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Why did the Nikkei crash in 1989, never to recover?

In this blog I will list some of my top Quora answers, where I am the most viewed writer globally for financial matters, for the last few days. 

If you want me to answer any questions on Quora or YouTube, or are looking to invest, don’t hesitate to contact me.

Long-Term Investing: Why did the Nikkei crash in 1989, never to recover?

Source: Quora

I was reveal some shocking (and unexpected) statistics below which challenge the narrative on Japan.

The reasons are well known and some of the answers below are spot on.

Valuations were crazy and there were other issues at play.

I would mention a few points though:

  1. There has been little or no inflation in Japan for 30 years, so the nominal and real rates of return are almost the same unlike other markets
  2. The Nikkei hit a 29 year high 1–2 weeks ago –Japan’s Nikkei index at 29-year high after US election . If somebody would have reinvested dividends as well, they would have made a profit
  3. More importantly, in reality, somebody would needed to have been unlucky to lose money in the index for the following reasons:
  • The Nikkei was only above 30k for a relatively short period of time. So anybody who invested 5–10 years before that and held is still up
  • The Nikkei was trading at 7,000–18,000 for over 10 years. So, a monthly investor would have made good profits
  • The Nikkei since the 2008–2009 financial crisis has done almost as well as the US Stock Markets, and better than Europe
  • Most importantly, if somebody would have done 35% in US markets, 35% in the Nikkei and 30% in bonds and invested every month for 30–40 years, they would have done just as well as somebody who was say 30% in bonds, 35% in US markets and 35% in European markets. The reason is simple. Whilst the Japanese markets have taken longer to recover, they were so depressed for so long, that a long-term investor could have taken advantage of this. The below information from Bogle heads illustrates the point and these results (if updated for the year 2020) would look better still:
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  • The only person who would have lost is somebody who invested 1–2 lump sums right at the top of the bubble, failed to buy again at regular intervals and failed to also own an international bonds index
  • I do think the Nikkei will hit another record high in the coming 10–15 years, but nobody knows for sure
  • This calculator shows the returns of the Nikkei adjusted for inflation, and importantly, dividends reinvested. The calculator starts in 1950 and ends on January this year – so it doesn’t follow show the latest positive developments in the Japanese market. Anyway, what are the results? An old person who invested in the Nikkei from 1950 until now, would have gotten 4.9% and 8% per year if they had reinvested their dividends (this is adjusted for inflation of course – without inflation it is 11.2% or so). Somebody who invested in 1970 would have gotten 3.8% after inflation if they had reinvested the dividends. 1975 = 4%. 1980 = 3.6%. 1985 = 2.7%. 1987 = 1.3% per year adjusted for inflation and reinvesting dividends. 1989–1990 = about -1%. 1995 = over 2%. 2000 = 2.4%. 2009 = 12.2%.
  • So based on the above, you can see that if you reinvested dividends, it would have been hard to lose long-term. You would needed to be unlucky
  • We see the same trend with the UK FTSE100. It hasn’t done as well as the US markets, but better than people think if dividends are reinvested – https://www.cazenovecapital.com/uk/financial-adviser/insights/strategy-and-economics/how-the-ftse-100-returned-94-without-moving/. So, it is a misconception to say that investors investing at the peak would be down by half, as that doesn’t account for dividend reinvestment.

Nevertheless, it is true to say that Japan hasn’t been as good an investment as the US and indeed global stock markets, despite the narrative being exaggerated.

it does show that people shouldn’t just focus on trends and should always own 3–4 indexes.

Japan was the flavour of the month in the 1970s and 1980s, but that didn’t make it rational to puts all eggs in that basket.

A more broadly diversified index like MSCI World, MSCI Developed World or even the S&P500 (in effect a global index indirectly) would have been better.

Some people made the same mistakes with China and some emerging markets in the 2000s.

The fact that as per the graph above, a well-diversified investor did well even during the extreme downturn in Japan, illustrates the point.

In capitalist economy, how true is the old saying ‘hard work pays off’? Does it pay off for the capital class just a bit more? 

Source: Quora

Firstly, the “capitalist class” aren’t really a class in most developed countries for some simple reasons:

  1. Some high-income people never buy assets or a lot of assets – live everyday as it comes is their mentality. I know plenty of high-income but broke people with zero wealth or they are even indebted.
  2. Over 50% of people in most developed countries, and indeed plenty of mid-income countries, own assets like stocks and property as the graphs show below:
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3. There has been a democratisation. Now even people with a few hundred or thousand can invest.

Nevertheless, to answer your question, hard work is important. What is more important is working hard + smart.

No matter how hard you work, you will never beat a machine. People who leverage technology in business, as an example, will always have a great chance to beat people using human manpower alone.

Likewise, as the book below showed, capital long-term always has a better chance of beating the rise in wages.

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Long-term, wages have done inflation +2%, whereas plenty of assets have done inflation +4% or even inflation +6.5% as per the US Stock Market.

Just play around with this calculator – S&P 500 Return Calculator, with Dividend Reinvestment.

Since 1950, the S&P500 has done 11% per year if dividends are reinvested – 7.4% after inflation. If you start it at 1970, you get 6.8% above inflation.

Now sure, these are only averages. There are some years where assets go down in value, and some years where wages skyrocket.

The point is though, people who own assets long-term can get wealthy without needing to work any harder.

Yet in the modern age, that route is available to the majority of people.

It is the central theme of this book below that a lot of millionaires in the US and other developed countries are “everyday millionaires”, who just invested relatively small amounts for decades.

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So, there is a great deal of truth in the idea that those that own capital have a better chance. 

That doesn’t mean that the only people who own capital in 2020 are elites.

Is it worth investing small amounts?

Source: Quora

It isn’t worth investing small amounts short-term. Investing $100 a month for 2 years, as an example, isn’t worth it.

It won’t compound much even if markets are doing 20% a year on a bull run.

Moreover, you are always taking more risk with short-term investments.

Nobody has lost money by holding a diversified index like the S&P500 or MSCI World for three decades, but plenty have lost by giving up after just three years.

So the keys to investing small amounts are:

  1. Do it long-term. It will compound much more. You can become a millionaire at retirement just by investing a few hundred a month for decades
  2. Reinvest the dividends whenever they come in or invest in funds that do that automatically.
  3. Increase how much you invest once your circumstances change – like you get an unexpected lump sum or a pay rise
  4. Be aggressive when you are young – focusing more on stocks – and start to focus on bonds more as you get older. Keep your asset allocation sensible
  5. Not giving up if markets aren’t as buoyant as they have been in the last 11–12 years. There are always good and bad periods for markets. Nobody can know in advance when those periods will be.
  6. Focusing on your life goals and aligning your investments to those goals. That will give you more motivation during the bad times.
  7. Automating the investing process. Studies have shown that people who invest one day after they are paid by direct debit end up investing 2–3 more than people who wait until the end of the month to invest. It forces discipline and indirectly helps spending habits. It also makes investing the path of least resistance and canceling it becomes a pain, which increases the likelihood of investing long-term.

I personally know a few people worth $2m-$3m who have just invested a couple of hundred a month for years and put in lump sums when they had the opportunity, or got some inheritance.

So, it isn’t all about investing large amounts if you can’t afford to do that.

Can money make a person look better?

Source: Quora

It can do. Just look at these people:

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Money can give people the opportunity to fix hairlines, get treatments and even be less stressed if work gets outsourced.

Although that clearly isn’t the case with these two, there are some wealthy people who feel less stressed once they reach a certain level.

It does depend on the individual though. Just as some world leaders age, like Obama below, some wealthy people feel more stressed than ever due to having new problems:

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It just depends on the person, the choices they make and their priorities.

There are plenty of wealthy people who start caring less about their appearance once they become wealthy, as they don’t feel like they need to prove themselves to others.

I can’t imagine Zuckerberg would look much different today if he didn’t have money, and on the left is Ikea’s founder:

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Are you rich if you have 2 million dollars?

Source: Quora

Most parts of general society, and even the media, would say yes, but that is an over-implication.

It is true that in almost any country in the world, you are wealthier than the average person.

Perhaps the only exceptions are small, tiny, rich places like Monaco.

Or for that matter, if you live in some of the most expensive cities in the world, in the richer parts of town.

With that being said, it depends on:

  1. Where is the $2m kept? Is it invested in ETfs, index funds and liquid assets which can be sold easily? Is it in rental properties or your primary property? if you are worth $2m but $1.9m is in your primary property, you could even be struggling. There are some pensioners in London who are forced to sell their house because they are “house poor” – in other words they have high wealth but relatively low incomes in retirement. A good example of this is widows.
  2. Another example of the first point would be a business. If somebody values your business at $2m that is pointless unless you find a buyer. It isn’t the same as actually have $2m invested into assets which can be sold easily. The same thing is true if somebody owns loads of cars, watches and other assets where it might take time to find a buyer
  3. Where you live and your age. Having $2m in a cheap country at 30 isn’t the same thing as having $2m at 65 in an extremely expensive city. In some parts of the US, $2m gives people a more modest retirement than people assume, due to health insurance and other issues. Again though, that can depend on the exact city.
  4. If you are earning $2m but aren’t worth much because it all gets spent, then you aren’t wealthy. Some people in society would assume that person is rich though, especially if they are going around town “looking rich” with loads of huge purchases. There are plenty of high-income people who struggle to pay the bills because of huge mortgages and luxury car payments. 10% of people earning over $100,000 live pay cheque to cheque – 78% Of Workers Live Paycheck To Paycheck. And that isn’t included people who are just above that level. Moreover, 60%-80% of retired sports stars go broke – Money lessons learned from pro athletes’ financial fouls. So, income and wealth aren’t always related. They can be, but only if the right decisions are made.
  5. Your lifestyle. If you are able to only spend 50k a year, you can easily retire on $2m. If you are spending 200k. year, it gets harder to retire on $2m unless you take big risks – for example high-risk rental properties.

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