“In the end, which investment trust should I buy?”
When you start NISA, the first thing you might be curious about is the product name.
All-country stocks?
US stocks?
Balanced funds?
Top-ranked products?
Hello, this is Hiyori.
Researching products is, of course, important.
However, there is a way of thinking that will make your subsequent investing much easier to organize if you know it before looking at product names.
That is,
asset allocation
.
It sounds difficult, but the concept is surprisingly simple.
“How should I divide my money into different roles?”
That is what it is about.
For example,
Money you want to grow over the long term while accepting price fluctuations.
Money you want to have a role in slightly suppressing price fluctuations.
Money you want to be able to withdraw immediately because you will use it soon.
There is no need to make all of it do the same job.
Stocks.
Bonds.
Cash and savings.
Because each has different characteristics,
it becomes easier to understand if you think about “What do I want this money to do?” before asking “Which product is the best?”
instead.
In this article, I will not provide specific
“The correct allocation is X% stocks and X% bonds”
answers.
Rather,
why should you diversify your assets?
I will break that down for beginners.
To begin with, what is “asset allocation”?
Asset allocation is called “asset allocation” in English.
It sounds like a difficult term, but it simply means
how you divide your money among different types of assets.
For example,
stocks.
bonds.
Cash and savings.
Assets like these each have different characteristics.
J-FLEC also states that financial products can be organized from the perspectives of ‘safety, profitability, and liquidity,’ and since there is no single product that is excellent in all aspects, it is important to consider what to prioritize according to your goals.
This is the starting point for thinking about asset allocation.
Do not try to solve everything with one thing.
The role of growing.
The role of protecting.
The role of spending.
It is the image of assigning jobs to each portion of your money.
Look at ‘what you hold’ before product names
When you are a beginner,
‘Which is better, the XX Fund or the YY Fund?’
you want to compare product names.
But there is something you want to check before that.
That product is,
what is it ultimately investing in?
.
For example, even if the product names are different, if the contents are both centered on stocks,
from the perspective of your entire household budget,
you are increasing money with the same role of stocks
It is possible.
Conversely, there are also balanced products that invest in multiple assets even if there is only one product name.
Therefore,
increasing the number of product names and
diversifying assets are
not necessarily the same thing.
First,
“How do I currently hold stocks, bonds, and cash?”
take a look at that.
After that, choose specific products.
Following this order makes it easier to avoid getting lost when comparing investment trust products.
The Role of Stocks | Money to “Grow” Over the Long Term
First, stocks.
Stocks are issued by companies when they raise funds for their business operations.
If the stock price rises due to company growth or other factors, you can expect capital gains, but conversely, the price can also fall.
Generally, this is an asset that tends to have larger price fluctuations than savings or bonds.
Therefore, within your household finances,
the role of growing it over the long term
is an easy way to think about it.
For example,
Retirement more than 20 years away.
Funds that you do not plan to use for a long time.
With money like this, you may be able to hold it for a long time while accepting price fluctuations along the way.
Conversely,
Next month’s rent.
Next year’s education expenses.
Housing funds that you will definitely need in a few years.
If you put these into stocks, they might be down in value when you need them.
It is not that stocks are bad.
Whether the timing of use and the role match.
It is important to look at this.
The Role of Bonds | Giving Them Different Movements from Stocks
Next are bonds.
Simply put, bonds are
things issued by countries or companies to borrow money.
Many have predetermined conditions such as interest and maturity, and generally tend to have smaller price fluctuations than stocks.
However,
this does not mean
that bonds are absolutely safe.
If you sell them midway, the price may fluctuate, and there is also credit risk where the issuing country or company may not be able to pay the principal or interest as promised. If they are foreign bonds, there is also the impact of exchange rate fluctuations.
So, why would you hold them alongside stocks?
One reason is
to combine assets with different characteristics
.
If you only hold assets that move exactly like stocks, they are likely to move significantly in the same direction together.
By combining things with different characteristics,
rather than focusing on just one asset,
you may be able to dampen the price fluctuations of your entire portfolio.
J-FLEC also considers “asset diversification,” which involves combining financial products with different characteristics, to be one of the fundamental methods of diversified investment.
It becomes easier to understand if you think of the role of bonds
not as “products that are weaker than stocks”
but as
assets that have a different role than stocks
.
The Role of Cash | It’s Not “Useless Because It Doesn’t Grow”
And then,
cash and savings.
When you start investing,
you might think,
“It’s a waste to hold it in cash.”
Admittedly, savings and deposits are generally not expected to yield higher returns than stocks or similar assets.
If prices rise and deposit interest rates fail to keep up, your real purchasing power may decline.
On the other hand, ordinary savings accounts have the major advantage of high liquidity, making them easy to use when needed.
Therefore, cash has a
job other than growing
to do.
Monthly living expenses.
Money you plan to use soon.
Emergency funds.
Unexpected expenses.
Being able to hold this money
separate from market fluctuations.
This is also a vital role.
Stocks are for ‘growing’.
Bonds are for ‘providing a difference in price movement’.
Cash is for ‘keeping funds ready for immediate use’.
When you think of it this way,
‘Which one is the best?’
is no longer a valid comparison.
Why divide your assets?
By this point, the purpose of asset allocation should become clear.
The primary reason is
to avoid leaving all your money subject to the same price movements
.
For example, suppose all your household savings are in stocks.
If the stock market drops significantly,
your retirement funds,
your housing funds,
and your emergency savings
will all be affected together.
Conversely,
if everything is in cash,
your anxiety about price fluctuations will be lower.
However, the role of growing your assets through long-term investment will be weakened.
Therefore,
what you want to grow
is not the only thing to consider; you must also think about
what you want to protect
.
Diversified investment is a strategy that aims to reduce the volatility of your total assets by taking advantage of the possibility that other assets will not move in the same way when one asset declines. However, diversification does not completely eliminate the risk of loss itself.
Asset allocation is similar to ‘team building’
Let me use a small analogy.
Asset allocation is
a bit like assigning roles in a sports team
to some extent.
It would be a problem if everyone were only on offense.
If everyone were only on defense, you couldn’t score any points either.
You combine players with different roles
to create a single team.
Money is similar.
Growing it for the long term.
Adjusting for price fluctuations.
Keeping it ready for immediate use.
Each has a different role.
That is why asset allocation is
‘Which one is the strongest?’
rather than
‘What kind of roles does my household need?’
the process of thinking about that.
This is not to say that ‘100% stocks’ is wrong
This is a point I want to make sure is not misunderstood.
This article is not about:
“Stocks alone are not enough”
“You must include bonds”
“You should hold X% in cash”
That is not what this is about.
Investment horizon.
Emergency fund.
Income stability.
Future expenses.
Risk tolerance.
Your approach will change depending on these factors.
For example,
if you have secured enough cash for your emergency fund and near-term expenses,
and the money you are investing will not be used for over 20 years,
and you can remain relatively calm even if prices drop,
then for someone like that,
there is an approach where you hold a larger portion of stocks in your investment portfolio.
On the other hand,
if you have a large expense coming up in a few years,
If you feel anxious and might sell when prices drop.
If you are that kind of person,
the same allocation might not suit you.
Therefore,
do not just copy someone else’s allocation.
This is important.
It is not to say that ‘all cash’ is a mistake.
Conversely,
having a lot of cash is not a failure,
either.
In the near future,
buying a house.
education expenses.
a car.
starting a business.
If you have plans to use it for things like these,
the role of cash becomes greater.
As I mentioned in a previous article,
cash is,
something you can use when you need it
is valuable.
On the other hand, if you are thinking about long-term wealth building,
can you achieve your goals with cash alone?
You need to consider the changes in purchasing power caused by inflation as well.
Rather than rejecting one or the other,
align it with your goals.
That is what asset allocation is for.
Asset Allocation and “Portfolio” Are Slightly Different
In investment articles,
“Asset allocation”
and
“portfolio”
often appear together.
As a beginner, they might look roughly the same.
If you want to think about them separately,
Asset allocation = which types of assets to hold and how to divide them.
For example,
stocks.
bonds.
cash.
and so on.
On the other hand,
Portfolio = the combination of financial products you actually hold.
is.
J-FLEC also explains a combination of financial products as a “portfolio.”
Therefore, the order should be:
First,
“What role do I want my assets to play?”
think about that.
After that,
“Then, which products will fulfill that role?”
look at that.
This approach is more natural.
Just because you hold three products doesn’t mean you are diversified.
This is also important.
For example,
Investment Trust A.
Investment Trust B.
Investment Trust C.
you hold.
“Since I have three, I am diversified.”
You might think that.
But what if all three
are invested in stocks from almost the same market?
Even if there are three products,
they may be quite similar in terms of their role as assets.
Conversely,
there are products that invest broadly in stocks around the world within a single investment trust.
Therefore,
number of products does not equal the degree of diversification
.
“How many do you hold?”
Instead of that,
“What is inside?”
If you make a habit of looking at this, choosing products will become much easier to understand.
Asset allocation is not something you decide once and finish
Once you think about your allocation, it is not
set for life.
Life changes.
From your 20s to your 30s.
From being single to getting married.
A child is born.
Buying a home.
Education expenses are approaching.
Retirement is approaching.
Income changes.
And,
the time remaining until you need to use the money also changes.
Retirement, which was 20 years away,
becomes 10 years away as time passes.
Education expenses, which were 10 years away,
will eventually be 3 years away.
That is why asset allocation,
should be checked from time to time,
to see if it still matches your current life.
Rather than ‘sticking to the ideal ratio you decided once,’
it is more important to
review it in line with changes in your goals and time horizon.
This is more important.
5 Questions for Beginners to Consider When Thinking About Asset Allocation
Before deciding on specific ratios, please first check these five points.
1. What is this money for?
Retirement.
Education.
Housing.
Emergencies.
Separate your goals.
2. When will you use it?
Will you use it next year?
Will you not use it for over 10 years?
Its role changes depending on the timeframe.
3. Do you have separate cash that you can use immediately?
Check to ensure you haven’t put your living expenses or emergency fund into volatile assets.
4. How much market fluctuation can you stay calm through?
This is the risk tolerance we organized in the previous article.
5. What job do you want each asset to do?
To grow.
To adjust market volatility.
To be available for immediate use.
After deciding on these roles,
We will move on to specific products.
Summary | “What role?” before “Which product?”
When you start investing,
you are most concerned about product names.
Popular products.
Top-ranked items.
Products with low fees.
Of course, you need to check these eventually.
But,
just once before that,
“What do I want to hold?”
please try thinking about it.
Stocks have,
the role of growing over the long term.
Bonds have,
the role of combining characteristics different from stocks.
Cash has,
the role of keeping funds available for when you need them.
These are the roles.
And,
How much you need
is not the same for everyone.
Purpose.
When you will use it.
Cash.
Investment horizon.
Risk tolerance.
These are what make it change.
Therefore,
‘X% stocks, X% bonds is the correct way’
instead of looking for an answer like
‘What kind of job does my money need to do?’
try thinking,
Beyond that,
you will find the asset allocation that suits you.
Organize before you grow.
And before you choose products,
first, divide the roles of your money.
Please start from here.