Bogleheads

[daryll40]

I have been wondering about rebalancing under extreme duress and how THIS would have worked out:

You invest 60% in Japanese equities in 1989 and the rest in fixed income. (60/40). You rebalance every year.

How bad did it get? Put another way: You "flush" remaining fixed income money into equities during the annual rebalances as Japanese equities continue to go down, year after year. How much of your original portfolio remains at the trough of the exercise? Did it ever go below 50% of your original 1989 stash?

Put YET another way: Would a wealthy Japanese investor, who planned to have their fixed income (40%) be the "fall back" money in a bad scenario, have had it work out that way? Or would he have lost that too by rebalancing "safe" fixed income securities into an umpteen year bear equity market?

[wab]

Hopefully bpp will see this thread -- he has run the numbers for Japan.

In general, most of the US-centric theories about rebalancing and safe withdrawal rates fail for the Japanese case.

Here's one of bpp's posts on the subject:

http://www.bogleheads.org/foru....411#116411

[bpp]

[daryll40]

Thanks for taking the time to do that computation and for posting it. It's somewhat comforting to see that even if you rebalanced in that scenario, you'd still never go below 60% of your original stash.

[expat]

[bpp]

[stratton]

From the The Economist Guide to Investment Strategy by Stanyer. Page 109 has a chart showing the efficient frontier for Japanese, UK and US investors. Here's a chart I eyeballed from it in local currency rounded to the nearest 1/2 std dev. with the ends and the optimum position for 1980 to 2005:

[mudfud]

[bpp]

[daryll40]

[RooseveltG]

If we are going to compare the US market now to the Japanese market in 1989, it would be helpful to know how the two markets differ in value. We have a probable P/E in the low 20s and our market has been flat for a decade. How does that compare to what the Japanese market looked like in 1989?

Roosevelt.

[EyeDee]

.
What if you were retired and taking a 4% withdrawal plus inflation as many “safe withdrawal” studies indicate? I am afraid the numbers would not look too good by the end of the period being reviewed in this conversation.
_________________
Randy

SSCA - Security (ER fund, insurance), Savings, Costs (inc. taxes), Allocation (inc. rebalancing).
Board Wiki

[Tramper Al]

I have been rebalancing an equity allocation to Japan since about 1991. Some losses, some gains. I suppose if that were my native land, I might have given it 50% weight, and that would have been a bit more painful.

[wab]

[mudfud]

[yobria]

What makes these scenarios less painful for most in reality is the fact that no one in Japan was given $1M the day they retired in 1989. Those retiring in 1989 had enjoyed the outstanding investment (stock/home) gains in Japan over the prior 20-40 years, and probably had far more money than they ever thought they would upon retirement. Younger people working through this time period continued to invest new money, buying more shares when they were cheap.

Also, who in their right mind, living on a island half the size of Texas, fails to invest internationally?

Nick

[daryll40]

You're not entirely right. I agree that the runup was as dramatic as the rundown. But people start to see any gains as "theirs" and adjust lifestyles and expectations accordingly. Anyone retiring around 1989 was in for a RUDE awakening.

[wab]

[Tramper Al]

[wab]

[bookshot]

This illustrates another problem I have with most investment models. Aside from being based on the theory that history repeats itself, they assume that people will invest and rebalance the same no matter what the economic conditions. Do people really do that? Very few.
In fact, during downturns, when you should in theory be investing, a lot of people can't - they have lost their jobs, or feel in jeopardy of job loss.

[yobria]

[bpp]

[detifoss]

thanks for taking the time to do all of this bpp

I am hopeful you will add to this data set at the end of 2008, it should be illuminating...

[Gekko]

doesn't the fact that Japan had massive deflation skew the Nikkei performance and make it look a lot worse than what it is?

[Met Income]

[Adrian Nenu]

[ecastilla]

Japan should not necessarily be considered a small country. Their population is more than 1/3rd of the US's and I would not be surprised if they had roughly as many professional/degreed workers as the United States.

[nisiprius]

[jimdigriztn]

Hi bpp,
Can you run the numbers starting the year after the peak? That is, for someone who started investing just after the crash?

Thanks.

Jim

[chaz]

The yen has surged up. Makes travel to Japan more expensive.
_________________
Chaz
"It is better to travel well than to arrive." - Buddha
http://www.bogleheads.org/wiki/index.php/Main_Page

[ryuns]

[btenny]

BPP could you please do one more set of calculations on the Japan retiree? What happens if the guy in Japan retired in 1990 with $1M but then reduces his allocation to stocks (both cases - with and without foreign stocks) over the 18 years in retirement from 50% at the start to 35% or so at the end.

My reasoning for the question is similar to my current situation. Should I keep my stock allocation at 50% like I had in 1999 when I retired or go with a smaller allocation, say 40% that the bad market has given me? Plus I am now older by 10 years so maybe I should have a smaller stock allocation.

Thanks in advance.
Bill

[CaptMidnight]

Is anyone here on the ground in Japan? Does anyone know what has actually happened to people there sine the bubbles burst? I know that their Keynesian spending schemes prevented depression-level unemployment at the cost of the highest deficit in any industirialized country. But what happened to the 100-year mortgages that people took out during the 80's bubble? Are they still paying them off? Did the children inherit them along with the house? How have Japanese workers been able to fund retirement since 1990?

From what I understand of the stringency of social obligation in Japan I expect homeowners underwater these years would not have walked away, but I haven't actually been able to find any info on the subject.

[bpp]

[detifoss]

bpp - thank you (I think)

that was perhaps more illuminating than I can handle...

I'm assuming this data is with yearly rebalancing

So a 50/50 Japan/'Foreign' split with a pretty conservative 60/40 stock/bond allocation produced a CAGR of 1.39% over 19 years! (in nominal terms) I can't even stomach the inflation adjusted CAGR

I am a boglehead through and through but ouch. 19 years is just one year longer than the amount of time I might need to save if I am ever lucky enough to help a child save for college. Unless higher education gets a lot cheaper, a CAGR of 1.4% will never get me to the finish line.

Of course, I could just take more risk, (take more risk if your needs are greater right?). But then I would be stuck with a CAGR of around -6.0%.


Hmm, maybe a second job would be a better plan.

[Gekko]

Warren Buffett on Japan -

http://www.5min.com/Video/Warr....apan-11337

[Easy Rhino]

A japanese investor who started out 60/40 at the beginning is hopefully going to have a more conservative allocation after 20 years. But I don't think that would make the numbers any less depressing.

[bpp]

[detifoss]

stop, bpp, your scaring me

so the CAGR remained terrible even if the investor transitioned from 60/40 to 41/59 stock/bond split with international diversification...


ok, if you are able, and so kind (and inclined) to run one more scenario (unless the data continues to be as grim - then please hide it!)

starting with 1 million, adding 20000 at the beginning of each successive year. Perhaps that will help improve the CAGR? I hope? Maybe?

[bpp]

[detifoss]

bpp - thank you. if there is a time in the future when i can be of help to you, please do not hesitate to ask.


your data should be publicized more widely than this simple thread.

yes, I know there are those who think that this example may be extreme (only 19 years, beginning at the peak of a domestic bubble, concluding at the year end of a severe global equities crash).

but I would argue that it is of incredible value.

it is the monte carlo simulation that we try not to look at but actually happened. If someone were to invest for 19 years, in a globally diversified, relatively conservative 60/40 portfolio, and either begin with a large sump sum then add to it incrementally (inheritance or the savings from an individuals first 20 years of investing! + IRA + 401k yearly) while moving to a more conservative portfolio over time, they could look forward to reaching retirement, or some other expensive goal (like college tuition for children), with a terrible, or even possibly negative, real rate of return!

As I said previously, I am A Boglehead, a non market timer, a buy and hold rebalancer, an intelligent asset allocator etc etc.

But I wonder, could I stomach 19 years of such a disaster? Would I give up at the wrong time? Or more importantly, does this data indicate that market timing, valuations, q, pyramiding up, or some other timing fad of the week should have a place in one's investment plan?

This data indicates to me that luck, and the luck (or skill?) that leads to the timing of the beginning and end point plays a huge role in the final outcome, and contrary to all academic work that says the opposite, market timing influences can completely outweigh asset allocation decisions (I won't bother bringing up security selection here).

Any thoughts on all of this from those much wiser than me? 19 years is a long time, much more than half of this wonderful life...

[jenol]

Sorry for bumping a somewhat old thread but this is hands down the scariest thread I've ever read on this forum.

In 1988 Japan was 40% of the global market cap. That is were USA stands today.

How do people that think 100% us equities is just fine react when they read this?

[bluto]

Few people on this forum are 100% US equities. Some tilt towards the US because they don't want currency risk and consume in $. Also, history suggests that you don't need much foreign exposure to gain the benefits of diversification, 20 - 30%?

I'm closer to 50-50 myself, but would agree that the US is far from being the next Japan. Demographics, culture and economic dynamism are much more growth friendly in the USA. I chuckle every time I hear someone compare the USA to Japan. It could happen, but its very unlikely.

[Karamatsu]

Very interesting thread. I'm glad it was resurrected or I wouldn't have seen all the data. In many ways it's difficult to compare the US today with Japan 20 years ago. Nothing is ever that easy. But in some ways they are stunningly similar. The bubble here was really a real estate bubble and an equity bubble that fed on each other, first due to greed (of course) and a lack of regulatory foresight, and then even when they realized what was going on, a lack of political will. Regulators knew what was happening, but the political costs of stopping it were too great, so the situation was allowed to get worse. Looking back... psychologically I think the skyrocketing paper economy, even though it was an illusion, also received some support from cultural bias and the notion that, not only is it different this time, but we are different, smarter, better, deserving... it was all part of the ongoing economic miracle. Maybe there was some of that in the US, too... the miracle of recovery from the dot-com crash, 9/11, the successes and failures of the wars... demographics, culture, dynamism...

One major difference is that there were few individuals investing in the Japan bubble. Back in those days brokers didn't want small investors (at one large brokerage the internal name for accounts with less than 10M yen actively traded was "garbage"). It was mostly a game of the rich, the powerful, and corporate/government actors (and indeed Nomura reimbursed such clients for their losses, hoping that they would continue to trade). So in truth, for most of us, the popping of the market bubble didn't have much effect in itself because it was never the "real" economy in the first place. Few people invested for their retirement (beyond cash savings accounts) because it wasn't necessary. The government retirement arrangement combined with corporate benefits were good enough. So it was only later, as the players stopped spending, demand dropped, businesses built on the assumption of exponential growth failed, and the banks found themselves saddled with mountains of bad debt, that the effects started to trickle down. But really, if nobody had reported it in the news? I guess we might have noticed fewer customers, some more shuttered businesses, No more gold leaf on sushi at the supermarket.

Things were "challenging," but honestly -- and maybe I'm just misremembering because I was younger -- I think the economic impact on ordinary people has been greater this time, primarily because a lot of the social safety net (financial, cultural, regulatory) was dismantled by the LDP and foreign advisors. Back then people had their huge savings accounts, what the West calls "lifetime employment" (really just mutual respect between workers and management) was still considered normal, there were no lavish executive lifestyles that could only be maintained at the expense of workers' jobs, China and Korea had not yet emerged, and military spending (as a percentage of GDP) was low. Also the government was more naive -- two generations had grown up seeing nothing but growth. They had a blind spot. But now those things have changed. Of course, as a consequence (in part), so has the government. We shall see.

So anyway, no, I don't think the US will reprise Japan after the crash. In many ways, the US situation has been worse. The difference is that the US acts. Japan has sat like a deer in the headlights... for two decades. The US has a political culture that demands action, and to some extent I think it doesn't matter whether the action is "correct" or not. The important thing is to create some kind of imbalance, whatever it is, because once that is done, the system will start moving to correct it. Japan is stuck because it is internally in balance, though only at the cost of massive public debt. As I said (only half joking) in one of these threads before, I don't think the US will duplicate Japan because Americans don't have the patience for it. But you could have stagflation.

[DualCitizen]

[rogov4321]

[LH]

[MCSquared]

[CaptMidnight]