Starting: review of options for a beginner

[Valoch33]

Dear All,

First all, thank you for this wonderful website and forum about finance in Japan, I have to say the quantity and quality of information is amazing!
I've been leaving in Japan since 4 years (I'm French btw), and after a rough financial start, I have set a savings strategy and expense monitoring which gives me clear picture about my finances.
I'm now thinking to buy a house but I feel I should still strengthen my finances before doing so.

So I came around this great website and I'm now considering all the options. I have to say I'm a beginner! (so maybe you can help me )
I feel I still have to study and make research a bit more the possibilities before starting something.
Let me ask you some questions about the possible investments. (and sorry in advance for the stupid questions!)

1. iDeCo:
My company has an in house iDeCo they set by the end of 2015. At first, the idea of having back the money when I will by 60 was repealing. In fact I was wondering that if I don't stay in Japan until retirement, it wouldn't be a good idea to subscribe to this.
But after reading this blog, and reading again the instruction manual that my company gave to me, I'm wondering if I should subscribe to the iDeCo.
My question: Does it make sense to enter the iDeCo even if I stay in Japan for 5-10 years more?

2. Robo-advisor (Theo)
This kind of Robo-advisor looks very interesting to me since I am a beginner and it looks simple.
You just have to put your money into it, make the settings, and then just watch if your money growing (and decreasing )
You have also a kakutei kouza (tax-reporting account) if I read well.

Questions:
・tax-loss harvesting: what does it mean actually? Your earnings are subject to a 20% tax like for normal trading with SBI for example?
・kakutei kouza (tax-reporting account): when receiving this paper, how to declare your earnings? 年末調整？
・According to the blog below, it is recommended to start Theo when yen is high compared to dollars (which is not the current situation).
Any comments about it?
http://widedeep.hatenablog.jp/entry/theo-_cancellation

3. NISA
5 years without any taxes on 120万 looks very tempting! However, unlike Theo, I guess you have to do everything by yourself.
For example, pass the orders to buy/sell.
Questions:
Would you advise it for a beginner?
What are the advantages and disadvantages compared to Theo?

4. Normal stock market investment:
Using a broker like SBI for example.
Your are totally free to pass your orders (I guess like NISA) and also you don't have a ceiling of 120万.
The downside is the tax of 20%.
Question:
Does the tax is applicable only on your earnings when you withdraw them? No tax for when you put some money in to buy right?

Finally, I would like to know which of the points above I should prioritize, and which are best to combine each others?

Thank you very much in advance for your answers!

Cheers

Valoch33

[RetireJapan]

Hi Valoch

You have come to the right place! And your questions are excellent

Hopefully others will chime in as well, but just to get things started:

1. iDeCo:
My company has an in house iDeCo they set by the end of 2015. At first, the idea of having back the money when I will by 60 was repealing. In fact I was wondering that if I don't stay in Japan until retirement, it wouldn't be a good idea to subscribe to this.
But after reading this blog, and reading again the instruction manual that my company gave to me, I'm wondering if I should subscribe to the iDeCo.
My question: Does it make sense to enter the iDeCo even if I stay in Japan for 5-10 years more?

The real value of iDeCo is the income tax savings. The higher your earnings, the more valuable it is. There is a link to a simulation on the iDeCo page on the main site.

Your employer may also match your contributions, which would make this an even better option.

Once you leave Japan you can no longer contribute new money to the account, but you can continue managing it until you cash out between 60 and 70 years old. All the providers I have asked say they can send funds to accounts abroad.

2. Robo-advisor (Theo)
This kind of Robo-advisor looks very interesting to me since I am a beginner and it looks simple.
You just have to put your money into it, make the settings, and then just watch if your money growing (and decreasing )
You have also a kakutei kouza (tax-reporting account) if I read well.

Questions:
・tax-loss harvesting: what does it mean actually? Your earnings are subject to a 20% tax like for normal trading with SBI for example?
・kakutei kouza (tax-reporting account): when receiving this paper, how to declare your earnings? 年末調整？
・According to the blog below, it is recommended to start Theo when yen is high compared to dollars (which is not the current situation).
Any comments about it?
http://widedeep.hatenablog.jp/entry/theo-_cancellation

THEO does not do tax-loss harvesting unfortunately. WealthNavi claims to do so, but I haven't looked into them in detail.

In principle, as long as you have a tax-reporting account you do not have to take any further action with regards to reporting your taxes (it's all done by the provider in the account).

Worrying about exchange rates is a form of market timing (a bit like fortune telling ) and in my opinion not worth bothering with if you are investing over the long-term. All investments in THEO are done using low-cost US ETFs.

3. NISA
5 years without any taxes on 120万 looks very tempting! However, unlike Theo, I guess you have to do everything by yourself.
For example, pass the orders to buy/sell.
Questions:
Would you advise it for a beginner?
What are the advantages and disadvantages compared to Theo?

NISA can be very easy, especially if you stick to a couple of ETFs or mutual funds. Just open the account, decide what to buy, then buy it. It should be cheaper than THEO and the tax savings are better. It is not quite as simple as THEO, but definitely worth the small amount of extra time.

4. Normal stock market investment:
Using a broker like SBI for example.
Your are totally free to pass your orders (I guess like NISA) and also you don't have a ceiling of 120万.
The downside is the tax of 20%.
Question:
Does the tax is applicable only on your earnings when you withdraw them? No tax for when you put some money in to buy right?

You are only taxed when you receive dividends and when you sell for a profit (capital gain).

Finally, I would like to know which of the points above I should prioritize, and which are best to combine each others?

Generally speaking, as long as they make sense for your situation, iDeCo -> NISA -> THEO or normal broker. iDeCo is by far the best as it reduces your taxable income. However, the fact you can't get your money until you are 60 may be a disincentive for some people. NISA does not tax your dividends or capital gains. I would recommend maxing this out before putting money into THEO or a normal investment account. If you have extra money then a robo-advisor or a normal investing account may fit your situation.

Hope that helps!

[N00bster]

First all, thank you for this wonderful website and forum about finance in Japan, I have to say the quantity and quality of information is amazing!

Welcome and congratulations for finding this site!

RetireJapan's answer is better than anything I could come with, but let's see if I can bring a few extra points.

1. iDeCo:
My company has an in house iDeCo they set by the end of 2015. At first, the idea of having back the money when I will by 60 was repealing. In fact I was wondering that if I don't stay in Japan until retirement, it wouldn't be a good idea to subscribe to this.
But after reading this blog, and reading again the instruction manual that my company gave to me, I'm wondering if I should subscribe to the iDeCo.
My question: Does it make sense to enter the iDeCo even if I stay in Japan for 5-10 years more?

You have to consider that your money will not be available until you are 60. If you are saving with the plan to buy a house, this may not be ideal.

2. Robo-advisor (Theo)
This kind of Robo-advisor looks very interesting to me since I am a beginner and it looks simple.
You just have to put your money into it, make the settings, and then just watch if your money growing (and decreasing )
You have also a kakutei kouza (tax-reporting account) if I read well.

I have been using Theo for ~1 year and quite frankly, it's a breeze. Just wire money and forget it. If you don't want to worry too much about what to buy you may want to start with this, even if there are no tax advantages and the management fees add an extra 1% to the funds cost. It will still be way better than doing nothing and is a smooth way to get started.

・According to the blog below, it is recommended to start Theo when yen is high compared to dollars (which is not the current situation).
Any comments about it?
http://widedeep.hatenablog.jp/entry/theo-_cancellation

We know that the yen is low compared to what it used to be recently. We don't know whether it is low compared to the near or far future. I mean, in 2007 we had 1 USD = 130 JPY, in 2002 1 USD = 140 JPY.

If you are concerned (like I am) about currency fluctuations, invest your money gradually to average your dollar cost. If the yen goes up, then you will be able to buy cheaper. There is no guarantee that you will do better that way vs. spending more time with all your money in the market, but it is probably more important that you sleep well at night.

3. NISA
5 years without any taxes on 120万 looks very tempting! However, unlike Theo, I guess you have to do everything by yourself.
For example, pass the orders to buy/sell.
Questions:
Would you advise it for a beginner?

I would definitely advise it when you feel confident choosing your assets yourself. I think it would be useful if we started a thread (or if Ben wanted to make a blog post) where we aggregate all that we own in our NISAs. Would give a few starting points for future beginners.

What are the advantages and disadvantages compared to Theo?

Advantages are no income tax for 5 years, and no 1% management fee. Disadvantage: you have to manage it yourself. Not necessarily a big disadvantage if you just buy and hold. Theo tends to sell and rebuy stuff, incurring taxes (or loss offsets), which irritates me a bit (but maybe I just don't get why they are doing this).

4. Normal stock market investment:
Using a broker like SBI for example.
Your are totally free to pass your orders (I guess like NISA) and also you don't have a ceiling of 120万.
The downside is the tax of 20%.
Question:
Does the tax is applicable only on your earnings when you withdraw them? No tax for when you put some money in to buy right?

Your capital gains are what is taxed. A capital gain occurs when you sell your asset (not when you withdraw the result of the sale).

Buying something does not incur any tax in itself, nor does the appreciation of your asset while you still hold it.

Finally, I would like to know which of the points above I should prioritize, and which are best to combine each others?

Given your situation, I am not sure about iDeco so evaluate by yourself whether it is good for you.

NISA is the next most tax-advantageous way to go, once you have educated yourself a bit ("Millionaire Teacher" is a great read) and have a plan about what to do. In the meantime, feel free to open an account next January so you can start pouring money into it as soon as you are ready.

Theo is something you can start right away. The cost in taxes and management fees is a bit higher, but at least your money will not stay idle.

A regular broker is good if you feel confident enough that you don't need Theo's management (in which case you can save the 1% fee), or if you want to play with individual stocks (which can be entertaining, but rarely profitable ). Playing with a regular brokerage account has taught me quite a bit about order types and how the market works in general, so it may also be good for your education if you are interested in finance.

[RetireJapan]

Great stuff N00bster! And check out the blog on Monday: I'll be pulling back the veil on my NISA holdings

[robster]

Admittedly, THEO does seem attractive when you consider the ease of set-up and use, portfolio re-balancing, etc.
But that 1% which might seem small, actually amounts to quite a lot.
Especially as this 1% is IN ADDITION TO the expense ratios of the ETFs Theo invests in.
So what was a low-cost index fund at 0.1% becomes a medium-cost index fund at 1.1%

Imagine you start with $10,000 and add $500 per month, for 25 years (and assume for the sake of comparison your investment earns 6% per annum).
The mere 1% management cost of THEO will have cost you more than $50,000.
Surprised? I was. Here is the calculator - try it yourself.
http://www.begintoinvest.com/expense-ratio-calculator/
http://prntscr.com/homsoy

And maybe THEO knows more than you about which funds to buy and, when to sell, but according to the wisdom in Millionaire Teacher and plenty of others, buying and selling is riskier (nobody beats the market over the long term) and incurs more trading costs (which they say are covered by the 1% but i suspect those costs come out of your funds) than just buying a few broad index-funds such as Vanguard S&P500 and holding onto them long-term.
So THEO will save you a bit of research and hassle, but my lay opinion is that it is more expensive than it first appears.

You can see what Portfolio the robo-advisers would make for you by doing a quick simulation (I did this on Wealth-Navi), and follow that, if you wanted to tap into their wisdom but save the management fees.

Read Millionaire Teacher and engage in this extremely helpful and generous forum, and you will be well positioned to save yourself $50,000. That is what I intend to do, with the help of all the contributors on this forum.

[N00bster]

Robster's math and reasoning is absolutely correct. One thing that we may overlook if we stay purely logical though (especially as we begin), is our own emotions and lack of discipline. Having to decide what to buy and buying it (and doing it every month) is work in itself, which our natural tendency to procrastination may delay more and more. And once the market takes a plunge, knowing exactly what we own may push us more towards the dangerous spiral of panic selling.

Theo at least has the psychological relief that someone else takes care of it, and that we just need to setup the automatic monthly wire to be done with it. 1% is indeed expensive for that service, but much less than the alternative of shady advisers, and it at least gets you started.

My personal allocation tends more and more towards regular brokerage as I become familiar with investing (and less scared of it), but I am grateful to Theo for allowing me to invest while I educate myself, and will keep pouring monthly into it.

[robster]

Good point, NOObster.
If you have any doubt in your resolve to stay the course and hang onto your index funds when the market takes a dive, then maybe the 1% is worth paying. THEO can be your Yoda, and save you from panicky errors.

[Valoch33]

Dear All,

Thank you very much for all answers!
It helps a lot to understand what are the current options.

As the window the subscribe to my company iDeCo is every year in June, I will wait until then to subscribe.
In the meantime, my 2 options are NISA or Theo.
Regarding Theo, it looks very tempting actually to subscribe to it, however I understood that the fee is quite high.
Also, since I want to learn more about finance, letting a robot take care of my money will not help I guess

So I will go for NISA. However I have to study more about it, so that's why I bought this wonderful ebook from RetireJapan
If I use Theo, I think I will not learn much as if I use NISA.

Now, regarding NISA, I'm hesitating between the normal one and the tsumitate. I don't think I will reach the 120万 limit, so maybe it is better to start with the tsumitate? I'm open to your advices!

Finally, in this topic, we saw 3 ways to start with investment; iDeCo, NISA and robot.

To speak about other financial products, could you give your advice regarding life insurance?
I saw Japan is quite a big market, and I'm wondering if it gives better performance than the 3 ways above.

Also, do you have other things in mind? For example, investing in another product or giving money in something which can help you reduce your taxes.

Thank you again very much for all the answers!!

Valoch33

[RetireJapan]

Hi Valoch

I would say that if you can only put in up to about 500,000 yen into NISA, you may want to go for the tsumitate version (the limit is 400,000 yen a year). If you can put in more, I would probably go for the ordinary NISA.

Life insurance is a huge topic, but people in Japan tend to overpay for it.