Big in Japan
Key Takeaways
Japanese stocks are a current hot topic as it is one of the top performing markets globally.
Peering into history however, shows a different story — an investment into the Japanese stock market since 1994 would only have broken even only 22 years later (with dividends).
It’s easy to be caught up with what’s happening currently, but don’t let our inherent recency bias prevent us from assessing the bigger picture.
Popular trends and themes have always been around in any given time period, be aware that most of them will have their time in the sun and then fade into history.
I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one or two of 'em go up big time, you produce a fabulous result.
It is no secret that Singaporeans love all things Japanese. A CNA travel writer alluded to the country having something for everyone — be it the foodie on their quest to find the best sushi or ramen, the culturist in search of a unique festival or event, the nature lover who enjoys the scenic treks and mountains, or even the anime and manga enthusiast. Even our DPM Lawrence Wong waded into the discussion by suggesting that Singaporeans should consider going to Japan to work or study.
However, something that has not featured in discussions for many years was the Japanese stock market — only recently has it started to make the news.
You can see why more investors are interested in looking to Japan as a place to invest their money. The returns this year have outpaced a globally diversified stock market index — a very similar diversified approach used on our core portfolios, as seen in the chart below (10% vs. 8.9% at the time of writing).
Looking back to history, the Japanese stock market is an important talking point: not for the good returns it is currently giving, but instead for the fact that it had gone for decades without a positive return. The Japanese asset price bubble burst in the early 90’s, and investors who had invested near the peaks would have suffered for many years.
The chart below shows S$1 invested in globally diversified stocks versus the Japanese market since 1994 — after the bubble burst. With this time frame, you’ll notice a very different result. Despite buying then, investors would only have broken even (including dividends) after 22 years. A 25 year investment time frame in Japanese stocks would have netted a meagre 0.93% annualised returns and this is even before transaction costs and other fees!
Unfortunately, many of us tend to suffer from a narrow viewpoint, and it’s usually because of our recency bias; this leads us to frequently question the benefits of global diversification. For instance, Singapore investors tend to focus more on local stocks instead of a broader global exposure specifically because they are comfortable with the names they hold in their CDP account. But when you look at the opportunity cost of holding onto the Singapore market, it is substantial. The chart below shows the last 5 years performance of the broad Singapore market versus the World. The gap currently stands around +50%.
This serves as a clear lesson on why it is important to not only diversify, but also diversify properly. It is natural to want to pile familiar investments, and especially into popular themes — especially when it is doing well and making money. The chart below shows the various themes that have happened over the years. It is not surprising that there had always been a “hot investment” during any period of time. We doubt that any of the investors who had happily invested into these would have expected their trends to end. Remember the Nifty Fifty and BRICS as well? We do not know how long the current popular themes will last — another 3, 5, or 10 years? It’s fine if you want to jump on the bandwagon and try to make a quick buck. But if we have learnt anything from history, it is that eventually, diversifying beyond these isolated themes will help ensure that you don’t destroy your wealth in a rapid fashion.
Diversification is not just throwing together a bunch of different investments together and hoping they work. After all, your multiple funds could all be skewed in the same direction, negating the benefits of holding more instruments. There is a proper way to build an investment portfolio — with proper allocations into not only the risky and safe assets, but all the sub-categories within them. If you want to find out more on how we do it for you, come and have a chat with us.
