FW-106 -- Why Boring Investments Work

* * * * * * * * F R U G A L W A T C H * * * * * * * *
A weekly roundup of how to be frugal in the world's most
expensive country to live (unless you read this!), written
and compiled by Wendy J. Imura.

October 9, 2007 Issue No. 106

***** Why Boring Investments Work ****

Hi Frugalites!

Are you investing in Japan? If you are already, or were thinking
about starting soon, a new law recently came into effect in Japan
(the Kinyu Shohin Torikihi Ho, or Financial Instruments &
Exchange Law) that might force some changes in dealings with
your broker. Essentially, it aims to extend protections for
investors for a wider range of sectors and financial products.

Practically speaking, it works like this: Sellers of securities
like stocks, bonds, forex savings schemes, and other investments
are now required to provide (at least once a year) clear
explanations *on paper* of how their products work and the risks
involved. Sellers must also ask clients what the purpose of their
investments are (growth, savings for retirement etc), and are
also obligated to be forthright in advertising these products as
to the possible risks investors face (i.e. they might lose
money!) in purchasing them.

This all emerged out of both the 2006 Livedoor scandal and a
string of fraud cases involving elderly and/or other unsuitable
investors being sold questionable products that clearly didn't
meet their needs, resulting in many billions of yen in losses. I
personally heard the sad story of an older 'friend of a friend'
who lost close to 10 million yen in foreign exchange options
trading, which someone told her was 'guaranteed' to make
money. Options trading, a rather complicated investment vehicle,
is certainly not where a beginner should start.

So, where should a beginner investor look to put their money?
What is safe? What has the best long-term performance? One of
my favorite websites, Get Rich Slowly ( www.getrichslowly.com)
offered some excellent advice on the subject which can be boiled
down to one word: indexing.

What is indexing? Essentially, this means placing your money in
funds (or a portfolio) that track a particular target index,
which is called a benchmark. The fund simply aims to achieve the
same performance as the benchmark it tracks. Suppose, for
example, that you want to invest in US stocks. You have a few
choices: (1) you can research one of the thousands of companies
listed on the New York Stock Exchange and other markets, (2) you
can choose one of the tens of thousands of actively
-managed mutual funds (i.e . you pay a fund manager to actively
invest the money for you), or (3) you can buy an index fund which
tracks a typical US stock index (such as the Standard & Poors
500). If you chose the latter, you would not only save money in
fees (on average, you pay 3.1% *more* for actively managed
funds), but may also enjoy better returns over the long-term.
For some extended reading on why, take a trip to the following
53-page PDF file:

(Yes, I'm asking you to read [or at least skim] a 50+ page
document on investing. Why? If you are serious about making
money investing in a simple manner, you'll have to do a little
research. Most people, interestingly, spend far much more time
investigating their next PC or car purchase than their

After reading up on indexing, doing some financial planning, and
determining your desired asset allocation, it's time to start
shopping for funds. If you have a US address or bank account, you
can most likely set up an online brokerage account and purchase
one of the funds recommended in Transparent Investing file. I
recommend this approach, from a tax perspective, for US citizens.
If you do not have this access, then you can ask your local
broker to find you an index fund that tracks either a Japanese
index (there are many Nikkei 225 or TOPIX 'rendogata' funds) or
one for an overseas market. The term 'index fund' is known in
Japanese in its katakana version (indekkusu faando), or is
sometimes mistranslated as 'toshi shintaku' (which is the general
name for an investment trust). Be sure and specify what you want!

If you are interested in the Vangaurd Funds listed in the PDF,
check out Monex Securities. It is, apparently, the sole
distributor of Vanguard Funds outside of the US, and offers a
small cap index and total stock market index fund. It is a
Japanese low-cost online stock brokerage that also offers a full
range of other investments. Regrettably, there appears to be no
English language support.

Good luck investing, Frugalites!

***Those using this newsletter for investment purposes
do so at their own risk***

Written by: Wendy J. Imura (frugalwatch@japaninc.com)
Edited by: JI

Copyright 2007 Japan Inc. Communication




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