How should American savers react to low interest rates? You would expect the answer to be simple: just invest in stocks instead of bonds or savings accounts. And indeed, a young saver can not only heed this advice, but probably doesn’t even need it, with target date funds for young savers automatically allocating their assets almost entirely in stocks / equity investments. And, on second thought, the immediate availability of mutual funds, ETFs, online brokers, and more, for both individual savings and retirement accounts, provides unprecedented access to investing in stocks. in a way that had not been the case for previous generations. In 1980, only 6% of American households had a mutual fund, compared with almost half the fairly stable of all households since 2000.

But this is an incomplete answer. As we age, experts advise us to shift our investments over time, with fewer stocks and more bonds, or use target date funds with a “glidepath” that do the math to automatically adjust. asset allocation. For example, Vanguard target date mutual funds start shifting their assets at age 40, going from 90% stocks to just 30% stocks at 72, the rest being mostly US corporate bonds. and smaller portions of international and inflation-adjusted government bonds.

So, yes, when reporters flag potential interest rate hikes as bad news, they fail to recognize the very real impact that historically low interest rates have on savers and older retirees who are trying to save money. make sure their savings last a lifetime.

Which brings me to Ms. Watanabe.

The term (equivalent to Mrs. Smith, say) was coined by The Economist in 1997:

“Everyone’s mom or aunt seems to be getting down to it. With near zero short-term interest rates and bonds yielding little more, Ms Watanabe, the ubiquitous Japanese housewife who controls family finances, has become more daring in her investing habits.

In the late 1990s, the metaphorical Ms. Watanabe invested in high-risk, high-interest bonds issued in Japan in yen by foreigners, called “samurai bonds”. These bond issuers were not interested in raising funds in yen, in particular, but instead issued them in Japan “because Japanese investors are prepared to accept much lower returns than their foreign counterparts.”

In the early 2000s, as bond rates continued to fall, “dozens of Japanese women” (or indeed middle-aged Japanese men, according to a 2015 survey) turned to currency trading and have acquired “cult status throughout the world”, so to such an extent that the Bank of Japan has credited “the business activity of housewives [with] stabilize[ing] currency markets as they bought troughs and sold rallies. As reported in 2019, “Individuals typically complete one trade per day, using margin accounts to take advantage of modest deposits of around 100,000 yen (NZ $ 1,483) in bets worth 10 times that. amount, ”said Takuya Kanda, managing director of Gaitame.Com Research Institute. , which is part of the country’s leading internet platform for retail investors. Later, according to Reuters, traders in Japan as well as South Korean retirees turned to bitcoin in the same hope of overcoming the low interest rates of traditional investments.

And this brings us to the present, or rather to a Financial Time article from almost exactly a year ago, “What Ms. Watanabe Can Tell Us About Managing Low Yields.” Looking at ultra-low interest rates in bond markets in the developed world, the authors believe that ordinary investors in those countries currently experiencing such low rates will react in the same way:

“Japanese household investment has propelled at least two highs of the yen’s carry trade – borrowing at low rates to invest in currencies or higher-yielding assets abroad. This brought Ms. Watanabe into the currencies of Brazil and Turkey and later in Australia.

“The key question is to what extent global capital flows could also be shaken by a fictitious Frau Muller, Mme Dubois or Signora Rossi. Or even, if ultra-low rates take hold in the United States, Ms Johnson. “

But, again, back to the retirees and near-retirees who experts say would seek to have the bulk of their retirement savings invested in bonds and other low-risk investments. In October, well-rated long-term corporate bonds returned 2.7%, which is considerably lower than inflation. Short-term bonds pay less. Inflation-protected government bonds have had a negative yield (real / inflation-adjusted) since the pandemic, but have hovered near zero even before that date, since August 2019; they are now at around -1.%.

What about the stock market? The S&P 500 had a very dramatic crash in March 2020, of course, but is now 40% higher than that pre-pandemic high, and doubling its low. Fundamental concepts of investing are based on balancing risk and return, but our government’s policy, monetary and otherwise, is to reduce low-risk returns, trap older investors into giving up advice that are given to them and force them to stay invested in risky investments. assets? And how artificially does this keep the stock market high?

In this regard, the difference between Ms Watanabe and Mr Smith is simple: American households have a greater capacity and willingness to invest in the stock market, compared to Japanese households, which are much more likely to keep their assets in cash. , although, as Bloomberg reported earlier this year, brokerage firms are making new attempts to appeal to young adults and, as S&P Global Market Intelligence reported, the Japanese government plans to “entice more managers foreign assets [to] help broaden the range of investment products and improve returns.

In fact, in the most recent Bank of Japan analysis, 54% of assets held by Japanese households were in the form of foreign currency and bank deposits, compared to 34% in the euro area and only 13% in the United States. . And this difference is perhaps still underestimated, because the calculation methodology includes in the total of insurance reserves, pensions and retirement savings, three types of funds which are in some way “owned” by individuals but do not have the capacity for the individual to make investment decisions. ; by excluding them (which then becomes an overestimate by wrongly including the US 401 (k) plans where savers make their own choices), and the Japanese hold 78% of their financial assets in currency / bank accounts, compared to 54 % in Europe and 17% in the United States

What does it mean ? It might be handy to say that Americans are smarter by taking advantage of the higher returns in the stock market – but how many financial experts, if / when the market crashes, will simply berate older investors who reasonably thought that? they had no choice but to stay on the stock market? There are no easy answers, but the effect of seemingly low interest rates on older savers cannot be ignored.

As always, you are welcome to comment at JaneTheActuary.com!


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