A Real Passive Allocation involves Bonds as well. How Japan's Bonds balances up their Poor 20 year Equity Returns | Investment Moats Skip to Content

A Real Passive Allocation involves Bonds as well. How Japan’s Bonds balances up their Poor 20 year Equity Returns

I enjoy financial blogger Cullen Roche’s work at Pragmatic Capitalism a lot. What I enjoyed the most is of him trying his best to take a common narrative that is popular in the media and provide a fresh perspective.

Put it another way, he often offers an alternative thought to the common narrative, without being seen as a bear or fear monger.

It is when you hear his explanation of some deeper economic topics such as the world printing money, gold and such that you appreciate a fresh perspective that is not too slanted.

The passive investors will not be happy when he describes their approach to be not reflective of the total market for one important reason: bonds and debts make up a large part of the world’s net worth on top of equity.

In his recent article, he decides to put the microscope on Japan.

As most of us are aware, since 1989, Japan’s equity have endured what is a 25 year old bear market, where prices are still below that high. The common narrative is to use the Japan case study to answer: What if you invest in one country and that country exhibits the same issues as Japan. How would your retirement look like then?

Cullen’s argument is that, like many of the indexing speak, much of the narrative is on the volatile equity markets in the home country, while we tend to ignore that of the debt markets.

Bonds are traditionally less correlated with equities, but have a positive expected return in the long run. Therefore, they make good diversifier in our portfolio.

Problem is that for individual stock pickers or even indexing folks, they tend to be ignored.

In the case of Japan, the performance of the JGB over this 25 years have been 4.9%/yr. This gives a 60% equity and 40% bond portfolio a 2%/yr return over the period.

The result improves further if we introduce a MSCI World Index fund into the equity mix. So the allocation is 30% Topix,  30% MSCI All World Ex-Japan and 40% 10 Yr JGBs.

That will generate a 5.2%/yr annual growth rate.

The key takeaway for myself was that, I have also buy into the idea that some countries will end up with a profile similar to Japan, and that would not be good for the investors who have an extremely strong home country bias.

My solution to that scenario would be to have a world stock index equity allocation added to the home equity index. What I omit is the role of the bond in that allocation.

It is probably why the Bogleheads advocate the simplest portfolio is one where it includes a home equity index, an international index and a home bond index.

You can read Cullen’s article here: The Importance of Global Asset Allocation – Japan Edition

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