We'll be back in January with more content. Until then, please use the forums or the Facebook page to ask questions or post comments.
You probably aren't as good as you think you are
Trading (also known as day trading) is where you buy shares or assets and try to sell them for a profit in the short-term. The idea is to make a certain amount of money off many different trades. It requires a lot of time and effort.
There are three main problems with trading as an investment strategy:
For the three reasons above I am not interested in trading. I prefer to spend less time thinking about my investments, and don't believe I would have any kind of edge.
Luckily there are other strategies that have higher odds of success. We'll look at the next one, value investing, next.
Other asset classes are not as important
So far we have covered cash, property, shares, and bonds. These four will probably make up the bulk of your portfolio.
There are other things of value you can own, including patents and copyrighted works, art, private businesses, jewelry, precious metals, futures contracts, and many others, but they will not be covered on this blog as I have no experience with them :)
From tomorrow we will start looking at different investing styles and then focus into options for residents of Japan. In 2014 the blog will move to a more relaxed posting schedule but I am going to try to get through the basics by the end of this year.
Feel free to comment on this post or in the forums.
Bonds are pieces of debt
When a government, company, or similar organization wants to raise money, one way they can do it is by issuing bonds. Basically they borrow money from people, promise to pay them back at some point, and pay interest in the meantime.
Bonds tend to be more stable than shares and also behave differently from them (they have low correlation with shares so their prices don't often move at the same time in the same direction).
For most investors, that's pretty much all you need to know about bonds.
If you want to invest in bonds directly, you will need to do a lot more research, but most people just buy bond funds or ETFs, collections of bonds similar to share funds or ETFs.
Bonds are a key part of a balanced portfolio, and we'll be talking about them later on when we reach passive investing.
Saving money is like brushing your teeth
On Saturday we had a poll about saving, and I was pleasantly surprised by the results.
I guess people who are reading a blog about retirement are probably a special subset of society, but it seems you are doing much better than most people at saving.
The results of the poll (on Monday afternoon) are as follows:
Saving is the foundation of investing. If you don't have any money to invest, it doesn't matter how brilliantly you do it, so these results are very encouraging.
If you are not currently saving, it probably seems very difficult. We only started saving seriously this year, but it has already become second nature. It's kind of like brushing your teeth. At first you have to make kids do it, but after a while it becomes a habit and not doing it seems weird.
Here are my top hints for increasing your saving rate:
Tomorrow we'll get back to asset classes and the bond post I didn't manage to write on Saturday.
Something for the weekend
I was going to write a post explaining bonds today, but decided to do something a little less boring instead!
I just read an interesting blog post that mentions in passing that most people don't save 10, 15, or 20% of their income.
How about you? How much are you saving? And I should probably qualify this and say that saving towards something with the intention of spending the money in the short term probably shouldn't count...
Answer the poll below and we'll see what the retirejapan community is like :)
Shares are much simpler than they first appear
Shares are basically pieces of a business. When you buy a share, you become a part owner of the issuing company.
Shares may entitle you to a share of the profits of a company (dividends) or give you voting rights.
There are two main ways you can benefit from share ownership:
You can buy shares directly from the company or through a financial institution.
You can also own shares by buying funds (mutual funds or index funds). This can be better for individual investors because it provides diversification. Owning just one or two companies is quite risky, as they could suffer losses or go bankrupt. Owning shares in tens or hundreds of companies is difficult for investors, particularly when they are starting out.
By buying a fund you can own a piece of hundreds or thousands of companies without having to buy individual shares.
Funds are either active (they have a manager who decides what shares to buy) or passive (they automatically buy shares based on a base model such as an index like the S&P500 in the US or the TOPIX in Japan).
Mutual funds are provided by a financial institution and exchange traded funds (ETFs) are bought and sold like stocks.
There are four main approaches to investing in shares:
That list is in order of difficulty (most difficult first) and in reverse order of effectiveness (most effective last). The easiest method is also the most effective over the long-term.
We'll look at each of these in turn in the next few posts.
Investing in property in Japan doesn't make sense to me
Property can be a good investment because it allows you to use leverage (use other people's money) and because it is often treated favourably by the tax code.
Unfortunately property in Japan is somewhat unique and I don't think it makes sense to invest in it at the moment. I have tried to make it work, but no matter how I do the sums they just don't add up.
Now, if you want to buy a place for you or your family to live in, that makes perfect sense to me. Just be aware of why you are doing it, do the maths and figure out how much it is going to cost you over the period of time you live in the house, and make sure you are happy with that before committing to anything.
The benefits of buying property in Japan
The drawbacks of buying property in Japan
Looking at the above, I think the financial case against buying is strong. I may be biased having experienced the earthquake in Sendai a couple of years ago, but I am much more inclined to rent and invest any extra money.
A couple of years ago I started investigating the possibility of buying property to let in Sendai. I found that the yields on apartments and 'mansions' were so low that again, it made little sense to me to buy -I could get a better return with much higher liquidity and less risk elsewhere.
Unfortunately, it seems to me that property as an investment in Japan is a non-starter.
What do you think? Let me know in the comments.
What is it good for? Quite a lot, actually.
Everyone understands cash. Today we're going to talk about its role in an investment portfolio though.
Cash is basically any money that you have instant access to. It includes money in bank current accounts, savings accounts, under the mattress, etc.
The benefits of cash
The drawbacks of cash
What is cash good for?
You need to have some cash around to pay for unexpected expenses, from car repairs to losing your job and having to support yourself and your family until you get a new one. This is the emergency fund we talked about yesterday. The amount will be different for everyone.
Cash is also useful for taking advantage of investment opportunities (for example, it is generally a good idea to buy shares when they are cheap -ie during a stock market crash). If you don't have any cash you can't take advantage of the sale :)
The key thing here is that you need enough cash to meet your needs in an emergency and to allow you to invest if something good comes along, but not too much, because cash is not producing any income and slowly loses value over time. The opportunity cost of cash is the profit you could have made by investing it.
Foreign residents in Japan have an extra factor to think about: what currency to keep their cash in? Currency risk is the danger that you will lose money because of changes in exchange rates. If you have all your savings in Australian dollars, and the A$ suddenly crashes against the yen, how are you going to pay your rent and buy groceries in Japan? On the other hand, if the A$ gets much stronger against the yen, your savings will buy a lot more.
My personal take on this is as follows:
As I can pay my bills with my salary, having my savings in other currencies is not that risky, so I can take advantage of the expected future devaluation of the yen. If I am wrong and the yen gets stronger, it will not be a serious problem. If I am right, I will benefit from the increased purchasing power of my savings when changed back into yen.
I keep a couple of months' expenses in yen, and then the rest of my cash in US dollars, British pounds, and euros. This is really easy to do as my bank (Shinsei Bank) offers instant transfers between 14 different currencies within the same account. I'll be taking a more detailed look at Shinsei in a future post, as it is the best bank I have found here in Japan.
The next post will look at property, and it will probably make a lot of people angry.
You know that saying, "don't put all your eggs in one basket"? It's particularly important for investing, and is known as diversification.
The basic idea is that we can't predict the future, so we don't know which investments will do well and which will do badly.
If you have all or most of your money in one share or asset class, you will do very well if you are lucky and very badly if you are unlucky. For most people, being unlucky would be disastrous as they would lose all their savings. Because of this, the chance of being lucky and doing well is not worth the risk of doing badly.
We can avoid the risk of losing everything by diversifying: spreading our investments over different asset classes, regions, or even currencies. We probably won't do as well as the person who got lucky with one share, but we are unlikely to lose everything.
The main asset classes we will be looking at on this blog are:
There are of course many other assets you can own, but the four above are probably the most versatile. We'll be examining them in detail in future blog posts.
For now, just remember that you really don't want all your eggs in one basket. The more baskets you have, the more likely most of your investments will be there when you need them.
Ben Tanaka is a teacher living in Sendai, Japan.