Gyroscopic Investing

Wow, thank you for the very detailed reply! Ok, I understood about the bonds being essentially a slowly growing anchor in the portfolio.

In Japan, we have two options (well, 3, but I'll ignore the 3 year bonds). I would most likely hold the bonds to maturity anyway, since there are large penalties for selling early, completely wiping out any gains. Would it be preferable to buy fixed interest rate 5 year bonds (where the interest rate is guaranteed over the life of the bond), or variable interest rate 10 year bonds (where the interest rate changes every 6 months)? I'm leaning towards the variable rate longer ones, as this year has shown some banks and post office accounts advertising higher interest rates for the first time in years (decades?) suggesting to me a coming upward trend. Or is stability preferred? I guess it's possible, though unlikely, that bonds would stop paying any interest at all...

So, as you mentioned, that only leaves stocks and gold as the driving factor for overall PP performance. So any graph of the portfolio performance would shown bonds/cash as a steady line, with only two wild fluctuating lines (well, actually not so wild for the TOPIX index), right?

It seems to be a lot easier to construct a PP in the US, and actually I have easy access to Vanguard and Fidelity ETFs through my broker. Would it be a terrible idea to just create an all US portfolio? Of course, I would much prefer an all Japanese fund, but while the stocks, gold and cash portions are relatively easy, the lack of good long term bonds is very unsettling for me... Perhaps it would even be advisable to implement a double PP, one Japanese and one US? What do you think?

Clive, thank you for your very detailed posts. You've given me a lot of good information to consider.

Slotline, thank you for using the key word "OTC" which led me to find the secondary market for JGB. You're right, I was just looking at the primary market bonds, which don't fluctuate in price.

Unfortunately, the words "cash" and "bonds" we're very confusing for me. I mistook them for "savings account" and "primary market bond" at first. I've got it now! Thank you!

Slotine wrote:
Unless you hedge the entire US-PP portfolio back into JPY and assume residual currency tracking errors, you're at the mercy of currency fluctuations.  And there will be some additional slippage in your final RR as currency hedging costs are based on borrowing rates, not CPI.  At the end of the day, I wouldn't be surprised if you end up with close to the exact same RR as a Japan-PP.

Or you can just maintain your foreign PP during the long run, and after 20,25 or 30 years (according to what you consider long wealth investment), just wait for the right currency 'window' to bring it back to your country. Its speculation, but there is no other alternative if you invest on a PP that doesn't belong to your own currency.

D1984 wrote:
The papers did not compare to value, momentum, or quality

In terms of style performance, Value massively outperformed Momentum in Japan since the early 80's. The two tend to be negatively correlated though so combining them both has paid off. Cliff Asness has a paper coming out in the Journal of Portfolio Management where he looks at this.  If you can find it the title is "Momentum in Japan - The Exception that proves the Rule"

In terms of style performance, Value massively outperformed Momentum in Japan since the early 80's. The two tend to be negatively correlated though so combining them both has paid off. Cliff Asness has a paper coming out in the Journal of Portfolio Management where he looks at this.  If you can find it the title is "Momentum in Japan - The Exception that proves the Rule"

Thanks for the tip on the article (does the Journal of Portfolio Management have their articles or at least abstracts available free online for a month or two after publication or do I need to go to my local uni library to pick up a copy?).

I do know that Small Cap Value outperformed since 1980 (that's as far back as the Japanese SCV data I have goes). Unfortunately, "massively outperformed" since 1990 has merely meant losing roughly 40% of its value in real terms since December 1989 rather than losing 65-70% as the broad Japanese stock market did) but I wasn't aware value as a whole did so as well.

What years did momo outperform (versus the general index and vs value)? 1999? 2003? 2004? 2005?