With the spread of NISA, more people are steadily increasing their assets by investing in global stock indices (commonly known as ‘All Country’). At the same time, there is growing concern and questioning, such as ‘Since stock prices are high and I have made too much profit, shouldn’t I switch to bonds or bond funds, which are said to be safe?’ or ‘Should I also buy bonds because interest rates have started to rise?’
In conclusion, making a simple judgment that ‘bonds = safe’ or ‘switching to bonds because the market has risen’ is strictly discouraged.
I will explain in an easy-to-understand manner why easily switching to bonds is dangerous, the ‘true risks of bonds’ that individual investors should know, and ‘overall portfolio management’.
1. The major misunderstanding that ‘bonds are safe and have guaranteed principal’
Many people tend to assume that ‘stocks are dangerous and bonds are safe,’ but risk in investment means the ‘range of price fluctuations.’ It is true that bond prices tend to fluctuate less than stocks, but they are not ‘principal-guaranteed’.
① The difference between individual bonds and ‘bond funds’
② The risk of ‘bond price decline’ due to rising interest rates
Generally, there is an inverse relationship (a balance scale relationship) where ‘when market interest rates rise, the prices of already issued bonds fall.’ If you easily invest in bond funds during a period of rising interest rates just because ‘interest rates are high,’ you must be aware that there is a risk of incurring losses as the fund price falls along with the rise in interest rates.
2. Why you should not simply imitate the ‘50% bonds’ of pension management (GPIF)
The GPIF (Government Pension Investment Fund), which manages Japan’s public pensions, manages half of its portfolio (25% domestic bonds, 25% foreign bonds) in bonds.
It is easy to think, ‘Since professional pension management is half bonds, individuals should also be half bonds,’ but this is not appropriate. This is because the ‘purpose of money’ and ‘time horizon’ are completely different between GPIF and individuals.
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GPIF:
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Its purpose is to pay benefits over the ultra-long term to future generations, and it must absolutely avoid a significant reduction in the entire portfolio, so it incorporates bonds to suppress overall volatility.
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Individual investors:
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Money planned to be used in the near future (living expenses and event funds) and ‘money to grow’ to be used decades later are mixed. Individuals do not need to adjust risk ‘only within the investment account’.
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3. Risk management technique of dividing money into three colors: ‘spending, saving, and growing’
When you are unsure whether to incorporate bonds, the shortcut to a solution is not to think only within your NISA account, but to organize the ‘total assets’ you own into the following three roles.
Role of assets Main purpose Appropriate placement/financial product ① Money to spendLiving expenses, money planned to be used within 1-2 yearsOrdinary deposits/time deposits (priority is being able to withdraw immediately) ② Money to save Money that might be used in a few years, but you want to avoid principal loss Japanese Government Bonds for Individuals (10-year floating, etc.) ③ Money to grow Money not planned for immediate use, intended to grow over the long term of 10 to several decades NISA/iDeCo (stock funds, etc.)
Why ‘Japanese Government Bonds for Individuals’ are very easy for individuals to handle
A great place to keep ‘money to save’ is ‘Japanese Government Bonds for Individuals (especially 10-year floating rate)’.
Unlike general bonds, Japanese Government Bonds for Individuals can be redeemed early without principal loss after one year has passed since issuance (*only the equivalent of the last two interest payments x 0.79685 is deducted). Because the applicable interest rate rises if market interest rates rise (with a guaranteed minimum of 0.05% per year), you can manage them safely with a feeling similar to a bank deposit.
4. Criteria for judging whether you need bonds in your NISA
After categorizing your assets into three types, whether or not to include bonds (or balanced funds) in your NISA or iDeCo depends on your individual asset situation and mental toughness.
Summary: Choose by ‘role’ rather than being swayed by the market
Trying to move assets based solely on market movements (timing), such as ‘because stock prices are high’ or ‘because interest rates have risen,’ can lead to buying at the top and incurring unnecessary fee costs (fund trust fees and currency risk).
Bonds are not something you invest in instead of stocks, nor are they something you must include in your NISA. First, start by looking at all your money on hand and checking how much safe cash and government bonds you have secured for yourself.
Thank you for reading to the end!
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