Investing for Japan-style future

[dallas27]

One of my fears for the US market is a Japan-style 20 year stagnation as Asia and other countries come to the forefront of the world economy. If you believe this is impossible for the US, I won't argue, but please suspend disbelief within this thread if you can.

My Question is, what could a Japanese investor in equites do to hedge that scenario, and more importantly what should the US investor do.

I operate on the gut feeling (but not enough knowledge) that having 50% of my equities non-US is at least partly a strategy to hedge away US long term underperformance. Half of that non-US allocation is in Developed markets, the other half emerging.

Can anyone speak to the good/bad of this strategy for a future where the US in the next 20-30 years looks a lot like Japan of the last 20-30? Or maybe some Nikkei indices that I could use to back test it?

 

[bingybear]

This thought was real strong in the last down turn. At that time it likely would not have worked out so well.
If you look at the nikkei 225 it dropped about 1990 and oscillated since then at lower levels. So one may do well with a momentum investing process in the US or as you suggest investing outside the US if the US becomes japan like (90's til now.)
The questions are can you pick the right countries and do you hedge currency.

I'm going with your hypothetical. I'm not endorsing it.

 

[Blue Collar Guy]

Wait?! Japan including dividends and such has been sideways- going down since 1990? OMG, I just looked at a chart. So I would say a 3 % withdrawal rate for them would have already made them all broke. Can some one tell me what happened to those retirees?

 

[OldShooter]

One of my fears for the US market is a Japan-style 20 year stagnation as Asia and other countries come to the forefront of the world economy. If you believe this is impossible for the US, I won't argue, but please suspend disbelief within this thread if you can.

My Question is, what could a Japanese investor in equites do to hedge that scenario, and more importantly what should the US investor do.

I operate on the gut feeling (but not enough knowledge) that having 50% of my equities non-US is at least partly a strategy to hedge away US long term underperformance. Half of that non-US allocation is in Developed markets, the other half emerging.

Can anyone speak to the good/bad of this strategy for a future where the US in the next 20-30 years looks a lot like Japan of the last 20-30? Or maybe some Nikkei indices that I could use to back test it?

Fama, French, et al would give the same advice to the Japanese and to you: "Hold the [total] market portfolio." IOW, do not invest with a home country or any other bias. Had a Japanese investor been smart enough to hold the same % in Japanese equities as Japan's % of worldwide equities, he would have had a fairly nice ride. In your case, 50% US total market about matches the US roughly 50% of the total world market, but you are making sector bets with your non-US portfolio. They would advise that is not as good a strategy as buying a total non-US fund.

There are arguments for "tilts" but I'll not go into that here.

 

[dallas27]

Fama, French, et al would give the same advice to the Japanese and to you: "Hold the [total] market portfolio." IOW, do not invest with a home country or any other bias. Had a Japanese investor been smart enough to hold the same % in Japanese equities as Japan's % of worldwide equities, he would have had a fairly nice ride. In your case, 50% US total market about matches the US roughly 50% of the total world market, but you are making sector bets with your non-US portfolio. They would advise that is not as good a strategy as buying a total non-US fund.

There are arguments for "tilts" but I'll not go into that here.

Probably the simplest and most useful perspective. I always think of fama-french in the local market sense, which just shows my cognitive bias and misapplication of the theory.

 

[OldShooter]

Probably the simplest and most useful perspective. I always think of fama-french in the local market sense, which just shows my cognitive bias and misapplication of the theory.

Here is Fama in a wide-ranging interview. It's well worth the half hour it will cost you: https://www.top1000funds.com/featured-homepage-posts/2015/12/11/investors-from-the-moon-fama/ This is one of my favorites.

Here is French on home country bias: https://famafrench.dimensional.com/videos/home-bias.aspx It's also very good but, interestingly IIRC he ducks the question of how much home country bias he has in his personal portfolio.

Both of these are linked from this page: https://famafrench.dimensional.com/videos.aspx It has quite a number of worthwhile videos, many of them only five or six minutes.

& obviously I have drunk the kool-aid. Not based on faith, however, but based on analytical arguments and historical statistics.

 

[Lsbcal]

...
My Question is, what could a Japanese investor in equites do to hedge that scenario, and more importantly what should the US investor do.
...

The Japanese investor could decide to take a good portion of the portfolio and use an intermediate term trend following approach to move money between a Japanese index fund and an international unhedged index fund. For example, use the Nikkei index and a large cap international fund like VFWAX. Only move on an end of month comparison basis.

I won't suggest exactly how this momentum approach would be done as that is homework for the truly interested investor. The data is available publicly to backtest such an approach. Hint: consider comparing the returns over a suitable intermediate period. For a US investor, a comparable choice might be the SP500 and VFWAX.

Such a market timing approach should be used in a tax deferred account. It requires a long term dedication which few would really enjoy. It requires patience as there will be periods of positive and negative tracking error.

 

[marko]

I'm not suggesting it's not possible but curious as to why you suspect it might be.

 

[Lsbcal]

I'm not suggesting it's not possible but curious as to why you suspect it might be.

Marko, are you asking me or someone else on this thread? If me, it is because I've been doing this sort of thing for several years.

 

[marko]

Marko, are you asking me or someone else on this thread? If me, it is because I've been doing this sort of thing for several years.

Sorry. I was asking the OP

 

[brewer12345]

Investments in emerging markets and 30 year treasuries would probably have been the best idea. But best lay in a supply of razor wire, MREs and ammo if you think this scenario is likely. Merkins are not as stoic as the Japanese.


The outcome that worries me a lot more is stagflation.

 

[NW-Bound]

I just checked, and for the past 10 years the US stock market has doubled in nominal terms, but the rest of the world just barely matched inflation. You can just look at VFWAX that Lsbcal mentioned, and VEMAX (Vanguard Emerging Index) to compare them with VFIAX (S&P).

Man, 10 years is a long time, and I do have significant international equities. Is it time for the pendulum to swing the other way, or is it going to take a few more years?

 

[dallas27]

I just checked, and for the past 10 years the US stock market has doubled in nominal terms, but the rest of the world just barely matched inflation. You can just look at VFWAX that Lsbcal mentioned, and VEMAX (Vanguard Emerging Index) to compare them with VFIAX (S&P).

Man, 10 years is a long time, and I do have significant international equities. Is it time for the pendulum to swing the other way, or is it going to take a few more years?

Historically, US tends to outperform or underperform EM in rather long cycles of 10-20 years, and certainly there's some belief we are just about flip from US to EM after a long stretch of outperforming them.

I'm not suggesting it's not possible but curious as to why you suspect it might be.

Not getting your question exactly, could you restate?

 

[marko]

Historically, US tends to outperform or underperform EM in rather long cycles of 10-20 years, and certainly there's some belief we are just about flip from US to EM after a long stretch of outperforming them.




Not getting your question exactly, could you restate?

My question was "what makes you feel that the US could be headed toward a Japan-like stagnation?" It is possible I suppose but why do you think it might be headed that way?

 

[dallas27]

My question was "what makes you feel that the US could be headed toward a Japan-like stagnation?" It is possible I suppose but why do you think it might be headed that way?

I don't firmly believe that we will head that way. However, I do also think it is in the realm of possible futures. I simply want to at least partially hedge for for it.

Probably the only way we could reasonably end up in a full japan style situation is of immigration stops or is shut down. That will throw off our demo's and make our population age stats look very much like japan's. simultaneously, we would start having trouble maintaining rates and economic power as younger nations mature their capitalistic institutions. Remember, less than 100 years ago the US was an emerging market that heavily invested in education and infrastructure via capitalism to come to dominate the world. Now most of asia is doing just that and producing far more post grads than we are. Their tech ramps are much shorter than ours was.

 

[Lsbcal]

I just checked, and for the past 10 years the US stock market has doubled in nominal terms, but the rest of the world just barely matched inflation. You can just look at VFWAX that Lsbcal mentioned, and VEMAX (Vanguard Emerging Index) to compare them with VFIAX (S&P).

Man, 10 years is a long time, and I do have significant international equities. Is it time for the pendulum to swing the other way, or is it going to take a few more years?

FWIW, a few months ago my mechanical system had me moving to Vfwax from Vfiax. Next month who knows.

I don't trade emerging markets like Veiex because they are so volatile.

 

[Totoro]

One of my fears for the US market is a Japan-style 20 year stagnation as Asia and other countries come to the forefront of the world economy. If you believe this is impossible for the US, I won't argue, but please suspend disbelief within this thread if you can.

Your answer is in the statement: invest in the world. Incidentally, US-listed companies are already diversified geographically, especially the S&P 500. Or do vanguard VT, that's what's there for.


Your bigger fear should be what if the world starts stagnating .. no more places to run to.

 

[NW-Bound]

FWIW, a few months ago my mechanical system had me moving to Vfwax from Vfiax. Next month who knows.

I don't trade emerging markets like Veiex because they are so volatile.

Should volatile stocks not be preferable to traders? More ups and downs, more chance to make money?

I do not hold much MF anymore, but their ETF counterparts so I can buy/sell during the day if I so desire. But mostly, I like to hold ETFs so I can write covered calls against them.

 

[Lsbcal]

It depends on ones trading methods as to whether volatility is desirable. I look for methods that require maybe 1 trade per year and back test well over 25 years.

 

[marko]

I could be completely out in the weeds here but to me you bet against the US market at your own peril.
IMO Hedging against something like this is a bit like putting all your eggs in gold bullion.
Yes, something might happen but you run a bigger risk of missing out on a nice bull run (my neighbor sold everything on the third week of Feb, 2009 and has been waiting for a jump-in point ever since)

 

[Ed_The_Gypsy]

IIRC, Japanese cannot buy foreign equities.

 

[Lsbcal]

IIRC, Japanese cannot buy foreign equities.

Interesting!
Can they buy through an intermediate instrument such as a mutual fund?

 

[Rambler]

Interesting!
Can they buy through an intermediate instrument such as a mutual fund?

Nonsense. Of course they can. When I lived there, I didnt own any US equities directly (via a Japanese bank...I did have US and Swiss equities in US and Swiss banks) but I knew of people who did, and I did own a mutual fund invested solely in US equities. This was invested thru a Japanese securities house that was a customer of mine...and in Japan, reciprocity is expected. So, I invested a portion of one of my bonuses with them...$20k or so.

 

[Totoro]

Must be thinking of China capital controls. Even then, it was/is more about us not being able to buy Chinese companies than vice versa.

 

[socca]

Your bigger fear should be what if the world starts stagnating .. no more places to run to.

What if Planet Earth is like a morbidly obese person who has begun to suffer the adverse health consequences of their obesity and is surrounded by doctors who argue vociferously among themselves about the best way to promote weight gain in their dear patient?

There is a tiny corner of the economics profession that deals with this issue: Ecological economics. However, this topic seems to be of zero interest among the power brokers who run today's world.