Most backtesting relies on US data. Partly that’s because most of us are American. Partly that’s because the US has the most comprehensive and widely available data.
There’s a pervasive worry, though, that the US data is overly optimistic. After all, it covers a period when the US went from emerging market to sole global superpower and had very little in the way of internal problems (compared to, say, the 1860s when civil war tore the country apart).
When looking at summary data we know that most countries did worse in the 20th century than the US. But most of them were also devastated in World War 2. Is France’s poor equity performance in the 20th century really indicative of their future returns? After all, it seems unlikely they’ll have two more world wars in this century.
But with Japan, over the past 30 years, we have the real worrisome data point. There’s no world war. No civil war. No global depression. Just…decades of a terrible economy.
But what does that really mean? We hear that it has been horrible since the bubble burst in the 1989–90. Are retirees in Japan eating cat food? What would it be like if you were an investor? What does it mean for things like the “safe withdrawal rate”?
A short study of the recent Japanese crisis
Based on public data sources providing Japanese stock returns and bond interest rates, this article provides a…
Siamond managed to pull together a number of free data sources such that we can reconstruct Japanese stock & bond returns from 1980–2016. (And with a bit of extra work we can easily extend that to 1975.)
I’ll let you read the entire article but the biggest takeaway is about the power of diversifying away from home-country bias:
For sure, the diversified investor might have been frustrated until 1989, but then the trajectory speaks for itself. Drawdowns were painful, but limited to 5 years or so when diversifying, while the Japan-only investor would have waited some 15 years for a brief recovery before the financial crisis hit. Bonds did help a lot smoothing the trajectory, thanks to decreasing interest rates.
It also gives reason to be cautious about a 100% equity portfolio.
Assuming a 25-year retirement (slightly shorter than the standard 30-year normally used due to the recency of the Japanese crash) we can see that a 100% equity portfolio saw the “safe withdrawal rate” drop down below 2%. Whereas holding 80% bonds meant that it was still above 5%.