1️⃣7️⃣ Deposits, Bonds, and Stocks—How Should You Use Them? My Thoughts on “Where to Keep Money” After Losing Money in Stocks
“Money doesn’t grow with just deposits.” “Stocks are suitable for long-term asset building.” “Bonds are safer than stocks.” When studying investment, you often see these explanations. So, where should we actually keep our money? Is it in a bank? Government bonds? Stocks? Or perhaps investment trusts? I invested part of my retirement money in individual stocks and am currently in the red. On the other hand, the balance of my defined contribution pension is increasing. However, since the increase in balance is partly due to additional contributions, it must be considered separately from investment gains. What I want to rethink this time is not “what makes the most money,” but the issue of “which money should be kept where.” Upon researching, I found that deposits, bonds, and stocks each have different roles. And I realized one thing. Before deciding where to keep money, you need to decide when and for what purpose you will use that money. 🔳 To begin with, what is the difference between deposits, bonds, and stocks? Let’s start by organizing the basics. Deposits mean keeping money in a bank or similar institution. There are savings accounts and time deposits. With yen deposits, the amount deposited does not usually fluctuate based on daily market prices. Also, under Japan’s deposit insurance system, general deposits, etc., are protected up to 10 million yen in principal per depositor per financial institution, plus interest. However, not all deposits are protected under the same conditions. Bonds are financial products that have the nature of lending money to governments or companies. Those issued by the government are government bonds, and those issued by companies are corporate bonds. Generally, you receive interest and are repaid according to set conditions when they reach maturity. However, there are credit risks of the issuer and price fluctuations if sold midway. Stocks mean owning a part of a company. You can expect stock price increases due to company growth and dividends. On the other hand, there is also a possibility that the stock price will fall significantly. In other words, deposits, bonds, and stocks are not the same “way to increase money.” The mechanisms themselves are different. 🔳 For deposits, “being able to use it” is more important than “increasing it” I didn’t find deposits very attractive before. This is because in an era of low interest rates, money hardly grew even when deposited in a bank. However, after studying this time, my way of thinking changed. The role of deposits is not necessarily to increase money significantly. It is to ensure that you can use the necessary money when you need it. This is a major role of deposits. For example, sudden illness or injury. Breakdown of home appliances. Home repairs. Family care. Or, income might temporarily decrease. In such cases, what if all your living expenses were held in stocks? You might have to sell them to secure necessary funds even when stock prices are falling significantly. If that happens, you cannot continue long-term investment even if you want to. Deposits are not just for competing for investment results, but also money to protect your life. 🔳 But, won’t deposits lose to price increases? Here, deposits also have a weakness. That is inflation. For example, suppose you have 1 million yen in a deposit. If the deposit interest rate is 1% per year, in a simple calculation without considering taxes, it will become 1.01 million yen after one year. However, what if prices rise by 3% during the same period? What you could buy for 1 million yen before will now require 1.03 million yen. The deposit has increased by 10,000 yen. But prices have risen by 30,000 yen. In other words, even if your deposit balance increases, what you can buy may decrease. This is called a “decline in real purchasing power.” Of course, the inflation rate does not always exceed the deposit interest rate. Even so, when using money over a long period like in retirement, you cannot ignore inflation. Deposits are important, but there is also a risk in managing all assets only with deposits. 🔳 Are bonds between deposits and stocks? Next is bonds. I previously recognized bonds as “products with slightly higher interest than deposits.” However, in reality, it is more complex. For example, government bonds. These are bonds issued by the Japanese government. It is a mechanism where you lend money to the government and receive interest according to conditions. On the other hand, with corporate bonds issued by companies, the creditworthiness of that company is important. Generally, issuers with higher credit risk tend to require higher yields. However, high yield also means there is a possibility of higher risk. What is important here is that there are various types of bonds. You cannot say that bonds are safe just because they are bonds. 🔳 Can individual government bonds replace deposits? Among bonds, what is relatively easy for beginners to understand is Japanese government bonds for individuals. There are mainly three types of government bonds for individuals: Floating 10-year: The maturity is 10 years, and the applicable interest rate is reviewed every six months. Fixed 5-year: The maturity is 5 years, and the interest rate decided at the time of purchase is applied until maturity. Fixed 3-year: The maturity is 3 years, and this also has the interest rate at the time of purchase applied until maturity. Government bonds for individuals can be purchased from 10,000 yen in face value. Also, there is a minimum interest rate guarantee, and the government pays the principal and interest. However, in principle, they cannot be redeemed midway for one year from issuance. Even if redeemed midway after one year has passed, a predetermined adjustment is made to the interest equivalent to the last two payments. Therefore, they cannot be used exactly like deposits. Money to be used immediately should be in deposits. Money not to be used for a certain period can be an option for government bonds for individuals. Such a distinction can be considered. Note that the actual interest rate changes depending on the offering period, so you need to check the latest conditions when purchasing. 🔳 Do bond prices fall when interest rates rise? This is where I found it difficult to understand at first. Bonds have a basic relationship where interest rates and prices move in opposite directions. For example, suppose there is an existing bond with 1% annual interest. What if, after that, new bonds with similar conditions are issued in the market with a 3% annual yield? For those buying new, the 3% annual bond is more attractive. Then, the 1% annual existing bond will be difficult to find buyers for unless the price is lowered. This is the basic mechanism by which bond prices fall due to rising interest rates. Conversely, when interest rates fall, the price of existing bonds may rise. However, this is mainly about general fixed-rate bonds traded in the market. The mechanism is different from the mid-term redemption system for government bonds for individuals. The way of thinking is different for bonds held until maturity and those sold midway. This is a point I want to remember. 🔳 Why do stocks have the potential to grow significantly? Then, what about stocks? Stocks are investments in the growth of a company. For example, suppose a company develops a new product and significantly increases its sales and profits. If that growth leads to expectations for future corporate value, the stock price may rise. Also, some companies return part of their profits to shareholders as dividends. In other words, stocks have the characteristic of being able to expect capital gains and dividend income. However, even if a company’s performance is good, the stock price can fall. This is the case when high growth expectations are already priced into the stock. And if the company’s management deteriorates, large losses can occur. I have experienced losses with individual stocks myself. While stocks can capture the potential for growth, they are assets where the principal is not guaranteed. 🔳 So, how should I divide 1 million yen? From here, let’s think concretely. Suppose you have 1 million yen on hand. How should this 1 million yen be divided into deposits, bonds, and stocks? Actually, there is no correct answer that applies to everyone. This is because it depends on what that 1 million yen is for. For example, let’s consider the following three cases: Case 1: 1 million yen to be used in half a year. This is money with a set plan to be used, such as home repair costs or car purchase costs. In this case, I prioritize holding it in a form that is easy to use reliably when needed, such as deposits. This is because I would be in trouble if the stock price fell in half a year. Case 2: 1 million yen to be used in 5 years. There is some leeway until the time of use. In addition to deposits, there is room to consider government bonds for individuals whose maturity and redemption conditions match the purpose. However, if the amount needed in 5 years is decided, you need to carefully consider how much stock price fluctuation risk you can tolerate. Case 3: 1 million yen not to be used for 20 years. This is money with no plans to be used for a long period. In this case, the room to consider diversified investment including stocks expands. However, holding it for 20 years does not guarantee a profit. The choice of investment destination, fees, and asset allocation are also important. What is understood here is that even with the same 1 million yen, the suitable place to keep it changes depending on when it is used. 🔳 Is it better not to invest “life defense funds”? When studying investment, the term “life defense funds” appears. This is money to prepare for sudden expenses or income decreases. For example, 3 to 6 months of living expenses is sometimes introduced as a guideline. However, this is not an absolute standard. Self-employed people. Company employees. People living on pensions. People with dependents. People with home loans. Each situation is different. People with unstable income or those expecting large expenditures in the future may need more preparation. In a generation conscious of retirement like me, it is also necessary to think about medical expenses, nursing care costs, and home maintenance costs. Life defense funds are not investment capital, but money to protect your life. Deciding on money not to invest before starting investment. I thought this was a very important way of thinking. 🔳 Where should retirement money have been kept? Now, here is my own story. I invested part of my retirement money in individual stocks. I am currently in the red. So, should I have kept all my retirement money in deposits? I don’t necessarily think so. Retirement money is important money that supports life over a long period. However, you won’t use all of it immediately. There will be money needed within a few years, and money that won’t be used for more than 10 years. Therefore, instead of thinking of retirement money as one lump sum, there is a method of dividing it by the purpose of use. For example: 1. Money to be used soon as living expenses: Secure with deposits, etc. 2. Money planned to be used in a few years: Consider deposits or bonds with matching maturity/redemption conditions. 3. Money not planned to be used for a long period: Consider diversified investment including stocks. This is just an example of a way of thinking. The actual allocation changes depending on pension income, housing costs, family structure, health condition, risk tolerance, etc. Still, I felt this way of thinking was very easy to understand this time. Not investing because it’s retirement money, but thinking about the part of retirement money that is okay to invest. Maybe the order was reversed. 🔳 Should stocks be reduced after age 60? This is also a concerning issue. Generally, there is a way of thinking that as age increases, the proportion of stocks should be lowered and the proportion of deposits and bonds should be increased. The reason is the investment period and asset withdrawal. If you are young, even if stock prices fall significantly, you may be able to hold them for a long period and wait for recovery. However, people who withdraw assets as living expenses after retirement may need to sell even when stock prices are falling. However, there is no uniform correct answer as to what percentage stocks should be at age 60. Some people work and have income even at 65. Some people have assets they won’t use for a long period even after age 70. Conversely, some people have large expenditures planned within a few years even at age 50. What is important is when and how much will be needed, rather than age itself. 🔳 If holding stocks, individual stocks or investment trusts? I have thought about the division of deposits, bonds, and stocks so far. Then, if you decide to invest in stocks, which is better, individual stocks or investment trusts? I think the purpose is important here too. Individual stocks are a method of choosing companies yourself and investing with the expectation of their growth. There is the fun of researching companies, and if your prediction is correct, there is a possibility of obtaining large profits. However, it is strongly influenced by the performance or scandals of specific companies. On the other hand, with index funds that diversify into a wide range of stocks, you can invest in many companies at once. However, if the entire market falls, the price of the investment trust will also fall. Both have characteristics. Since I am losing money on individual stocks, I have come to rethink the meaning of diversified investment trusts. However, this is not a conclusion that individual stocks are bad. I think the problem is whether you understand how much risk you are taking. 🔳 Is everything equally advantageous if you use NISA? Here, it leads to the NISA story I learned in Episode 10. NISA is a system that makes certain profits obtained from investment tax-free. This is a different story from the problem of which to choose among deposits, bonds, and stocks. With NISA, you can purchase eligible listed stocks and investment trusts, etc. On the other hand, bank savings accounts, time deposits, and government bonds for individuals are not eligible for NISA. Also, if the products purchased in a NISA account fall in price, a loss will occur. NISA does not make it safe. Furthermore, losses incurred in a NISA account cannot, in principle, be offset against profits in taxable accounts. In other words, it is not appropriate to decide where to invest based solely on tax benefits. First, think about which money to hold in which assets. Then, think about how to utilize systems like NISA. This order is important. 🔳 In an era of rising prices, which assets are strong? Recently, there are more opportunities to feel price increases. Food. Daily necessities. Electricity bills. Dining out costs. When the prices of things necessary for life rise, what you can buy with the same amount of money decreases. Then, what assets are resistant to inflation? Generally, if a company can maintain and expand profits through price pass-through, stocks may be a long-term preparation for inflation. However, if interest rates rise at the same time as price increases, stock prices may fall. Bonds can also fall in price due to rising interest rates. Deposits may have increased interest if interest rates rise, but it is not guaranteed to keep up with price increases. In other words, there is no asset that is always the strongest against inflation. Here too, the meaning of combining multiple assets emerges. 🔳 If it were me, I would divide money into three wallets I organized what I learned this time in my own way. That is the idea of “three wallets.” First wallet: Money to protect. This is daily living expenses and emergency funds. Keep it in a place that is easy to use immediately, such as a savings account. What is most important for this wallet is not increasing it, but being able to use it when needed. Second wallet: Money to prepare. This is funds planned to be used in a few years. Home repair costs, car replacement costs, and lump-sum medical expenses can be considered. Consider deposits or government bonds for individuals whose conditions match the time of use. For this wallet, it is important to secure the necessary amount at the necessary time. Third wallet: Money to grow. This is funds not planned to be used for a long period. Consider diversified investment through stocks and investment trusts, etc. This is money aimed at long-term asset building while accepting the possibility of price drops. It is not necessary for everyone to put money into these three wallets in the same proportion. What is important is to allocate according to your own life. And if your living environment changes, you need to review the contents of your wallets. 🔳 Before increasing money, decide on money that must not be decreased I studied deposits, bonds, and stocks this time and reflected a little. When you start investing, your eyes inevitably turn to profits. Which stock will rise? Which investment trust is advantageous? Which country’s economy will grow? Of course, these are also important. However, in asset building for retirement, there is something to think about before that. How much risk can you expose the money necessary for life to? For example, if you invest 1 million yen planned to be used next year in stocks and it becomes 800,000 yen, you will be in trouble. On the other hand, if it is 1 million yen not planned to be used for 20 years, there is an option to accept price fluctuations and manage it. In other words, the suitable place to keep it differs depending on the nature of the money. I invested part of my retirement money in individual stocks and am losing money. But because I had that experience, this learning has sunk in. What should be decided first in investment may not be the product to buy, but the role of the money. 🔳 Summary I will organize what I learned about the division of deposits, bonds, and stocks this time. 1. Deposits are suitable for money to be used when needed, such as living expenses and emergency funds. 2. While deposits have the merits of safety and liquidity, there is a risk of purchasing power decline due to inflation. 3. Bonds are a mechanism to receive interest and redemption money, but there are credit risks and interest rate fluctuation risks. 4. Government bonds for individuals can be considered as a place to keep money not to be used for a certain period if you understand the conditions. 5. While stocks can expect profits due to corporate growth, there is a possibility of significant price drops. 6. Even with the same 1 million yen, the suitable asset changes depending on whether it is used in half a year or 20 years later. 7. Think of life defense funds separately from money to invest. 8. NISA is a tax system and does not guarantee the safety of investment destinations. 9. In asset management for retirement, it is important not only to increase assets but also to keep them in a state where they can be used when needed. And this is the biggest lesson of this time. Do not rank deposits, bonds, and stocks, but give each a role. Deposits are for protecting. Bonds are for preparing according to conditions. Stocks are for aiming for long-term growth while taking risks. Of course, the actual division changes depending on age, income, assets, family structure, and life planning. I invested part of my retirement money in individual stocks and am losing money. That is precisely why, from now on, I want to think not only about “what to buy” but also “which money is okay to invest.” After all, it’s troublesome to have even living expenses swayed by stock prices. I am someone who lost money in stocks, but with this study, I feel like I have seen a little bit of how to deal with money. 😂 I learned something new this time too. 🔳 Keywords of this time Deposits: Financial products where you deposit money in a bank, etc., and can withdraw it as needed. Bonds: Securities issued by governments or companies, etc., to raise funds. Stocks: Securities representing the rights of investors to a joint-stock company. Government bonds for individuals: Japanese government bonds that individuals can purchase, including floating 10-year, fixed 5-year, and fixed 3-year. Credit risk: The risk that the issuer of a bond, etc., will not be able to pay interest or principal as promised. Interest rate fluctuation risk: The risk that the price of bonds, etc., will change due to fluctuations in market interest rates. Inflation: A phenomenon where prices rise continuously and the purchasing power of money declines. Life defense funds: Money kept to prepare for sudden expenses or income decreases, etc. Asset allocation: The way of thinking about what proportion of assets to divide into deposits, bonds, stocks, etc. Liquidity: The property of how easily assets can be converted into cash when needed. #MoneyStudy #InvestmentBeginner #Deposits #Bonds #Stocks #GovernmentBondsForIndividuals #AssetAllocation #AssetAllocation #NISA #RetirementMoney #RetirementFunds #AssetBuilding #FinancialEducation #AdultRelearning