FIRE in Japan

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nomadscientist
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FIRE in Japan

Post by nomadscientist »

Japan is a kind of worst case scenario for "blind FIRE" in a major country, but I've seen little quantitative analysis, I decided to take a look at it. I define "blind FIRE" as investing money in the country's stock market and retiring when expenses are covered according to a fixed percentage without trying to value the securities one holds.

I am using Nikkei225 total return data in inflation-adjusted Yen. For bond allocation, I use US 10 year treasuries in inflation-adjusted dollars. I assume (hope) this doesn't cause major inaccuracy versus holding Japanese bonds (of course, a hypothetical Japanese investor could have held US bonds).

I use 25 year withdrawal period because that is the longest period that includes retiring during and immediately after the bubble years. I do not reorder the time series.

With these assumptions, the 4% rule has a 17% failure rate in Japan with a 60/40 stock/bond holding:

Image

0% failure "safe" withdrawal rate is 2.5%:

Image

Stepping back from this, the problem is partially with "blind FIRE" and partially with home country bias. If we just plot the total return over the whole time period:

Image

stocks are only being purchased at really bad rates in six years around the bubble peak. We have risk from two sources:

1. over-enthusiastically retiring earlier than originally planned on the back of high PE asset appreciation

2. having a short accumulation phase (typical of FIRE/E-RE) that lies within the bubble period due to bad luck with birth year

The best simple answer for both Boglehead 40-year DCAers and wannabe early retirees in this scenario was to invest in countries other than Japan during years of very high PE (i.e. those six bubble years - it doesnt require hindsight). The Boglehead 40-year DCAer would have been fine anyway, because he will only have bought stock at bad prices for 15% of his career. The E-REr must be more careful.

2.5% WR may be bomb proof. Reducing WR provides nonlinear safety return. At some point, you're just spending the 1/PE each year or less, even at truly atrocious valuations, and that in turn means your low draw down rate alone extends the portfolio life into the "long run" where valuations mean revert.

Below 2.5% WR, you may be more likely to be ruined by confiscatory taxation, war, being hit by a car, etc. than by any failure in your financial planning.

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unemployable
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Re: FIRE in Japan

Post by unemployable »

Japanese bonds have been in the 1-handle or lower since the mid 1990s, very different from Treasuries (for now).

But it doesn't really matter what you use for bonds. The important thing is that some part of your portfolio wasn't in NKY. Four percent in all-NKY would've failed by 2002 for any starting date from 1985-91 I believe.

How far back is your NKY data, anyway? I assume everything essentially got wiped out in Japan in WW2. Which illustrates scenarios exist that no withdrawal rate can protect you against. Then you're starting from zero with nowhere to go but up. Not sure Japan even had a traditional recession between 1945 and 1990. You imply you started around the mid/late 1960s; perhaps a side advantage of this analysis is you're omitting the structural rebuild of their economy.

ertyu
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Re: FIRE in Japan

Post by ertyu »

Prof. Wade Phau has done work on various countries other than the US; swrs are in the 1.5-2.5% range.

Seppia
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Re: FIRE in Japan

Post by Seppia »

In fairness, if one has 100% country bias in 2020, he/she is taking unnecessary risk
It's completely unjustified seen how easy it is to diversify.

nomadscientist
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Re: FIRE in Japan

Post by nomadscientist »

unemployable wrote:
Sun Jan 10, 2021 6:47 pm
How far back is your NKY data, anyway?
1953.
I assume everything essentially got wiped out in Japan in WW2.
Corporate structures survived WWII, seemingly under similar ownership. However, there were expropriations immediately after the occupation, which I believe were then partially reversed by MacArthur. It's a complex topic and I don't read Japanese, so I didn't try to factor it. I think things had normalised substantially by 1953. Resumption of sovereignty occurred in 1952.

The Nikkei225 itself (an index, not an exchange) doesn't predate WWII.

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Re: FIRE in Japan

Post by jacob »

There is a pre-Pfau book analyzing 20th cent returns making the case for equities in any given country. IIRC, the worst ones "in the long run" were the losers of WWII (Italy, Japan, Germany) because losing a world war is pretty bad for its stock market. That's on a timescale that includes the loss (war) though.

nomadscientist
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Re: FIRE in Japan

Post by nomadscientist »

@Seppia

I'm reading Pfau's stuff now.

It's worth pointing out though that long run NKY225 total return is not significantly different to SP500 total return over the same period. The lower withdrawal rate is due to differences in sequence of returns. There's no particular reason to assume this can't happen in the US.

Again, I suggest the best defence against this is to not buy highly overpriced stocks and not make a decision to retire on a fixed percentage of income without adjusting for very high PEs.

But if you do decide to do that, 2-2.5% is probably bomb proof regardless of PE for a broadly diversified fund.

@jacob

If you remember the title of the book, I'd appreciate it.

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