Japan, 1989

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daryll40
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Japan, 1989

Post by daryll40 » Wed Sep 10, 2008 4:28 pm

[RESTARTED THREAD - NOTE POST DATES]
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?

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wab
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Post by wab » Wed Sep 10, 2008 6:39 pm

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/forum/viewtop ... 411#116411

bpp
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Re: Japan, 1989

Post by bpp » Wed Sep 10, 2008 7:04 pm

daryll40 wrote: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?
Assuming no withdrawals, here is how a one-million-yen lump-sum invested at the end of 1989 would have fared through 2007, rebalanced yearly.

100% Domestic
60% Stocks (TOPIX index w/dividends included)
40% Bonds (6-month JGBs)

Code: Select all

Year     Year-end Balance
1989    1000000
1990     794164
1991     815597
1992     714251
1993     766120
1994     814968
1995     826312
1996     797259
1997     705478
1998     678741
1999     922083
2000     785651
2001     696533
2002     623406
2003     717652
2004     766487
2005     974576
2006     994184
2007     930119
Looks like the trough, in 2002, is at 62% of the original stash. Probably a little bit lower if one looked intra-year.

For comparison, here is the same stock/bond ratio, but with a 50/50 domestic/foreign ratio:

50/50 Domestic/foreign
60% Stocks (30% TOPIX, 30% MSCI All-Country-ex-Japan (gross, yen base))
40% Bonds (20% 6-month JGBs, 20% US commercial paper)

Code: Select all

Year     Year-end Balance
1989     1000000
1990      872723
1991      923812
1992      878971
1993      928637
1994      915928
1995     1025885
1996     1157645
1997     1264540
1998     1252397
1999     1503241
2000     1442704
2001     1407326
2002     1194849
2003     1341636
2004     1426898
2005     1781642
2006     1955119
2007     1932779
Last edited by bpp on Tue Aug 06, 2013 7:46 pm, edited 1 time in total.

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daryll40
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Post by daryll40 » Wed Sep 10, 2008 7:45 pm

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.

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Post by expat » Wed Sep 10, 2008 10:09 pm

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.
No doubt the result is much more sobering once you consider the effects of inflation over nearly 20 years,

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Post by bpp » Wed Sep 10, 2008 10:25 pm

expat wrote:
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.
No doubt the result is much more sobering once you consider the effects of inflation over nearly 20 years,
Only a little bit more sobering, due to low or negative inflation during much of that time period. Here is the all-domestic case again, with an extra column showing the inflation-adjusted balance based on the Japanese CPI:

Code: Select all

Year   Year-End Balance  Inflation-adjusted Balance (1989 yen)
1989    1000000            1,000,000
1990     794164              770,285
1991     815597              765,802
1992     714251              660,082
1993     766120              698,931
1994     814968              738,327
1995     826312              749,354
1996     797259              722,284
1997     705478              627,834
1998     678741              600,436
1999     922083              818,159
2000     785651              702,019
2001     696533              626,775
2002     623406              566,065
2003     717652              653,604
2004     766487              698,080
2005     974576              890,269
2006     994184              905,465
2007     930119              846,270

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stratton
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Post by stratton » Wed Sep 10, 2008 10:55 pm

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:

Code: Select all

        Domestic
Nation  % Equity  Std Dev
=========================
Japan    100        19.0
Japan     40        14.5
Japan      0        17.5
-------------------------
UK       100        16.5
UK        50        15.0
UK         0        16.5
-------------------------
US       100        15.0
US        70        14.0
US         0        16.5
The US and UK don't gain all that much reduction in Std Dev, but the Japanese get a much larger gain. You'll also notice for he Japanese market less domestic equity is better compared to the US.

Paul

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mudfud
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Re: Japan, 1989

Post by mudfud » Wed Sep 10, 2008 11:29 pm

bpp wrote:
Assuming no withdrawals, here is how a one-million-yen lump-sum invested at the end of 1989 would have fared through 2007, rebalanced yearly.

100% Domestic
60% Stocks (TOPIX index w/dividends included)
40% Bonds (6-month JGBs)
Bpp,

I really appreciate your data. What would have happened to this portfolio if it were not rebalanced?
Thanks,
Mud
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Re: Japan, 1989

Post by bpp » Thu Sep 11, 2008 4:33 am

mudfud wrote:What would have happened to this portfolio if it were not rebalanced?
Unrebalanced all-domestic Japanese portfolio, starting with 60% stocks and 40% bonds in 1989:

Code: Select all

Year	End Bal.	Infl.-adj. Bal.	Stock percentage
1989	1,000,000	1,000,000	      60%
1990	  794,164	  770,285	      46%
1991	  824,333	  774,005	      44%
1992	  757,036	  699,623	      37%
1993	  795,734	  725,948	      39%
1994	  834,970	  756,448	      40%
1995	  843,738	  765,157	      41%
1996	  824,365	  746,841	      39%
1997	  763,244	  679,242	      34%
1998	  748,023	  661,726	      33%
1999	  893,911	  793,163	      44%
2000	  799,085	  714,022	      37%
2001	  743,919	  669,414	      32%
2002	  702,509	  637,893	      28%
2003	  751,753	  684,661	      33%
2004	  779,488	  709,921	      35%
2005	  902,740	  824,647	      44%
2006	  917,216	  835,365	      44%
2007	  874,799	  795,937	      41%

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Post by daryll40 » Thu Sep 11, 2008 6:23 am

expat wrote:
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.
No doubt the result is much more sobering once you consider the effects of inflation over nearly 20 years,
I thought Japan had very little inflation or even deflation?

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? Value of Japan's market in 1989

Post by RooseveltG » Thu Sep 11, 2008 8:15 am

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.

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Withdrawals

Post by EyeDee » Thu Sep 11, 2008 9:43 am

.
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

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Post by Tramper Al » Thu Sep 11, 2008 9:51 am

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.

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Re: ? Value of Japan's market in 1989

Post by wab » Thu Sep 11, 2008 10:41 am

RooseveltG wrote: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?
Japan had two bubbles: stocks (1989 peak) and real estate (1991 peak). 17 years later, they still haven't reclaimed either peak.

The two bubbles we had in stocks (2000) and real estate (2006) were similar, but Japan's were bigger by most metrics.

At the peak, Japan's real estate market was worth $20 trillion. For the US, it was about $22 trillion, but smaller on a per capita and %GDP basis.

The Nikkei P/E peaked at around 100. Our NASDAQ P/E peak was even higher, but the S&P peak was a mere 46.5 in 2001 (earnings fell faster than prices, so the P/E peak came after the price peak of 2000).

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Re: Japan, 1989

Post by mudfud » Thu Sep 11, 2008 10:49 am

bpp wrote:
mudfud wrote:What would have happened to this portfolio if it were not rebalanced?
Unrebalanced all-domestic Japanese portfolio, starting with 60% stocks and 40% bonds in 1989:
Thanks bpp,
Mud
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Post by yobria » Thu Sep 11, 2008 11:04 am

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

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Post by daryll40 » Thu Sep 11, 2008 11:08 am

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.

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Post by wab » Thu Sep 11, 2008 11:11 am

yobria wrote: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.
The same can be said of anybody who retired in the US post-2000. 1980-2000 was a rocket for both US stocks and bonds that is unlikely to be repeated in our lifetimes (IMHO). So, how to hold on to outsized gains is an interesting question, I think.

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Post by Tramper Al » Thu Sep 11, 2008 11:12 am

yobria wrote:Also, who in their right mind, living on a island half the size of Texas, fails to invest internationally?
Well, you have to try to put yourself into an unfamiliar home-bias situation, and try to think outside of our own U.S.-centric bias at the same time. I believe that at one point the market-cap weight of Japan exceeded that of the U.S., no? It just too easy to ridicule investment in the Japanese stock market - in retrospect. As for land mass, I don't believe I have seen that seriously proposed as a weighting scheme for international asset allocation.

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Post by wab » Thu Sep 11, 2008 11:19 am

Tramper Al wrote:I believe that at one point the market-cap weight of Japan exceeded that of the U.S., no?
Yes, in 1988 Japan was 40% of global market cap vs 29% for the US. (Long live google!)

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Post by bookshot » Thu Sep 11, 2008 1:20 pm

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.

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Post by yobria » Thu Sep 11, 2008 1:41 pm

bookshot wrote: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.
Yes, very important point. Buffett says "Buy when there's blood in the streets!", problem is few people have the means or inclination to invest during such times.

When allocating assets, I always consider not just that "stocks might drop 50%" but "stocks might drop 50%, probably while my house value is dropping and my career is in jeopardy"

This line of reasoning leads me to favor long term bonds, which often do well during depressions, and to defensive career choices.

Nick

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Re: Withdrawals

Post by bpp » Thu Sep 11, 2008 5:49 pm

EyeDee wrote:.
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.
Indeed not, as discussed in the thread to which wab pointed upstream:
http://www.bogleheads.org/forum/viewtop ... 411#116411

detifoss
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Post by detifoss » Sun Oct 26, 2008 7:30 pm

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...

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Post by Gekko » Sun Oct 26, 2008 7:34 pm

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

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Post by Met Income » Sun Oct 26, 2008 7:45 pm

daryll40 wrote: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.
That's their fault, then no? Entitlement isn't always deserved.

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Adrian Nenu
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Post by Adrian Nenu » Sun Oct 26, 2008 7:47 pm

For comparison, here is the same stock/bond ratio, but with a 50/50 domestic/foreign ratio:

50/50 Domestic/foreign
60% Stocks (30% TOPIX, 30% MSCI All-Country-ex-Japan (gross, yen base))
40% Bonds (20% 6-month JGBs, 20% US commercial paper)

Code:

Year Year-end Balance
1989 1000000
1990 872723
1991 923812
1992 878971
1993 928637
1994 915928
1995 1025885
1996 1157645
1997 1264540
1998 1252397
1999 1503241
2000 1442704
2001 1407326
2002 1194849
2003 1341636
2004 1426898
2005 1781642
2006 1955119
2007 1932779
Excellent illustration why global diversification and conservative stock/bond mix are very important.

Adrian
anenu@tampabay.rr.com

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Post by ecastilla » Sun Oct 26, 2008 8:01 pm

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.

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Post by nisiprius » Sun Oct 26, 2008 8:28 pm

bookshot wrote: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.
Which is why the happy talk about how if people who bought in 1929 would have been just fine if they'd just held until 1942 rings hollow.

Furthermore, these big crashes--not 1987, but 1893 or 1929, and likely 2008 are very obviously social, economic, and political discontinuities. It is not the same world before and after that kind of an event, and therefore nobody's convinced that the last one is really a good predictor of this one.

To put it another way: saying that the market will recover within 15 years because that's what it did the last half a dozen times, is like an optimistic Floridian coast dweller who holds a hurricane party instead of vacating, because he's been through six hurricanes and his house is still standing.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by jimdigriztn » Mon Oct 27, 2008 9:48 am

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
Last edited by jimdigriztn on Mon Oct 27, 2008 10:55 am, edited 1 time in total.

chaz
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Post by chaz » Mon Oct 27, 2008 9:52 am

The yen has surged up. Makes travel to Japan more expensive.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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Post by ryuns » Mon Oct 27, 2008 10:22 am

nisiprius wrote: To put it another way: saying that the market will recover within 15 years because that's what it did the last half a dozen times, is like an optimistic Floridian coast dweller who holds a hurricane party instead of vacating, because he's been through six hurricanes and his house is still standing.
An interesting analogy. But comparing the consequences are completely different. Say you're wrong about the hurricane, result is death. Say you're right and your house is still standing, you simply saved yourself some trouble. OTOH, if you're wrong about the market recovering in due time, you're short a little cash and there's still a very good chance "everything will turn out ok". If the market does recover in X years, you've probably made very good money by buying on the way down. Not to say this is the best course of action for everyone, but for a young-ish person, the relatively small chance that we'll face a Japan-like situation probably does not justify any course of action other than the typical Boglehead approach.

My two pennies,
Ryan
An inconvenience is only an adventure wrongly considered; an adventure is an inconvenience rightly considered. -- GK Chesterton

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Post by btenny » Mon Oct 27, 2008 10:32 am

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

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Post by CaptMidnight » Mon Oct 27, 2008 11:06 am

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.

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Post by bpp » Mon Mar 16, 2009 9:55 am

detifoss wrote: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...
Finally got around to updating the numbers (yearly rebalancing):

100% Domestic
100% Stocks (TOPIX index, dividends included)

Code: Select all

Year	Year-End Bal.	Infl.-adj. Bal.
1989	1,000,000	    1,000,000
1990	605,600	      587,391
1991	603,238	      566,409
1992	464,373	      429,155
1993	515,314	      470,122
1994	562,260	      509,384
1995	574,011	      520,551
1996	539,226	      488,517
1997	434,562	      386,734
1998	406,011	      359,171
1999	648,359	      575,286
2000	486,529	      434,738
2001	394,526	      355,014
2002	325,484	      295,546
2003	407,474	      371,108
2004	453,681	      413,191
2005	658,881	      601,884
2006	678,779	      618,206
2007	603,367	      549,523
2008	358,279	      321,815
100% Domestic
60% Stocks (TOPIX index, dividends included)
40% Bonds (6-month JGBs)

Code: Select all

Year	Year-End Bal.	Infl.-adj. Bal.
1989	1,000,000	    1,000,000
1990	794,164	      770,285
1991	815,597	      765,802
1992	714,251	      660,082
1993	766,120	      698,931
1994	814,968	      738,327
1995	826,312	      749,354
1996	797,259	      722,284
1997	705,478	      627,834
1998	678,741	      600,436
1999	922,083	      818,159
2000	785,651	      702,019
2001	696,533	      626,775
2002	623,406	      566,065
2003	717,652	      653,604
2004	766,487	      698,080
2005	974,576	      890,269
2006	994,184	      905,465
2007	930,119	      847,116
2008	704,175	      632,506
50/50 Domestic/foreign
60% Stocks (30% TOPIX, 30% MSCI All-Country-ex-Japan (gross, yen base))
40% Bonds (20% 6-month JGBs, 20% US commercial paper)

Code: Select all

Year	Year-End Bal.	Infl.-adj. Bal.
1989	1,000,000	    1,000,000
1990	872,723	      846,482
1991	923,812	      867,411
1992	878,971	      812,310
1993	928,637	      847,196
1994	915,928	      829,793
1995	1,025,885	    930,340
1996	1,157,645	    1,048,780
1997	1,264,540	    1,125,366
1998	1,252,397	    1,107,912
1999	1,503,241	    1,333,817
2000	1,442,704	    1,289,128
2001	1,407,326	    1,266,381
2002	1,194,849	    1,084,948
2003	1,341,636	    1,221,899
2004	1,426,898	    1,299,552
2005	1,781,642	    1,627,518
2006	1,955,119	    1,780,646
2007	1,932,779	    1,760,301
2008	1,315,678	    1,181,773
Sources:
Japanese T-Bills (1990, 1991=90-179-day CD rates): http://www.boj.or.jp/type/release/teiki/sk/data/sk2.pdf
World-ex-Japan stocks: http://www.mscibarra.com/products/indic ... mance.html
Exchange rates: http://www.oanda.com
Japanese CPI: http://www.e-stat.go.jp/SG1/estat/List. ... 5&cycode=0
TOPIX (dividends included): http://www.tse.or.jp/market/topix/data/topixroj.pdf
US Commercial paper (from 2002, hand-average): http://www.economagic.com/em-cgi/data.exe/fedbog/fp1m
(Pre-2002: from Intercst's spreadsheet)
(Should switch to 6-month Treasuries some day...)

detifoss
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Post by detifoss » Tue Mar 17, 2009 1:48 am

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
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Post by Gekko » Tue Mar 17, 2009 7:46 am


Easy Rhino
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Post by Easy Rhino » Tue Mar 17, 2009 10:15 am

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
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Post by bpp » Tue Mar 17, 2009 7:10 pm

detifoss wrote:I'm assuming this data is with yearly rebalancing.
Yes.
Easy Rhino wrote: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.
Not really, no.

Here are numbers for an all-domestic portfolio, starting at 60/40 at the end of 1989, and lowering the stock allocation one percentage point each year (i.e., age in bonds, starting at 40 years of age):

100% domestic
Age-in-bonds, starting at 40 years of age

Code: Select all

Year	Year-End Bal.	Infl.-adj. Bal.
		
1989	1,000,000	    1,000,000
1990	794,164	      770,285
1991	816,210	      766,378
1992	719,111	      664,574
1993	769,333	      701,863
1994	816,283	      739,518
1995	826,933	      749,917
1996	801,014	      725,686
1997	719,872	      640,644
1998	696,592	      616,228
1999	908,972	      806,526
2000	797,577	      712,675
2001	723,703	      651,223
2002	662,923	      601,948
2003	741,444	      675,272
2004	780,128	      710,504
2005	939,023	      857,792
2006	954,130	      868,985
2007	911,567	      830,220
2008	757,108	      680,052
Hardly makes any difference.

Same is true for the internationally diversified portfolio:

50/50 Domestic/foreign
Age in bonds, starting at 40 years of age

Code: Select all

Year	Year-End Bal.	Infl.-adj. Bal.
		
1989	1,000,000	    1,000,000
1990	872,723	      846,482
1991	923,426	      867,048
1992	881,175	      814,347
1993	927,239	      845,921
1994	913,970	      828,019
1995	1,018,636	    923,766
1996	1,146,062	    1,038,285
1997	1,252,149	    1,114,338
1998	1,235,468	    1,092,936
1999	1,440,825	    1,278,437
2000	1,415,753	    1,265,045
2001	1,412,182	    1,270,750
2002	1,230,296	    1,117,134
2003	1,337,195	    1,217,855
2004	1,398,626	    1,273,803
2005	1,691,036	    1,544,750
2006	1,827,682	    1,664,582
2007	1,811,828	    1,650,143
2008	1,359,505	    1,221,140

detifoss
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Post by detifoss » Tue Mar 17, 2009 8:29 pm

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
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Post by bpp » Tue Mar 17, 2009 9:46 pm

detifoss wrote: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.
Cover your eyes:

50/50 Domestic/foreign
60/40 Stocks/bonds
Start with 1,000,000 yen on 31 Dec. 1989, add 20,000 yen each 1 Jan. from 1991 on.
(Total of 1,360,000 yen invested over 19 years.)

Code: Select all

Year	Year-End Bal.	Infl.-adj. Bal.
		
1989	1,000,000	    1,000,000
1990	872,723	      846,482
1991	944,983	      887,289
1992	918,143	      848,512
1993	991,153	      904,229
1994	997,315	      903,526
1995	1,139,444	    1,033,322
1996	1,308,357	    1,185,319
1997	1,451,015	    1,291,317
1998	1,456,889	    1,288,812
1999	1,772,696	    1,572,904
2000	1,720,504	    1,537,355
2001	1,697,823	    1,527,784
2002	1,458,467	    1,324,319
2003	1,660,096	    1,511,938
2004	1,786,868	    1,627,396
2005	2,256,077	    2,060,912
2006	2,497,696	    2,274,805
2007	2,488,929	    2,266,820
2008	1,707,874	    1,534,053
Perhaps that will help improve the CAGR? I hope? Maybe?
Nope.

Using IRR, I get an internal rate of return of 1.38% nominal, 0.87% real.
If one had not started with a 1,000,000 yen lump-sum, but instead just steadily put in 20,000 every January 1st from 1990 on, the nominal IRR would be below 1%.

So yen-cost averaging through the past 19 years was actually worse than lump-summing at the peak of the Nikkei bubble. This seems to be because the internationally diversified portfolio had already recovered its peak value by 1995, so all money added after that was at higher (portfolio-averaged) prices than those of 1989.

For the all-domestic portfolio, yen-cost averaging was better than lump-summing, only because the 1989 peak was never reached again. Still, the overall return was negative.

detifoss
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Post by detifoss » Tue Mar 17, 2009 11:27 pm

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
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Post by jenol » Sun Dec 06, 2009 6:16 pm

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
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Post by bluto » Sun Dec 06, 2009 7:02 pm

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.

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Post by Karamatsu » Sun Dec 06, 2009 8:54 pm

[OT comments removed by admin LadyGeek]

DualCitizen
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Post by DualCitizen » Tue Dec 08, 2009 1:47 am

bluto wrote:It could happen, but its very unlikely.
Sounds familiar... ;)

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Post by rogov4321 » Tue Dec 08, 2009 3:11 am

Karamatsu wrote:In many ways it's difficult to compare the US today with Japan 20 years ago.
This paper does just that:
Avoiding An American “Lost Decade”: Lessons from Japan’s Bubble and Recession
http://reason.org/files/091666ffae057ae ... f65caa.pdf
Karamatsu wrote: 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.
The paper disagrees with you. Both the Japanese Central Bank and the government did plenty to make the problems even worse.


The Boglehead might take a different lesson than most and conclude that investing in All-World index to buy and hold may be the best thing so you don't get (inadvertently) stuck with an imbalance of any particular country, particularly if a country's market cap shrinks (or grows) by huge amounts.

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LH
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Post by LH » Tue Dec 08, 2009 5:35 am

nisiprius wrote:
bookshot wrote: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.
Which is why the happy talk about how if people who bought in 1929 would have been just fine if they'd just held until 1942 rings hollow.

Furthermore, these big crashes--not 1987, but 1893 or 1929, and likely 2008 are very obviously social, economic, and political discontinuities. It is not the same world before and after that kind of an event, and therefore nobody's convinced that the last one is really a good predictor of this one.

To put it another way: saying that the market will recover within 15 years because that's what it did the last half a dozen times, is like an optimistic Floridian coast dweller who holds a hurricane party instead of vacating, because he's been through six hurricanes and his house is still standing.
The boglehead approach, buy and hold through the depression, continue to accumulate if able, is the best approach I know of.

Its not perfect, nothing is. Its not happy talk that I can see. Its just the only rational option out there. Nothing has a guarentee of success, I may drop dead as I write this sentence, you may lose your job, the market may never come back, all that is true.

The question is, what else are you going to do? I have never found anything else thats better. I plan to pay off my house by age 47 if not sooner, and buy and hold in the stock market, fate willing. Thats all I can do. The market may drop down to 90 percent from its peak again, and never come back up. I cannot predict it.

What other system would you do?

To try and wing it, to time it, has well documented expected failure versus buy and hold.

Each time is different, but the fear and uncertainty is the same quality, yet differing magnitudes certainly. Once can only really compare if one has gone through both times personally, when it meant something financially to you I posit.

MCSquared
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Post by MCSquared » Tue Dec 08, 2009 10:22 am

jenol wrote: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?
I wonder how the numbers would look if the bond allocation called for 30 year JGB versus short term? Seems with the deflationary environment they would have provided some protection.............

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Post by CaptMidnight » Tue Dec 08, 2009 12:13 pm

Karamatsu wrote:
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.
Sure, there may have been relatively few ordinary Japanese in the stock market, but what about people who bought houses and apartments? What happened to the hundred-year mortgages that they were going to pass along to their grandchildren along with the house? Housing bubbles are more destructive than stock bubbles just because more people are affected and they use more leverage. Since Japanese don't seem to walk away when they are underwater there must be a lot of people still paying off those mortgages on houses that are 60% or 70% underwater now.
The history of thought and culture is ... a changing pattern of great liberating ideas that inevitably turn in suffocating straightjackets... | --Isaiah Berlin

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