Investment trust fund: The Importance of Diversification
Topic: Asset Allocation: Which country and industry should you choose? Are REIT funds or commodities needed?
(Updated on 2021/01/19)
- Are international investments necessary, and if so, how much?
- Why is diversification important?
- Why should you put money in different industries?
- What is a REIT and does your portfolio need it?
- Does your portfolio need commodities?
Hi there Kinkajyuu here.
What kind of things do you care about when considering your financial portfolio? I’m sure many people have trouble selecting funds from all the possible options. Are international funds needed? From which countries? And what industries should they choose? Should they add REIT funds or commodities?
I’ve opened Tsumitate NISA and iDeCo investment accounts with Rakuten Securities but it was really difficult to select my allocation due to the lack of information. To make it easier for you, I’ll share my insights on how to select funds for beginning investors.
I’m cautious about which countries I allocate my investments towards. Investors often wonder which countries’ stocks are good for investing in: American, Japanese, developed countries, emerging countries… I’ll look into each of them and focus on the differences.
Stocks from Japanese companies are easy to understand for Japanese because they are familiar with the company names. Recently, the headlines have said that Warren Buffett, who is called an investment god by the Japanese press, made heavy investments into Japanese stocks. That’s a good sign that the Japanese economy is pretty stable.
The USA is one of the most popular countries as a target for investment because it has a steady population growth and it is the world’s most powerful economy. The economic foundation of the US is steadfast and many people believe it holds promise of future growth.
Index funds are available that track worldwide stocks. Some people think world stocks are also a good option because they reduce the country risk by putting all money in one country.
For example, if all your investments are in one country and it experiences a major natural disaster, you could see all of your investments become worthless while a world stock index fund could keep its value.
Developed countries stocks
Developed countries stocks include the USA, Japan, EU countries and so on. You can consider G7 countries as developed. It is said the economic systems are well-developed and economic meltdowns rarely happen there, even if some trouble occurs.
Emerging countries stocks
Emerging countries means mainly BRICS: Brazil, Russia, India, China and South Korea, plus Taiwan and Mexico and so on.
To compare with developed countries, emerging countries are popular because they have much more room to grow. There is especially some fear that developed countries’ economies are too capitalized and have no more room to expand. Some people invest in these countries because of the possibility for better upgrowth. However, these countries’ funds generally have higher management fees and are riskier due to the undeveloped nature of those nations.
We touched on diversification in the above points. Country risk can be mitigated by spreading your assets among different countries; otherwise, you could lose everything if you invested in one country which suffers an economic meltdown. If you can state confidently that country risk is not a worry, then you can invest money in just one country. But in my case, I’d like to hold a wide range of stocks, so I hold mainly world stocks and also keep some American, Japanese and emerging funds.
Putting money into several industries is another type of diversification.
You can check the industries held in a fund in the prospectus.
For instance, some major companies in the IT industry are FAANG: Facebook, Amazon, Apple, Netflex, and Google. They are world-famous and their balance sheets are strong.
The automobile industry has Toyota and Tesla which are both growing quickly.
Then there is the financial industry and medical industry, and many others that are also strong.
One of the best choices is to keep several industries in your basket of stocks because it’s harder for your assets to lose money when just one industry has trouble.
As my situation, all above industries are in my basket.
A REIT is a fund that invests in real estate. These funds buy and manage real estate and share the profits with investors.
In my case, I have eMAXIS Slim バランス（8資産均等型）which includes Japanese REIT and developed countries’ REIT, in addition to Japanese stocks, developed countries stocks, emerging countries’ stocks, Japanese bonds, developed countries’ bonds, and emerging countries’ bonds. This type of fund is called a “balanced fund” and it is a one-stop selection, easy to set up even for beginners.
Commodity means hard assets like petroleum, gold, platinum and so on. There are some funds for commodities, and the management fees are higher than with stock funds.
In my case I’ve invested in Statestreet Gold Fund “ステートストリート・ゴールドファンド（為替ヘッジあり）” as a commodity fund. Its fee is 0.895％, which is higher than my other funds. For example, my lowest management fee is 0.0968％ for eMAXIS Slim米国株式(S&P500) .
Commodities show different movements than stocks. Some people believe real assets are strong in chaotic situations like the current COVID-19 pandemic.
I started investing into Tsumitate NISA and iDeCo from 2019. Even though I’m relatively new to investing, I am maxing out my contributions.
However, if I can share one piece of advice, it is to always keep up with the newest information. Information changes quickly, including investing systems and rules. Keeping up to date is the best way to protect yourself.
I hope this post will help you start to invest and select funds.