Would buy and hold work if Japan's lost decade happens?

[aaja]

I follow the bogleheads philosophy of buy and hold long term. The beauty is it takes the worrying about the day to day prices out of the picture, which I love. The market always goes up.

I was reading about Japan's lost decade, and looking at its current stock market prices, it seems like the market has still not recovered to its peak. Would that mean someone who was half way into his career would have lost most of the gains after crash and never recovered those?

I was trying or find a portfolio visualizer equivalent to check the returns for the worst market timer for Japan but could not. I read somewhere that due to the policy changes, deflation etc in the end for long term investors it was not that bad. Is that right?

I was just wondering if this is a case where buy and hold would not have worked. I know a lot of people here think this could not happen to the US but I was mainly looking at this data to decide on how much international. I am currently thinking 20% but if a scenario like Japan can take US stocks down long term, cap weigitng the international market would be better I think, no?

Thanks.

[Broken Man 1999]

I follow the bogleheads philosophy of buy and hold long term. The beauty is it takes the worrying about the day to day prices out of the picture, which I love. The market always goes up.

I was reading about Japan's lost decade, and looking at its current stock market prices, it seems like the market has still not recovered to its peak. Would that mean someone who was half way into his career would have lost most of the gains after crash and never recovered those?

I was trying or find a portfolio visualizer equivalent to check the returns for the worst market timer for Japan but could not. I read somewhere that due to the policy changes, deflation etc in the end for long term investors it was not that bad. Is that right?

I was just wondering if this is a case where buy and hold would not have worked. I know a lot of people here think this could not happen to the US but I was mainly looking at this data to decide on how much international. I am currently thinking 20% but if a scenario like Japan can take US stocks down long term, cap weigitng the international market would be better I think, no?

Thanks.

I think it is possible for the US investors to experience a situation like Japan's investors. Of course you cannot know how long such an event might last. I see two options:

1. Continue to invest regularly as a buy and hold investor hoping the US doesn't experience the fate suffered by the Japanese investor.
2. Continue to invest regularly as a buy and hold investor hoping the US doesn't experience the fate suffered by the Japanese investor, but diversify portfolios with international holdings.

I am investing in option 2, though, honestly I do not hold a lot of international. My portfolio rework is a work in progress, however.

With respect to "buy and hold" working, or not working, I simply don't know what other strategy would provide better results. In retirement, I have a pretty good moat around our casa provided by bonds. The bonds allow me to sleep well at night and protects my portfolio from the market volatility. My AA is 50% bonds and 50% equities. The equities portion will have increasing international flavor, as I change holdings. Honestly, I am not thrilled holding international, but I believe it is good for my portfolio.

Broken Man 1999

[acegolfer]

1. Buy and hold in Japan would have resulted in loss but a smaller loss than other strategies.
2. Japan's lost decade can happen in U.S.
3. There was a thread about holding international and tilting to home. It may give you some insights.

[JBTX]

It obviously depends on when you bought and how long you held.

Buying and retiring right before the crash would have been painful.

If you had bought over 30-40 years and retired at the crash, you would have gotten some early accumulation at least, but you likely never recover most of the losses.

If you started at the crash and have DCAd in over the next 40 years you may have a small positive return.

If you invested your money internationally as well then you would have done much better.

[runner540]

Here's a good calculator for the Nikkei that includes dividend reinvestment and an inflation adjustment.
https://dqydj.com/nikkei-return-calcula ... nvestment/

For example, from June 1988 to June 2018 (30 years), the inflation adjusted annual (real) return (in yen, so no currency changes affecting it) was 0.045% per year. So basically no growth. If you had been taking out 4% a year for a 30 year retirement, you would be out of money.

This possibility is why my long term money is roughly 50/50 international/US. Don't forget that your non-financial assets are already weighted to the US if you live here (your career, social networks, language skills, house, etc.).

[rich126]

Well, the good news is at least inflation was minimal.
100 Yen on 6/1/88 went to 116 on 6/1/2018 so a total of 16% inflation.

Compared to the US
$100 -> $210.

Still would have been terrible.

http://fxtop.com/en/inflation-calculator.php

[acegolfer]

This possibility is why my long term money is roughly 50/50 international/US. Don't forget that your non-financial assets are already weighted to the US if you live here (your career, social networks, language skills, house, etc.).

+1
When I read BH, it seems many ppl separate non-financial assets (human capital, houses) from investment decisions.

[Random Walker]

I agree with the above poster that it has been more like a lost generation than a lost decade. The lessons I take from it are the following.
1. Yes it can happen here. So this is a reason to diversify geographically broadly. I’m 50% US/50% Int.
2. I believe value investors in Japan did significantly better than home country TSM investors. Good reason to tilt to value and in fact diversify across all the factors that drive equity returns.
3. Don’t be greedy. If one has profited big time from an extraordinary market run, take risk off the table, create a safe floor of bonds.

Dave

[Hyperborea]

There have been a few discussion on this already and a few of the main take aways from those are:

• Japan had a very low inflation over the years since the end of the bubble. There have been quite a number of years in that period with deflation.
• A Japanese investor who retired at the moment of the bubble didn't just take a big bag of money out of the bank and invest it all at once. They were investing for possibly 30 years or 40 years and so had an incredible runup in the value of their shares. Even after the drop at the end of the bubble they had far more than they put in.
• Couple that runup in prices above with a world diversified portfolio and the rebalancing from your appreciating Japanese stocks lets you buy foreign stocks with inflated Japanese stocks.

So, a Japanese retiree at the end of the bubble would be doing fine. Somebody younger might only have 10 or 20 years of investing in the market by the time of the crash. They would have the same benefits to their portfolio that the inflated Japanese stock prices gave with the rebalancing into a world portfolio. They would then have another 20+ years to continue investing.

The biggest lesson here is international diversification. Vanguard sure thinks so too but some bogleheads are adamantly opposed to doing that.

[beyou]

If I could have predicted Japan’s lost decade i would have shorted a japanese closed end fund back then. But we din’t know and never will.

[whodidntante]

There are market conditions that can make any strategy look stupid, or at least make it much more difficult for the investor to achieve desired targets. Buy and hold can and has lead to some gut wrenching drawdowns. You can believe that it will eventually come back. You might be right, but the market doesn't owe you a recovery. It can be much worse than lost decade(s). Some markets go to zero.

[AlphaLess]

While looking at Japan's history is sad, consider the factors that have caused it:
- lack of culture of innovation,
- lack of immigration,
- workers beholden to corporation (loyalty: #1 enemy of capitalism),
- overly high savings-rate mentality,
- cultural tilt against spending,
- low birthrate.

For better or worse, the USA is still leading in many of those aspects (although China is pushing very hard).

[InvestInPasta]

Why do they call it Japan lost decade?
It lost 30 years!
MSCI Japan today is still under the price it was in the 90s both in USD and in JPY.

A lost decade is nothing, the Dow lost 17 years in 1965-1982, and 25 years after the 1929 crash, it had a new maximun only in 1954.

Price only, nominal returns.

Good night and let's hope Bogle and Buffett are right, otherwise we better buy gold, many cans of pork and beans and a gun.

[typical.investor]

Here's a good calculator for the Nikkei that includes dividend reinvestment and an inflation adjustment.
https://dqydj.com/nikkei-return-calcula ... nvestment/

For example, from June 1988 to June 2018 (30 years), the inflation adjusted annual (real) return (in yen, so no currency changes affecting it) was 0.045% per year. So basically no growth. If you had been taking out 4% a year for a 30 year retirement, you would be out of money.

This possibility is why my long term money is roughly 50/50 international/US. Don't forget that your non-financial assets are already weighted to the US if you live here (your career, social networks, language skills, house, etc.).

Nice calculator.
1983 to 2018 (35 years) 6.613% (returns in USD)
CPI adjusted 3.820%

[arcticpineapplecorp.]

A lost decade is nothing, the Dow lost 17 years in 1965-1982, and 25 years after the 1929 crash, it had a new maximun only in 1954.

Price only, nominal returns.

You must be new here. Welcome to the group. This myth has been perpetrated so long, I'm not surprised so many people like you still believe it. You seem to know that the Dow is price only, rather than total return, and yet you're still spreading the myth. I'm not sure why. Since the Dow is not a growth index, but rather a price index which does not include the reinvestment of dividends, in and of itself, it tells you absolutely nothing.

The truth that I hope you will come to understand is the following:

“So when did the overall stock market really make it back to its pre-crash peak?” Hulbert asks. “Just four years and five months after its mid-1932 low, according to data provided … by Ibbotson Associates, a division of Morningstar.
source: http://blog.validea.com/the-great-depre ... very-myth/

That link in the above quote is a short article that explains why investors who bought and held would have recovered much more quickly than the actual Dow did. I hope you read it and stop spreading myths from now on.

[david1082b]

All investing involves risk of losing money and there is always the risk that the entire global portfolio of investments might lose money over the course of many decades. A global portfolio has often helped reduce single-nation risk and is the theory used to construct Vanguard's Target Retirement and Lifestrategy funds. iShares has its Allocation ETFs, e.g. $AOR is 60% global stocks 40% bonds.

[TN Bogle]

I'm fairly new to investing. Would this situation be alleviated anyway by holding bonds? I guess it would depend on what the yield is?

[AlohaJoe]

I was reading about Japan's lost decade, and looking at its current stock market prices, it seems like the market has still not recovered to its peak. Would that mean someone who was half way into his career would have lost most of the gains after crash and never recovered those?

Like almost all discussions about big stock crashes, this ignores a lot of the context which ends up making things look far worse than they were. Let's take your example in a big more detail and look at the years before the crash as well. The crash was in 1990 -- that's the year Japanese stocks lost -39%. Someone who was "half way into his career" at that point would be in their 40s. Let's call it 40, since that's a nice round number.

That means back in 1970 they were 20 years old and just starting work. Let's also say they started out with a salary of $12,800 a year (that's the equivalent of $50,000 in today's dollars; using Japanese CPI to deflate things). Let's also assume they never get any pay raises, just cost-of-living-adjustments to keep their salary flat -- again, to keep things simple.

In a situation like that someone might go, "Okay, I have 45 years until retirement. Historically stocks (in the US) have grown at ~6% (after inflation). So let's assume that'll be my returns over the next 45 years. If I save 14% of my paycheck then I'll have around $1 million in 45 years. Using the 4% rule-of-thumb that would give $40,000 a year to live on. $40,000 is 80% of my pre-retirement income. As a ballpark estimate all of that looks good! So I just save 14% of my paycheck every year and then my retirement is secured."

So how did reality match up with his plan?



You can see that the stock returns in Japan were so good in the 1970s and 1980s that even after the 1990 crash he was way ahead of his plan. He had more money at age 40 than he had expected to. So even after the crash his retirement is still (easily) on track. Even after the crash his portfolio is double what he expected it to be at age 40.

7 years later is the Asian Financial Crisis. This is the first time in 27 years -- including the crash of 1990-1992 -- where he might be a bit worried this his retirement is not on track any more. But let's assume he's a bit believer in "mean reversion". So he makes no adjustment to his retirement planning and just sits tight. Markets rebound and by the end of 1999 -- as he enters a new millennium -- his portfolio is back on track. He's actually $9,300 above where thought he'd be at this point.

So, 30 years into retirement. Your plan is still on track despite the massive Japanese crash of 1990-1992, despite another crash in 1997. It is a full decade since the 1990 crash and your retirement is still on track.

Does it feel like buy & hold failed them through that "lost decade"? Yes, he lost a lot of money in two crashes. But he also made a lot of money before those crashes..

The real problem for a Japanese investor wasn't so much the 1990-1992 crash. It was the 1990-1992 crash plus the 1997 Asian Financial Crisis plus the 2000 Dotcom crash plus the 2008 Global Financial Crisis. That's a -55% crash followed by 5 years later by -32% crash followed 1 year later by a -52% crash followed 5 years later by a -47% crash.

Treating all four of those crashes as the same thing obscures more than it illuminates. Yes, the 1990-2000 period was painful for a Japanese investor. But without the 2000 & 2008 crashes, they would have been fine. Likewise, the 2000 & 2008 crashes were painful but without the 1990 & 1997 crashes they would have been fine.

Heck, just take out the 1997 Asian Crisis (which in retrospect was so minor compared to other crashes that most people probably don't even remember it unless prompted) and the Japanese investor would be totally fine.

Now, obviously there's no law of nature saying a US investor can't also have four massive crashes in close proximity to one another. But when you look at the gains before the crashes, things look less dire. And when you realise we're talking about four separate crashes -- not just one -- then you also gain a better understanding of what confluence of events is required.

[alfaspider]

I agree with the above poster that it has been more like a lost generation than a lost decade. The lessons I take from it are the following.
1. Yes it can happen here. So this is a reason to diversify geographically broadly. I’m 50% US/50% Int.
2. I believe value investors in Japan did significantly better than home country TSM investors. Good reason to tilt to value and in fact diversify across all the factors that drive equity returns.
3. Don’t be greedy. If one has profited big time from an extraordinary market run, take risk off the table, create a safe floor of bonds.

Dave

I agree that it can happen here, but one concern I have is that if it DOES happen, then international allocations won't be as helpful as they might have been to our hypothetical Japanese investor. The problem is that the U.S. is such a dominant market, that if it falters, the rest of the world is likely to falter as well. Japan is a much smaller market on a relative basis.

[AlohaJoe]

The problem is that the U.S. is such a dominant market, that if it falters, the rest of the world is likely to falter as well. Japan is a much smaller market on a relative basis.

Er? This shows a lack of understanding of what Japan was like in the 1980s. By 1989 Japan made up 45% of the global market capitalization. (More than the US at that time.) Today the US makes up around 53%. Unless the argument is that there's some magic line where 45% is "too small to affect much" but the extra 8% means "the rest of the world is likely to falter as well"?

At the time the Osaka stock exchange had displaced the London stock exchange for 3rd place (behind Tokyo and New York).

Japanese banks supplied 20% of all credit in the state of California.

Japanese investors determined the price of US bond auctions. (The Brady presidential task force on the October 1987 crash found that Japanese dumping of treasures on October 14th drove yields on 30-year bonds over 10%.)

Japan was the largest source of capital in the world (especially after the 1985 currency adjustments in the US, Japan, and Germany.) Japan provided 65% of all financing to Asia.

Today, the US-China trade imbalance is around $360 billion dollars and (some) people are concerned about it. In the 1980s the US-Japan trade imbalance was $750 billion (in 2016 dollars, to make it an apples-to-apples comparison).

Nomura Securities had enough capital to buy every single Wall Street bank you know the name of.

In 1989, 8 of the top 10 companies in the world were Japanese. Only 1 American company was in the top 10. (ExxonMobile.) A single Japanese company -- NTT -- was worth more than the six biggest US companies combined.

In 1989, the top 3 companies for US patents were all Japanese companies. That's right, Japanese companies got (vastly) more US patents than American companies.

Japan was not a smaller market on a relative basis and it definitely wasn't a "much smaller market". It was approximately the same size as the US is today. When I read about Japan in the 1980s I am reminded of two things:

1. Japan was dominant economically in the same way the US is today. We may try to downplay it and pretend the US today is vastly more outsized than Japan was in the 1980s but it just isn't true. We always want to assume our current lived experience is more unique than it is.

2. Yes, Japan had many problems. And basically no one saw them. They are clear in hindsight, sure. Can you name a single famous investor who made billions (or trillions) whose reputation was made by making the right call on a Japanese equity bubble? History is often like that -- what seems obvious in retrospect is completely invisible to people at the time. We are not really capable of seeing where the seeds of our downfall lay.

[alfaspider]

The problem is that the U.S. is such a dominant market, that if it falters, the rest of the world is likely to falter as well. Japan is a much smaller market on a relative basis.

Er? This shows a lack of understanding of what Japan was like in the 1980s. By 1989 Japan made up 45% of the global market capitalization. (More than the US at that time.) Today the US makes up around 53%. Unless the argument is that there's some magic line where 45% is "too small to affect much" but the extra 8% means "the rest of the world is likely to falter as well"?
seems obvious in retrospect is completely invisible to people at the time. We are not really capable of seeing where the seeds of our downfall lay.

Point taken, but that just shows how much of a bubble Japan's market was relative to its GDP. In 1989, Japan's GDP was 3 trillion.The U.S. had a GDP of 5.5 Trillion. Yet Japan had a larger share of global market cap? It's real economy was nowhere near as dominant as the U.S. I think a big reason why the Japanese crash didn't tank the U.S. markets was that the real economy wasn't nearly as interconnected as the financial markets.

By contrast, the U.S. GDP today is still larger than the entire E.U. put together (19 vs 17T). China, with a wild-west stock market, is the only other player that even factors at (12T). Both the E.U. and Chinese economies are highly interconnected with that of the U.S. I think both the Chinese and E.U. markets would be highly likely to crash if the U.S. pulled a Japan. And in fact, 2008 crisis did quickly spread to the EU.

[asif408]

I think what many don't realize is that the Japanese stock market outperformed the US stock market (and most other stock markets around the world) dramatically throughout the 1970s and 1980s: https://finance.yahoo.com/chart/%5EN225 ... In19XX0%3D. There was no "lost decade" in the 1970s in Japan like there was in the US.

So it wasn't so bad if you started investing in Japan in the 1970s or early 1980s, but if you jumped on board in the late 1980s then, yes, you did really bad up to today. The real takeaway is if you want to avoid a really bad scenario where your money is concentrated in one country, better to have a healthy dose of investments in many countries, and not be concentrated in a stock market that has outperformed all other stock markets dramatically over the last decade or two. This won't necessarily give you the best return, but it will eliminate the potential for very poor returns.

[H-Town]

I follow the bogleheads philosophy of buy and hold long term. The beauty is it takes the worrying about the day to day prices out of the picture, which I love. The market always goes up.

I was reading about Japan's lost decade, and looking at its current stock market prices, it seems like the market has still not recovered to its peak. Would that mean someone who was half way into his career would have lost most of the gains after crash and never recovered those?

I was trying or find a portfolio visualizer equivalent to check the returns for the worst market timer for Japan but could not. I read somewhere that due to the policy changes, deflation etc in the end for long term investors it was not that bad. Is that right?

I was just wondering if this is a case where buy and hold would not have worked. I know a lot of people here think this could not happen to the US but I was mainly looking at this data to decide on how much international. I am currently thinking 20% but if a scenario like Japan can take US stocks down long term, cap weigitng the international market would be better I think, no?

Thanks.

There is always a risk when you invest. On every investment product, there is an asterisk stating to the effect that you might lose your principal money.

Will a Japanese type of crash happen in the U.S. market? Maybe, maybe not. If it happens, what can you do about it? I will affect many people in the U.S. (including the one-percenters, federal pensions, etc.) and globally as well. Again, what can you do about it? With this type of black swan event, just accept it and keep on living.

I wouldn't lose sleep about the potential of such black swan event either. If I can build a house and a fire took it away, I can always start again from scratch.

[financeperchance]

Over the course of a 30-year career, when you're investing money each month, you did fine.

For example, the money you put in:
1) In September 1993 has returned 1.6% compounded each year, adjusted for inflation.
2) In September 1998 has returned 4.0% compounded each year, adjusted for inflation.
3) In September 2003 has returned 6.9% compounded each year, adjusted for inflation.
4) In September 2008 has returned 8.7% compounded each year, adjusted for inflation.
...etc.

In the real world, you don't just put a massive lump sum in at the very top of the market and then watch it shrivel. Instead you get your paycheck and dollar cost average in.

It would be interesting to do a 30-year spreadsheet starting in 1988 to today, with $1,000 a month (or whatever) placed into the Nikkei. I think you'll find you actually would have been okay.

[financeperchance]

I'm fairly new to investing. Would this situation be alleviated anyway by holding bonds?

Correct, that's the point of bonds. When stocks are crashing, bonds go up, historically.

[Hyperborea]

I'm fairly new to investing. Would this situation be alleviated anyway by holding bonds?

Correct, that's the point of bonds. When stocks are crashing, bonds go up, historically.

Actually, it depends. If you had held bonds instead of Japanese stocks on the way up then the drag on the portfolio would have been more than the cushion on the way down. Bonds are fine at damping short term volatility in the portfolio but not great for the long run. So, add some bonds a certain number of years before you retire if you can't deal with a variable retirement date. Add some bonds for the first 5-10 years after retiring to help reduce a bad sequence of returns. But other than that, in a retirement portfolio you shouldn't be too weighted towards bonds - maybe 20% or lower after the first 5-10 years.

[asif408]

Here's a timely article: https://pensionpartners.com/the-nikkei-straw-man/

[sperry8]

Here's a timely article: https://pensionpartners.com/the-nikkei-straw-man/

Agreed, was just reading it as well.

Seems most people who perpetuate the "lost decade" do so without including dividend reinvestment and assumes you only held Japan. Both unwise moves... diversify!

[AlohaJoe]

It would be interesting to do a 30-year spreadsheet starting in 1988 to today, with $1,000 a month (or whatever) placed into the Nikkei. I think you'll find you actually would have been okay.

I don't think many people would call it "okay". If you invested $1,000 a month ($12,000 a year, using 2016 dollars -- I only went up to 2016 because I haven't bothered to update with 2017 numbers) then after 28 years of investing you'd have $542,899. That's after putting in $334,862 of your own money. That's an annualised return of just 1.7% a year. I mean...you've still got a half million dollars. So you aren't living on the street or anything. But you also don't exactly have a lot to show for 28 years of investing in the Nikkei.

[bhsince87]

Speaking of bonds, has anyone ever seen an analysis of the outcome if an investor had been in a 60/40 (or similar) Japanese stock/bond portfolio?

[GAAP]

Here's a timely article: https://pensionpartners.com/the-nikkei-straw-man/

Agreed, was just reading it as well.

Seems most people who perpetuate the "lost decade" do so without including dividend reinvestment and assumes you only held Japan. Both unwise moves... diversify!

And yet so many here only hold USA...

[acegolfer]

Here's a timely article: https://pensionpartners.com/the-nikkei-straw-man/

Agreed, was just reading it as well.

Seems most people who perpetuate the "lost decade" do so without including dividend reinvestment and assumes you only held Japan. Both unwise moves... diversify!

And yet so many here only hold USA...

and assume the US market will always go up in the long run because of USA.

[GAAP]

Here's a timely article: https://pensionpartners.com/the-nikkei-straw-man/

Agreed, was just reading it as well.

Seems most people who perpetuate the "lost decade" do so without including dividend reinvestment and assumes you only held Japan. Both unwise moves... diversify!

And yet so many here only hold USA...

and assume the US market will always go up in the long run because of USA.

Things will continue to get better -- until they don't...

There are multiple reasons that I market weight world equities, not a single economy.

[financeperchance]

It would be interesting to do a 30-year spreadsheet starting in 1988 to today, with $1,000 a month (or whatever) placed into the Nikkei. I think you'll find you actually would have been okay.

I don't think many people would call it "okay". If you invested $1,000 a month ($12,000 a year, using 2016 dollars -- I only went up to 2016 because I haven't bothered to update with 2017 numbers) then after 28 years of investing you'd have $542,899. That's after putting in $334,862 of your own money. That's an annualised return of just 1.7% a year. I mean...you've still got a half million dollars. So you aren't living on the street or anything. But you also don't exactly have a lot to show for 28 years of investing in the Nikkei.

Yeah that's true, thanks for doing that work. I was very curious about that. Any chance you can upload it to Google Sheets? I'd very much love to see it.

[financeperchance]

I'm fairly new to investing. Would this situation be alleviated anyway by holding bonds?

Correct, that's the point of bonds. When stocks are crashing, bonds go up, historically.

Actually, it depends. If you had held bonds instead of Japanese stocks on the way up then the drag on the portfolio would have been more than the cushion on the way down. Bonds are fine at damping short term volatility in the portfolio but not great for the long run. So, add some bonds a certain number of years before you retire if you can't deal with a variable retirement date. Add some bonds for the first 5-10 years after retiring to help reduce a bad sequence of returns. But other than that, in a retirement portfolio you shouldn't be too weighted towards bonds - maybe 20% or lower after the first 5-10 years.

I think what you say is true in most times and places, but what about for a 55 year-old Japanese worker in 1989 with a portfolio equivalent to $1 million in 2018 US dollars?

I think that's the whole point, that we can't predict the future. So that's why bonds.

So we'll just have to agree to disagree on that one. Cheers.

[Hyperborea]

It would be interesting to do a 30-year spreadsheet starting in 1988 to today, with $1,000 a month (or whatever) placed into the Nikkei. I think you'll find you actually would have been okay.

I don't think many people would call it "okay". If you invested $1,000 a month ($12,000 a year, using 2016 dollars -- I only went up to 2016 because I haven't bothered to update with 2017 numbers) then after 28 years of investing you'd have $542,899. That's after putting in $334,862 of your own money. That's an annualised return of just 1.7% a year. I mean...you've still got a half million dollars. So you aren't living on the street or anything. But you also don't exactly have a lot to show for 28 years of investing in the Nikkei.

It's not great and one would have done better by holding a world equity portfolio or perhaps one with a small tilt to home country. However, given that inflation has been close to zero over that whole time with periods of deflation and that domestic bank accounts and safe bonds pay out close to zero it's not as bad as it appears (though it is not great).



Edit: I just read the article linked earlier in this thread - https://pensionpartners.com/the-nikkei-straw-man/

Interestingly, their claim is that the return isn't as bad as you have calculated. They get 4.2% from December 1989 over the next 28 years. That's a pretty decent return since that's not just the nominal return but pretty much the real return too.

Let’s say someone in Japan was just starting their career in December 1989 (the worst timing imaginable), and started dollar-cost-averaging into the Nikkei, continuing until today. 28 years later, they would have an annualized return of 4.2% (versus -0.8% for the lump sum). Not fantastic, but not nearly as disastrous as the lump sum argument.

[Hyperborea]

I'm fairly new to investing. Would this situation be alleviated anyway by holding bonds?

Correct, that's the point of bonds. When stocks are crashing, bonds go up, historically.

Actually, it depends. If you had held bonds instead of Japanese stocks on the way up then the drag on the portfolio would have been more than the cushion on the way down. Bonds are fine at damping short term volatility in the portfolio but not great for the long run. So, add some bonds a certain number of years before you retire if you can't deal with a variable retirement date. Add some bonds for the first 5-10 years after retiring to help reduce a bad sequence of returns. But other than that, in a retirement portfolio you shouldn't be too weighted towards bonds - maybe 20% or lower after the first 5-10 years.

I think what you say is true in most times and places, but what about for a 55 year-old Japanese worker in 1989 with a portfolio equivalent to $1 million in 2018 US dollars?

I think that's the whole point, that we can't predict the future. So that's why bonds.

So we'll just have to agree to disagree on that one. Cheers.

The problem with most of these scenarios of heavy stock versus light stock investing for retiring is the false equivalence. The assumptions always go like this, assume that Sato-san had a million dollar portfolio with a 50/50 allocation and that Tanaka-san had a million dollar portfolio with an 80/20 or even 100/0 allocation when they are both the same age. Where would they both be when the collapse happens? Well, Sato-san and Tanaka-san in that case were not saving and investing the same amount of money then because if they were Tanaka-san would have had a much larger portfolio than Sato-san on the run up. You can't ignore the benefit of the extra run up and then invoke the greater drop that heavier stock allocations can have.

Now, if both of those fellows had been keeping the apparently un-Boglehead world diversified (even partially) portfolio then the drop wouldn't have hurt them as much. Further, if both had been desiring to retire at a fixed date (very common in Japan with very, very few early retirees) then they would have already been on the glide path to more bonds by that age.

[UpsetRaptor]

For those considering the likelihood of Japan's lost decade to replicate in current markets, bear in mind that Japan had CAGR > 20% OVER FORTY YEARS leading into the lost decade.

[Toons]

Yes I think So.
Corporation Earnings Will Continue To Grow.

[reformed.trader]

Dont just invest in the US. Invest globally and in different asset classes(bonds, reinsurance, real estate, gold etc). Highly unlikely you do not experience any gains on a diversified portfolio.

Better yet, mix the above with avoiding assets that are expensive(ie US stocks, negatively yielding sovereigns).

[AlohaJoe]

It would be interesting to do a 30-year spreadsheet starting in 1988 to today, with $1,000 a month (or whatever) placed into the Nikkei. I think you'll find you actually would have been okay.

I don't think many people would call it "okay". If you invested $1,000 a month ($12,000 a year, using 2016 dollars -- I only went up to 2016 because I haven't bothered to update with 2017 numbers) then after 28 years of investing you'd have $542,899. That's after putting in $334,862 of your own money. That's an annualised return of just 1.7% a year. I mean...you've still got a half million dollars. So you aren't living on the street or anything. But you also don't exactly have a lot to show for 28 years of investing in the Nikkei.

Yeah that's true, thanks for doing that work. I was very curious about that. Any chance you can upload it to Google Sheets? I'd very much love to see it.

https://docs.google.com/spreadsheets/d/ ... sp=sharing

[financeperchance]

Amazing, thank you AlohaJoe

[BogleMelon]

Some markets go to zero.

If that happen here, can I buy infinite amount of VTSMX at a price of $1?

[whodidntante]

Some markets go to zero.

If that happen here, can I buy infinite amount of VTSMX at a price of $1?

I think we might have other problems in that event. But you don't have to wait for economic collapse to own a lot of shares. Fidelity just announced a 10 to 1 split on some of their funds.

[vitaflo]

For example, from June 1988 to June 2018 (30 years), the inflation adjusted annual (real) return (in yen, so no currency changes affecting it) was 0.045% per year. So basically no growth. If you had been taking out 4% a year for a 30 year retirement, you would be out of money.

There was a link in an older thread somewhere that showed the worst 30 year returns for multiple countries, including Japan, and then showed what the returns would have been if you had held market weight internationally. If you had done market weight international in Japan your real return would have been 2.2%.

Still below the 4% rule but certainly better than having had all your eggs in the Japanese basket.

[bhsince87]

For example, from June 1988 to June 2018 (30 years), the inflation adjusted annual (real) return (in yen, so no currency changes affecting it) was 0.045% per year. So basically no growth. If you had been taking out 4% a year for a 30 year retirement, you would be out of money.

There was a link in an older thread somewhere that showed the worst 30 year returns for multiple countries, including Japan, and then showed what the returns would have been if you had held market weight internationally. If you had done market weight international in Japan your real return would have been 2.2%.

Still below the 4% rule but certainly better than having had all your eggs in the Japanese basket.

Actually, even if returns were as calculated by AlohaJoe, 1.7% real, then the 4% rule would have worked just fine. My math gives me about 43 years at that rate (might be off, been a rough day...)

Plus government bonds look like they did well in local currencies too.

[InvestInPasta]

A lost decade is nothing, the Dow lost 17 years in 1965-1982, and 25 years after the 1929 crash, it had a new maximun only in 1954.

Price only, nominal returns.

You must be new here. Welcome to the group. This myth has been perpetrated so long, I'm not surprised so many people like you still believe it. You seem to know that the Dow is price only, rather than total return, and yet you're still spreading the myth. I'm not sure why. Since the Dow is not a growth index, but rather a price index which does not include the reinvestment of dividends, in and of itself, it tells you absolutely nothing.

The truth that I hope you will come to understand is the following:

“So when did the overall stock market really make it back to its pre-crash peak?” Hulbert asks. “Just four years and five months after its mid-1932 low, according to data provided … by Ibbotson Associates, a division of Morningstar.
source: http://blog.validea.com/the-great-depre ... very-myth/

That link in the above quote is a short article that explains why investors who bought and held would have recovered much more quickly than the actual Dow did. I hope you read it and stop spreading myths from now on.

Beware of what you take for the truth.

The article is absolute nonsense, for the following reasons:


1) Dow returns including dividends are freely available online here
Anyone can see that from 1929 the Dow took to recover:

• 25 years (until 1954) - price only not counting inflation (nominal return)
• 21 years (until 1950) - dividend included and counting inflation (real return)

By no means the market recovered in 4-5 years (mid 1934) as Mr Hulbert seem to think.


2) According to Hulbert the market recovered in 4-5 years because the Dow did not represent well the market and investors should have bought IBM.
LOL!
The Dow started in 1896, it exists for real, it's unbelievable to find someone who writes that an investor should have bought a bit of IBM, in order to justify his ridicolous ideas.
Yeah with the benefit of hindsight I would have bought more Amazon in 2009 to quadruple the returns of my S&P500 portfolio.


3) Even pretending for a while that the Dow did not represent well Wall Street, we could use the S&P500 (reconstrucred data, the S&P500 started only in 1957).
But from 1929, even the S&P500 took to recover 16 years (until 1945) - dividend included and counting inflation (real return).
And by no means it recovered after 4-5 years.

[Stormbringer]

The S&P 500 hit an all-time high of 1,552 in March, 2000. It hit a new all-time high of 1,589 in April, 2013. Nasdaq took even longer.

So we've already had a lost decade (plus 3 years). I think people did fine.

[rgs92]

I have often heard Mr. Bogle say that the foundation of his investing philosophy is belief in the ongoing strength of the American economy, such that the proper holding period in the S&P 500 index is "forever."

So if you you are going to follow the Boglehead way, you need to have this faith. In the long run, the index will go up and up indefinitely, and certainly go up a great deal over a normal person's investment horizon, which is at least several decades.

It's all about the greatness of the American business universe as a whole, and if you don't accept this, you are not accepting the Bogle way.
So you follow the path of doubting the success of American corporations in aggregate at your peril.

These are strong words, but that is the core belief behind everything that Vanguard and this site stand for.

So I invest on the assumption that what happened in Japan will not happen here. I always have.

(Can I prove this, no; it's a matter of faith. But I feel I have to take some sort of a stand on things and invest accordingly, and then relax and sleep well. And so far, so good. I'm a Believer I guess, like Neil Diamond wrote.)

[AlohaJoe]

For example, from June 1988 to June 2018 (30 years), the inflation adjusted annual (real) return (in yen, so no currency changes affecting it) was 0.045% per year. So basically no growth. If you had been taking out 4% a year for a 30 year retirement, you would be out of money.

There was a link in an older thread somewhere that showed the worst 30 year returns for multiple countries, including Japan, and then showed what the returns would have been if you had held market weight internationally. If you had done market weight international in Japan your real return would have been 2.2%.

Still below the 4% rule but certainly better than having had all your eggs in the Japanese basket.

Actually, even if returns were as calculated by AlohaJoe, 1.7% real, then the 4% rule would have worked just fine. My math gives me about 43 years at that rate (might be off, been a rough day...)

You can't use average returns like that, since it doesn't take into account the sequence of returns. 4% didn't work in Japan with 100% equities. I think siamond has a few articles on it on the Bogleheads Blog: https://finpage.blog/