1 important takeaway from the Nikkei story

Some people make it seem as though index investing is the holy grail of investing

Is index investing the easiest way to invest? Many experts, including Warren Buffett, agree. Investing into an index comprising of one's own country's equities seems like a sure bet to invest well.

But what if, you have to be a Japanese and invested in the Nikkei since 30 years ago?

But it could well have caused tremendous disappointment

At the start of 1984, the Nikkei traded at an adjusted price of 10,196 JPY. It went on to climb to a peak of 38,916 in December 1989. From then, it has never recovered fully and currently, it is trading at 16,465 JPY.


The peak of the Nikkei was in December 1989

All prices are adjusted for stock splits and dividends for easy understanding.

Therein lies the danger of simply investing into your own country's index fund, or any index fund at all. If you had bought the Nikkei at its peak in 1989, you would still be looking at a loss.

Index investing is not without its own risk

Could this happen to the STI ETF? Definitely. The STI has enjoyed tremendous growth over the past 30 years as Singapore transitioned from a third-world country to a first-world modern city. It might not enjoy the same spectacular returns going forward, similar to the Nikkei.

Country risk is another type of unsystematic risk that can be diversified away

Investing in any particular country exposes us to country risk, and we can mitigate this risk by diversifying globally. A global ETF suffer the same fate could well suffer the same fate as the Nikkei too, but it is still the best alternative we can have right now.

Fallacy 1: I will do better by picking stocks

Some people might argue, albeit erroneously, that it is far better to pick stocks. One should understand that it is, on average, impossible to beat the average. If the Nikkei had suffered, 50% of investors in Japanese stocks would have suffered even worse. The other 50% might do better, but with transaction costs involved, this percentage decrease further.

Fallacy 2: simply avoid countries which will suffer

Another argument would be that we can simply avoid investing in the Nikkei. This is fallacious as well, because we are unable to predict looking forward. The STI, or even the S&P 500, might turn out to be another Nikkei going forward.

The only possible solution

The only solution we have is to continue investing into a globally diversified pool of assets, and stay in for the long haul. Jut how long will it take for the Nikkei to recover is uncertain, but it will eventually get there.

We might not live as long to see our own portfolios recover, but eventually they will. As John Maynard Keynes famously mentioned, "in the long run, we are all dead".
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FFE
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22 October 2016 at 12:40 delete

Hi LS,

There's nothing wrong in Index investing, even if we look at Nikkei.

What's ultimately important is that the fundamentals must be there.

At the height of the bubble, the land on which the palace ground is was actually more expensive than the whole of Manhattan.

These were warning signs that the fundamentals are terribly out of whack. Thus it's a signal to avoid investing in the Nikkei.

Regards,
FFE

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22 October 2016 at 13:21 delete

Hi FFE,

Thanks for your comment. Other than having to check on the fundamentals before investing in an index, a simplified way would just to invest into a global equities index.

Lazy Singaporean

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