Views on whether Japanese PP works

[Coearth]

Hi, below are my views on supporting that Japanese PP works for Japan. Any comments?
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Japan is interesting example on whether PP works for Japan. I refer to Japan PP chart here: http://europeanpermanentportfolio.blogs ... folio.html
My observation is to compare Japan PP in relative terms:

1. Compare Real Returns: Japanese to US PP, Year 2000-2007:
-Japan PP has returns of 4.6% and inflation of –0.2% which means real returns of 4.8%, and since Japanese mostly buy and spend in Japan, Japanese buying power in Japan rose by 4.8%.
-US PP has 7.% returns and 2.8% returns, which means real returns of 4.5%, and since American mostly buy and spend in America, American buying power in US rose by 4.5%.
-In this aspect, Japanese PP did just as well for Japanese, compared to US PP for Americans.
Why is real returns important? Because an investment returning 15% per year is still losing buying power if annual inflation is 20%, which means a loss of –5% of buying power per year.
*This is simple example to illustrate how and why to compare different PP performance using real returns.

2.  Compare Japanese PP to typical Japanese Stock Heavy Portfolio, 1990s:
-Jap PP returned annualized 0.5% per year, means a return of 5.1% in 10 years.
-100% equities portfolio returned annualised –4%, means a return of –44% in 10 years.
A typical stock heavy portfolio would likely be negative and below performance of Jap PP for whole of 1990s.
-Therefore comparing this way, Jap PP, although having miserable 10 years returns in 1990s, would have outperformed most other Jap stock heavy portfolio.
*In hindsight, it is easy to say that Japanese would have switched out of bonds in 1990s to avoid the massive losses in stocks. But in reality, some or many people would likely have ‘guessed market bottoms’ and bought into stock heavy portfolio and lost money during 1990s, not knowing that it was possible for Japan to be in deflations for so long. For Jap PP investors, there would be no need to market time and although they make miserable returns, at least they preserved their capitals during the decade long stock market declines.

3. Compare PP to Stock Heavy Portfolio in general.
-It’s just as easy, if not much easier, to create blogs to show why stock heavy portfolio would not always work. The ‘lost decade’ in US stocks in 2000~2009. The declining Japanese stock market since 1990s till today. The disastrous year 2007~2008 for stocks...
-The typical 40%~60% possible declines in stocks markets that one would have to face in one’s investment lifetime – Actually before a stock heavy portfolio drop  -40%~60%, some people may have panicked and ‘cut loss’ already, hence materializing their loss. A pp investor would likely face lower drawdowns and lesser likelihood of panicking and avoid ‘cut loss’ prematurely.

[brownehead]

No doubt  Japanese PP has been better than domestic  stocks or stocks+bonds, but what about international stocks + domestic bonds? Or PP with international stocks instead of domestic stocks? I'd like to backtest this because I suspect international stocks are a good hedge for long term domestic deflation

[Ad Orientem]

First a question: Do the charts reflect reinvested dividends? If not, that would seem to suggest one might have been better off with a more traditional boglehead 50/50 portfolio.

Secondly I have long been of the opinion that the equity part of the PP ought to include some exposure to international stocks. Why? Because of the four HB recognized possible economic conditions, prosperity is the only one that is not a currency related event. And the addition of some diversified foreign stock holdings can add an additional degree of protection against the currency specific threats of a deflationary depression and severe inflation.

If you take a Japanese PP and split the stock holdings evenly between Japanese stock market and total international stock market index funds you significantly improve your long term returns.

[Arturo]

First a question: Do the charts reflect reinvested dividends? If not, that would seem to suggest one might have been better off with a more traditional boglehead 50/50 portfolio.

Secondly I have long been of the opinion that the equity part of the PP ought to include some exposure to international stocks. Why? Because of the four HB recognized possible economic conditions, prosperity is the only one that is not a currency related event. And the addition of some diversified foreign stock holdings can add an additional degree of protection against the currency specific threats of a deflationary depression and severe inflation.

If you take a Japanese PP and split the stock holdings evenly between Japanese stock market and total international stock market index funds you significantly improve your long term returns.

Hi Ad,

do you know where we can see this scenario statistics? thanks in advance.