5 principles of asset building: Why are US stocks placed at the core?

Written by:  Mutsumi Kagawa (Chief Global Strategist, Economic Research Institute of Rakuten Securities)


1. Five principles of asset building and roles of US stocks

US stocks (S&P 500 index) fell 19.4% in 2022. This is the lowest rate of decline since 2008 (during the financial crisis) of 38.5%. However, looking back over the long term, last year was also a good opportunity to “buy on decline” and “bargain hunt”. In October 2008, Warren Buffett, a well-known American investor, wrote an article titled “Buy American. I am” when the global financial markets were dominated by fear due to the collapse of Lehman Brothers to the New York Times. Buffet said, “You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.” For reference, I would like to review the “five principles” that I consider important for asset building (investment). They are  “long-term investment”, “instalment investment”, “distributed investment”, “low-cost investment” and “tax-saving investment”. That said, I am sorry to see those who have steadily invested with the tax-saving instalment NISA (small investment tax exemption system) and iDeCo (individual-type defined contribution pension plan) have tried rushing to sell their stocks when their stocks have fallen. Chart 1 shows trends of the past 30 years of US stocks, world stocks, and world stocks excluding US. You can see that the US stocks, which have led the world stocks, were good opportunities for investment when they fell. Besides, I would like to pay attention to the fact that “world stocks excluding US” have been subordinated to US stocks and world stocks.



2. Forecasted ROE in the US market is the highest level

When considering markets for investment, I would like to compare not only growth expectations and valuations, but also “capital efficiency”. From the perspective of long-term performance, returns on US stocks are better than “world stocks excluding US” such as Japan stocks (Chart 1). I would like to pay attention to the high ROE (Return on Equity) in the US market as the main factor. Chart 2 compares forecasted ROE (market forecasted average based on MSCI index) by major stock market. Forecasted ROE in the US market is 22.0%, overwhelming other markets. This has pushed up the valuation indicators, forecasted PER (price-earnings ratio) and forecasted PBR (price-to-book ratio).



On the other hand, the forecasted ROE for the Japan market is 8.9%, which is low by international standards. This is the main reason the forecasted PER and forecasted PBR in the Japan market are low. Looking at sectors with a high ROE in the US market, IT (Information Technology), consumer goods and services, daily necessities and healthcare have all raised the overall average. Even when stock prices fluctuate, the relative high rate of return on shareholders’ equity can be one of the attractions of US stocks that easily attract investment money from around the world. Besides, US is the world’s largest supplier of energy and agriculture. The total population and working population continue to grow. It seems US will continue to play a leading role in the development of technological innovation and the capitalist economy. As a “diversified investment” from the perspective of Japan residents, the investment strategy that focuses on US stocks will continue to play a major role in the future. In terms of asset building, I would like to consider continuing to practice long-term instalment investment in US.


3. Simulating a long-term diversified instalment investment in US stocks

At the beginning of the year, I verified the cumulative results of investing in US stocks (regular fixed amount investment) based on market performance from a long-term perspective. Chart 3 shows a case that invested 30,000 yen in US stocks (S&P500 total earning index <converted to yen>) since the beginning of the 21st century (early 2000), and then continuously invested 30,000 yen at the end of each month thereafter. When 273 regular fixed-amount investments were made from Jan-2000 to Dec-2022, the cumulative investment amount was 8.19 million yen (= 30,000 yen x 273 times) on a book value basis. Due to the dollar cost averaging and the compound interest effect (snowball effect), the market value of the investment principal has grown to about 35.06 million yen as of December 2022. This indicates that the market value has grown to approximately 4.3 times the cumulative investment amount (cumulative investment principal). During this period, there were recessions and the sharp decline in stock prices due to the collapse of the IT bubble (2000), bankruptcy of Lehman Brothers (2008), the Covid-19 pandemic (2020) and inflation shock (2022). The dollar-yen exchange rate fluctuated on many occasions in the foreign exchange market. While investing for long-term, there are many cases where stock prices and exchange rates fluctuated violently  in the short term. However, the US stocks converted into yen far exceeded the savings of course, and also returns of fixed income securities and Japan stocks, indicating that the assets had increased. I would like you to look into the simulation shown in Chart 3 that has verified of the long-term asset building effect of continuing to invest in yen-converted US stocks on a regular basis.


(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (beginning of 2000 – End of Dec-2022)