (unless losing your job would mean leaving Japan immediately)
  3. If you have a future need for JPY as a base currency, you are going to lose spending power in JPY cash / bonds – this means you will have to take some risk with some of your money.
  4. One way to do this would be to look for dividend paying stocks / ETFs. Here is an interesting list of dividend paying ETFs in Japan. Google translate does a pretty good job on this. Remember that you should be looking at the Japan stocks / REITS – anything that invests in overseas assets, like emerging market bonds, carry currency risk that could wipe out your actual return.
  5. You could also consider a diversified Japan fund manager. I invest part of my NISA in Rheos Hifumi Plus, which is one of the most popular NISA investment funds in Japan. (this is not a sales pitch – just what I do)

I hope this helps. Please do get in touch with any interesting price increases you notice here in Japan.

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.

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