“Woman with parasolle and ETF”
Image extraction: DALL・E2
Naturally, people start trading stocks because they want to make a profit, but the speed (risk) at which they want to profit can vary greatly. However, if we were to roughly divide it, it would be either:
1. Slowly, with low risk
2. Quickly, with high risk
Day trading and individual stock investments fall into the second category, and index investing in ETFs (Exchange Traded Funds) and the like fall into the first category. This is quite a generalization, but it can be said.
However, even if one primarily trades in the second category, there should be many traders who also engage in the first category. In other words, it might be quite normal for day traders not only to have a short-term perspective, like day trading, but also to have a long-term portfolio running in parallel.
Overconfidence of the day trader
Long-term portfolios refer to things like funds for retirement, but I didn’t understand their significance when I first started day trading.
I used to be brash and thought – “If I earn more than I can use through trading and save the rest, that would be my retirement fund!” – that era is long gone.
After experiencing some hard times, it took me a while to clearly understand that it’s only natural to manage funds separately according to the size of risk and reward.
The ETFs to include in the portfolio are quite limited
In my personal opinion, the ETFs to include when building a portfolio for long-term investment are quite limited.
There are countless ETFs globally, but if the primary goal is safety (low risk, low return), it would be the popular ETFs with large volumes, participated in by a large number of users from major asset management companies like Vanguard and BlackRock.
That tends to lead to globally diversified stocks (like All-World stocks) or US-related stocks, and I am no exception. Since the main objective is safety and peace of mind, it is appropriate to choose the major ones with large fund volumes.
Japanese stocks
As of June 2023, there have been some opinions stating that Japanese stocks seem to be becoming an investment target. However, personally, I have not yet come across information that makes me want to invest long-term.
When considering long-term, it doesn’t seem easy to find positive factors that could counterbalance the fundamental risks (the outcome of unprecedented easing, natural disasters, closure due to aging and declining birthrate).
That being said, I personally believe that Japan is a country with its own unique merits, and if given the opportunity, I would like to pick up a bit more Japanese stocks when they’re down.
The “opportunity” I mention could be, for instance, when stocks sharply drop due to a ‘some kind of shock’. This might sound inappropriate, but regardless of whether one desires it or not, such situations occur periodically and are reflected in stock prices.
Even if the prices do not plummet drastically due to a ‘some kind of shock’, I would like to have a solid rationale for picking up stocks when they drop a little.
Currency swaps are also good at the moment
The return on ETFs is generally 2-3%, or at most 4-5%. In such a case, you can receive a swap of around 4-5% just by buying (purchasing foreign currency) USD/JPY, for example.
Swap points refer to the adjustment amount for the interest rate difference between currency pairs. As of July 2023, the US rate is around 5%, while Japan’s is around 0%. So, the interest rate difference is about 5%.
However, as I have written on this page, I do not particularly recommend purchasing foreign currency through banks. This is due to the threefold hit of fees, the skimmed-off interest rate difference, and terrible exchange rates. It’s like the jab, jab, straight in boxing, or a triple kick in karate. It’s terrible.
The best way to get the differential without skimming is to open an account with an FX company and hold a foreign currency position with a leverage of 1 (for example, holding a long position in USD/JPY). This is something I picked up from a YouTube video, but when you think about it, it’s definitely true. Swap points are given daily.
However, even with that being said, you should not consider currency swaps as a simple alternative to ETFs.
Currency swaps cannot replace ETFs
The first reason for this is that the interest rate difference fluctuates frequently. Although I wrote that it’s about 5% between Japan and the US, this is just the current situation. Naturally, the percentage would change if the US lowers its interest rate or Japan raises its interest rate (although whether this is possible after Japan’s extreme easing is another matter, at least theoretically).
Another reason is that currency price fluctuations are significant.
For example, even if you hold a long position in USD/JPY without leverage, you would be stuck in a tough position if the trend unexpectedly shifts towards a stronger yen and a weaker dollar. In practice, this isn’t much different from holding an account denominated in US dollars, but it’s common for long-term currency trends to last for 5-6 years. In such a scenario, you would be constantly looking at an account showing reduced profits from trading. Furthermore, there’s no guarantee that the interest rate difference when the position was established will be maintained in such a situation.
In the case of ETFs, the quality of the incorporated stocks is constantly checked and controlled (at least for popular ETFs). This is indeed a product, and although it aims at an interest rate difference, it is different from FX trading. Popular ETFs are popular for a reason, including their low fees.
…This is starting to sound like an advertisement for ETFs, but as I’ve mentioned in the title, my understanding is that ETFs with a yield of just a few percent are suitable for index investing and systematic investing, and thus are primarily for retirement fund accumulation. For a day trader like me who is prepared to take higher risks, it’s the kind of thing you do on the side. Or rather, for any working person, it should be something done on the side of their main job.
