Avoiding the Comparison Trap! How to Choose Financial Products Wisely

I sometimes hold financial study sessions or provide individual financial consultations. A common question I receive is, 'If I compare A and B, which one is better?' There are many of these binary-choice questions.

Today, I would like to think about this.

Is comparison appropriate?

Q: Do you prefer apples or oranges?
Q: Do you find baseball or soccer more interesting?
Q: Would you like cold water or hot green tea?

When I receive financial consultations, it sounds like this. Apples have their own unique pros and cons. The same goes for oranges.

<Apples and Oranges>
Apples have the benefit of a pleasant texture, but the drawback is that they turn black if left out after being cut.
Oranges have the benefit of being easy to process into juice, but the drawback is that one spoiled orange can cause the others to rot.

Everything has pros and cons. I believe one should make choices based on their own individual circumstances.

In the first place, is comparison appropriate?

<Baseball and Soccer>
I love baseball very much. I used to be a youth baseball coach, I go to Jingu Stadium to watch Teikyo High School games, and I often visit professional baseball stadiums, mainly for Hanshin Tigers games.

Ajinomoto Stadium is within cycling distance from my house, but I have no particular interest in soccer, so I don't go there.

I often hear people compare baseball and soccer, but I don't think they are on the same playing field for comparison.

<Cold Water and Hot Green Tea>
The hot days continue every day, don't they? It's humid, and when you enter a cafe drenched in sweat, what is the first thing you want to drink?

It's hard to imagine for a July article, but when you come home in the snow, what does your family serve you after saying, 'Welcome home'?

In other words, what I want to say is,
it depends on the person, it depends on the situation,
and the answer changes depending on the background.

Comparison becomes possible by matching the conditions.

Comparison of Financial Products

Now, returning to the topic of financial products,
Q: Is bond investment or stock investment better?
Q: Is a dollar-denominated insurance policy or a monthly investment trust better?

These binary-choice questions are the same.
Since I answer based on the background of the person asking, I cannot say which is better unconditionally.

When I provide individual consultations, the first things I ask are:
By when do you need it?
How much do you need?
What is the purpose?
You need to clarify these points.

Example 1: Education Funds

If you need 5 million yen for your child's university education in 5 years.

I personally would not invest the 5 million yen I have already set aside. I would put it in a regular savings account. I would keep it there with a clear purpose in mind. If I were to invest it at all, I would check the maturity date and buy Japanese government bonds.

This is because my top priority is a safe strategy that will never result in a loss of principal. I know for a fact that this 5 million yen will definitely be needed in 5 years.

Example 2: Leisure Funds

On the other hand, if you need 1 million yen for an overseas trip with your spouse in 5 years.

If you plan to save 20,000 yen every month for 5 years, I would take on more risk and invest in equity-based mutual funds.

If the investment goes well, you can live it up, and even if it fails, you can just change your plans to a hot spring town in Atami.

There must always be a purpose behind a question. It means that the investment method changes depending on how much you need and by when, as well as the purpose of the funds.
The investment method changes depending on how much you need and by when, and the purpose of the funds.

Pros and cons of each product

There are many different investment methods.
Stock investment, bond investment, real estate investment, cryptocurrency investment, FX, futures investment, margin trading, etc.

People often ask me which one is best, but you should purchase each product only after fully understanding its pros and cons, and based on your personal investment horizon and risk tolerance.

Also, since you are diversifying your investments rather than concentrating on just one product, I believe that if you clarify your personal financial goals first, you will be less likely to feel confused about your investments.

Q: Which is better for mutual funds, the S&P 500 or All Country?

I get this question a lot, honestly, it's extremely common. Both are stock investments. My answer is "either one is fine," but before that, please accept the risks involved in stock investing. Stock investing always carries risk.

It's been fine because stock prices have been strong for the last two years, but if you don't accept the risk, you'll end up quitting when stock prices fall.

If you have never held dollar-denominated assets, try comparing mutual funds after gaining a comprehensive understanding of finance in general. You will stop making such ridiculous comparisons between the S&P 500 and All Country. The dollar-yen exchange rate is also fluctuating wildly.

Knowledge is essential when starting to invest!

Today is July 26, 2024. Over the last two weeks, stock prices have fallen surprisingly, and the dollar has weakened against the yen. Yesterday, the Nikkei Stock Average was down 1,285 yen (-3.3%). If you had invested 10 million yen, 330,000 yen would have been wiped out in a single day.

In the last two weeks, prices have dropped by 10% all at once, which means 1 million yen has disappeared. Please accept the risk.

Defensive Asset Allocation

I often talk about asset management with members of the FIRE community. While many people in their 30s and 40s are investing aggressively, I, in my 50s, have a defensive portfolio.

Since not many members have an asset allocation like mine, I get teased a little. It's as if I'm avoiding the competition. However, a defensive asset allocation is the perfect portfolio for me.

But from the perspective of someone in their 30s, it probably looks boring. That's because a defensive asset allocation doesn't grow much at all.

By strengthening my defense, my assets won't increase significantly. However, they won't decrease significantly either.

Specifically, I am managing my assets mainly through bonds. Unfortunately, I have not been able to benefit from the excellent stock market performance of the past few years. However, I have already prepared for a potential crash and have built a defensive asset allocation to reduce risk.

This is because I am already in my late 50s, living my second life, and have no salary income. After carefully repeating simulations of my future retirement living expenses, I decided that there is no need to take risks. Not needing to take risks means there is no return, which means my assets will not grow.

Except for those who manage their assets like they are aiming for a high score in a game, I have enough as long as I have the minimum assets to live on, so I don't want anything more. This is my own strategy.

When I was young, I also experienced investments that surprised people. I even dabbled in products that were unsuitable for investment. It might have been speculation rather than investment, haha.

I tried day trading, did FX, and also dabbled in Chinese and Brazilian stocks. I have also suffered huge losses in things like the Turkish Lira.

However, I am who I am today because of those investment experiences. My current age, by when I need money, how much I need, and what the purpose is, are all clear. That is why I am simply shifting my asset allocation and portfolio to a defensive stance.

Everyone is different, so please don't copy me.

I often hear people say, 'If Mako-san is doing it, I want bonds too,' but please consult with me thoroughly and only copy me if it is necessary. Otherwise, generally speaking, stock investment has a higher probability of increasing assets through long-term operation.

Stock investment has high volatility, so if you are too scared to do anything and just hold Japanese yen, I recommend bond investment.

Especially for bond investment, now is the perfect buying opportunity. The US policy interest rate is being kept at a fairly high level. Bond prices can be said to be at their lowest point right now. If you target zero-coupon bonds, since it is expected that policy interest rates will fall from here on, it is clear that bond prices will rise.

For a financial product, this is a rare period of low risk and middle return.

However, before purchasing bonds, please study 'what are bonds?' thoroughly before considering a purchase. If you just copy me, you will get hurt.

I am often asked about bonds, but there are not many people suited for bonds. After all, I recommend stock investment.

Now that the possibility of President Trump has increased, he, who aims for high stock prices, will undoubtedly lower policy interest rates and aim for economic expansion. To dispel concerns about a strong dollar, it will likely head toward a stronger yen and a weaker dollar. I think now is the time to buy stocks.

Just because Mako-san holds bonds, please carefully consider whether it suits you. I live on the small interest (like interest) from bonds that generate almost no profit. If you are okay with a small amount of interest, I will consult with you.

Bonds are products that financial institutions do not recommend.

Investment trusts are the products that make money for financial institutions.
Bonds are the products that do not.

Information in the world is filled with investment trusts, isn't it? Social media and YouTubers also focus only on investment trusts. That is because there is marketing working in the background where financial institutions are pushing hard to get people to buy them.

On the other hand, you don't hear much about bonds in the media, but that is because financial institutions don't make money from them, so they don't advertise them.

To acquire proper financial literacy and make choices that suit you, you need a certain level of financial knowledge. Please do your best not to be swayed one-sidedly by listening to anyone, including me, and avoid buying financial products at high prices.

If you don't mind, and if you are okay with just casual conversation, I am always happy to provide financial advice.

Contact information for Mako-san ↓

For individual financial consultations, please try listening to various people's opinions. Please consider me as just one of those people.

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