Category: Uncategorized

The Rule

There are three components of any investment:

1. The Risk
2. The Expected (or average) Return
3. The Taxability

You often hear about “Risk vs. Return”, but the actual return you get is of course affected by taxes.

Investments

When you make an investment, you are taking some amount of risk (at least in the short term) with the expectation that you will make gains.

For example:

1. You could put your money into a savings account at around 0.33% that’s practically nothing, but the risk is very low. Even if the bank failed, the government would step in and make things right. The main long “term” risk is that interest rates might get even lower.
2. You could put your money in something like the S&P 500. Here the expected returns are much higher (based on historical data), but short term returns are quite variable. You could easily have a large loss in your first year of investing. Your overall effective risk lowers as time goes on, but it doesn’t reach a theoretical zero chance of losing money until you get to around 20 years. What’s more, if you are investing in US Dollar based securities from Japan, you also have exchange rate risk. Still, you can expect an overal average of something like 7% after taxes.
3. If you invest in the stock market in Japan, you might be able to expect something like 3-4% dividend income from high dividend stocks, which would be a bit less after taxes.

The point here is, you have a range of options, but the higher of a return you want to chase, the less certainty you will have.

Debts

The same is true from the bank’s point of view. If they lend money for a mortgage, it’s relatively low risk since they could always sell the house. If they lend you money via a credit card loan, well that’s high risk since you might decide not to pay it back.

From the bank’s point of view, they should charge more when loaning money to riskier borrows, and they should charge less when the loans are secured.

Sadly, though, from your point of view, your bank loan is “risk free” in the sense that there is pretty much zero chance that the bank will say “Oh you don’t have to pay as much this month”.

They may count your loan as risky because they don’t know 100% if you will have the will and ability to pay – but your obligation is to pay in full, on time, every month, like clockwork.

What this means is that if you have a credit card balance at 12%, a student loan at 6%, a housing loan at 1%, and a shopping loan at 1% – they are all “risk free” because you know how much you will owe, and when. The only real risk is that the interest rate might change.

Debts as Investments

You can think of debts as investments with negative returns. Your 6% student loan is an “investment” which returns -6%, risk free.

Paying down your debt, then, is reducing the balance of your -6% investment, and when compared to your current situation, is almost the same^*1 as investing in a risk free product at 6%.

This is because paying down 10,000 yen of this 6% loan has almost the same effect as investing in an offsetting financial product that earns 6% risk free.

Example:

For the sake of simplicity, let’s say interest is calculated on your average balance, charged or paid at the end of the year, and compounded yearly. We’ll also assume a world with no taxes.

For every 10,000 yen of your loan, you will owe 600 yen at the end of the year.

For every 10,000 yen you invest, you will make 600 yen at the end of the year.

Scenario 1:

You owe 20,000 yen, so you end up owing 1,200 yen.

Cash Flow : -1,200 yen

Scenario 2:

You owe 20,000 yen, so you end up owing 1,200 yen.

You invest 10,000 yen, so you end up making 600 yen.

Cash Flow: -600 yen

Scenario 3:

You owed 20,000 yen, but you paid down 10,000 yen at the end of last year, so now you only owe 10,000 yen.

Cash flow: -600 yen

Summary

You can see here that the end result of paying down your loan by 10,000 yen is the same as keeping your 20,000 yen loan and investing 10,000.

Where things go wrong: Risk & Taxes

Many people understand this to some extent and say “Well investing can make sense when when I have debt, so long as the investing returns are higher than the interest rate on my loans!” In effect, they ask themselves “Why should I pay down my 3% student loan when I could invest that money in the stock market where I could get 10%?”

Fair though, but there are two problems:

Risk – As mentioned above, the debts you owe are effectively risk free, except for interest rates in many cases. Paying them down is in effect investing risk free. So, the choice between paying down your student loan debts or investing in the stock market isn’t a simple 3% vs 10% question, it’s a question of which is better: 3% risk free vs. 10% with high risk.

Taxes – In the example above, we ignored taxes, but leaving aside mortgages and business loans, interest on most consumer loans is not tax deductible. Investment income, on the other hand usually does have taxes taken out. Assuming you are investing in a NISA account, you may be able to avoid this up to certain limits. Nevertheless, if you are comparing paying down a 3% debt vs a 10% pre-tax investment return, the real choice may be between a 3% risk free investment vs. a high risk investment with a 6-7% post tax expected return.

Comparison with other risk free investment alternatives

Normally, you might have the following choices for risk free investments.

1. Bank Accounts – Less than 0.5% return
2. Term Deposits (1 year term) – <=1% return
3. Japanese Government Bill (1 year term) < 1.5% return
4. Japanese Government Bonds (10 year term) < 3% return

All of these returns are nominal pre-tax numbers.

As of the time of this writing, even if you buy a 10 year government bond, you will only get a 2.785% return. This is the highest it’s been in over 10 years, but still quite small compared to most consumer debt.

So if you pay off a 3% student loan, you can get a better effective return than you can get even by investing in 10 year government bonds.

Not only that, but if you have credit cards, of other consumer debt, chances are you owe 6%-14% APR.

This means your choice comes down to “investing” in paying off a 6%-14% loan, tax free and risk free, or trying to make that much risk free which is … completely impossible.

The Bottom Line

For any loan with an APR above about 4%, paying down the loan instead of investing in a risk laden financial product that will likely return less after taxes is the obvious choice.

^*1 I say “almost”, because there may be differences in compounding periods, methods, interest rate adjustment timing, etc.

Mortgages

The situation with Mortgages is a bit murky. With the average home loan interest rates still under 1%^*3, and the fat that home loan interest is generally tax deductible, things are a bit less clear cut than the consumer debt examples above.

The expansion of the Shin NISA program which enables tax free investment opportunities for amounts on par with some home loans swings things even farther towards the investing side.

For example: Paying down a 1% home loan may save you less than that 1% since it was tax deductible. At the same time, if you were lucky enough to get an average of 8% in an index fund in your NISA no taxes need be paid on that gain.^*2

This means you might be weighing a 0.7% risk free return vs. a risky 8% return. Here, the risk vs. return trade-off seems very reasonable.

Still, if you suddenly lost your job during an economic downturn while the stock market is in a bust cycle you may well wish that you had paid off your mortgage before investing in risky assets.

The main point is this: Investing in stocks, gold, bonds, etc. is really not defensible if you owe any kind of consumer debt such as credit cards, etc. Mortgages are typically much lower interest rates and tax deductible, so considering your options is a sane thing to do.

^*2 In Japan, at least. Some funds pay taxes overseas first before distribution.

^*3 My choice of words here is intentional. Property investment loans tend to be well above 1%, currently hovering around 2.5%.

The Exception

If your place of work has a 401k (or other DC plan) with matching contributions, then for every 10,000 yen you invest, you might be getting an additional 10,000 yen from your employer. Add this to the tax deferment feature, and suddenly you might be able to get 20,000 per month added to your DC account while your paycheck is only dropping 6,000-7,000 yen. That means an immediate and roughly a 300% return for the amount you invest each month.

I would invest in any account with matching to the maximum allowed before paying off low interest loans, assuming my cash flow situation was stable.

Bear in mind, though, that 401k accounts in Japan can not be withdrawn from, borrowed against, or liquidated except in exceptional circumstances. I would be ironic if you were missing credit card payments while you had millions of yen in the bank that you couldn’t touch.

I spoke in my last post about how the stock market is essentially a bet on the progress of humankind. I believe that companies out there will continue to innovate and provide value to individual customers and society in general, but let’s look at the statistics.

I believe that statistics is one of the most underutilized and underappreciated branches of math – in fact any field of study. You will hear people say things like “I don’t know why they made me study calculus in high school, I never use it in real life as an adult”. Fair enough, but you do use statistics – at least you should.

I remember a project at work where a some was asking me how much data they thought we should check. We had many thousands of records, so we couldn’t verify all of it manually. On the other hand, it seemed obvious that we couldn’t just check 10 random records and assume everything would be okay. I told them “Well it depends how sure we want to be”. They looked surprised and asked me “What do you mean?” I replied “Well, so you want to be 90% sure? 95% sure? 99.9% sure? I can estimate how many records we would need to check for each of those”. Despite having a college education, they were mystified by this.

The truth is that statistics can be applied almost anywhere. How many days will it rain next summer in Tokyo? How many car accidents and earthquakes will there be in 2027? And yes, how will the stock market do? Even large language models and other forms of AI are basically based on statistics. Which word is likely to follow the last one given the context? It’s used in the medical field, too. What are the chances you will develop cancer in the next 10 years? How does this change if you are a smoker?

Basically, the way we make statistical predictions is like this:

1. We observe the behavior of a system and collect data
2. We look at the characteristics of this data and create a model
3. We use the model to predict future behavior

Statistics assumes in many cases that things are random, but most things are.

Diffusion

Take an example: You pump air into a tire. The average pressure and temperature increase. Technically, the pressure and temperature don’t need to be even – but in practice they are. Why? The air molecules bounce around chaotically and everything evens out in short order. The movement is random, but there are so many molecules that the transfer is nearly instantaneous. We don’t find situations where all of the air molecules are on one side of the tire – even though it is theoretically possible, it’s so unlikely that it never happens.

A similar thing happens if you place a drop of food coloring into a glass of pure water. It quickly spreads until after just a few seconds the entire volume of water has the same pale shade of color. Again, theoretically this need not be the case, but there are so many molecules of water and dye and so much thermal energy making them bounce around randomly that the randomness wins in short order.

If you were to make an equation to describe this, it would have a curve such that the chances of everything evening out almost perfectly would be very close to 100%. It will actually never be perfectly mixed since things are always in motion, but the chances of it getting very far away from perfect are very, very low.

The law of large numbers

Say we take something that doesn’t have millions of chances to interact, like a coin flip. A single coin flip should have almost a 50% chance of landing on heads, and a 50% chance of landing on tails. If you assume the coin is perfectly balanced and never lands on it’s side, then the percentage would actually be exactly 50%.

Still, if you flip a coin twice, there is a reasonable chance that you could get two heads in a row, or two tails in a row. In fact, there is a 25% chance.

When you get to the third flip, the chance drops to 12.5%, and with the fourth flip, it drops to 6.25%. By the time you get to 10 flips, the chance is only 0.09766%, or 1 in 1024. Make this 20 coin flips, and the chance is 1 in 1,048,576. So is it possible that you could flip the coin 20 times and have it land on heads every time? Sure. You’ll probably never see such a result, though. If you don’t believe me, just try it!

This is called the “Law of Large Numbers” and is related to “Reversion to the mean”. It’s simple: The more trials you have, the more likely you are to align with predictions based on the statistical model you have (assuming it’s correct).

A trip to the casino

The same concept applies when you are at the casino: You might play the slot machine one time and win the jackpot. It’s unlikely, but it could happen. You also might put coins into the machine for an hour and never get a single payout – but that’s equally unlikely. Casinos tune their machines so you win just often enough to keep playing and lose your money slowly, so they payout ratio might be something like 0.99 – in other words, you get back 99% of your money. This means sometimes you get back more than you put in, and sometimes you get back less – but on average it will be 99%.

The average doesn’t tell the whole story though. Imagine two different scenarios:

1. For every 100 coins you put in, none of the coins pay out until you get to the 100th coin – then 99 coins come rushing out. This would have an average payout ratio of 99%, and also if you only look at trials of 100 coins, would always pay out 99% of what you put in. There would be zero variance.
2. For any coin you put in, there is a 99% chance a single coin will come out – but more than one coin never comes out. You could very easily have the case that you put 100 coins in, and 100 coins come out, and also have the case where you only get 99 coins, or 98 coins, etc. As the number of coins goes down, that scenario becomes increasingly unlikely. The case where you get 0 coins back is technically possible – but practically impossible.
3. For any coin you put in, any number of coins could come out. Maybe 0, maybe 1,000,000 – but the long term average is that you will get back 99% of your money. You might put in 1 coin and get back 100 sometimes, or you might put in 10 coins and get nothing. Both are very unlikely.

All of these scenarios are the same in that if you put in 1000 coins, you should expect to get 990 out on average, but the level of certainty is very different. In the first scenario, you are guaranteed to get 990 coins. In the last, you are actually unlikely to get exactly 990 coins. You might bet 800 this time, and 1100 next time, but if you did thousands of trials, the average would converge on 990 coins.

Clearly the “average” doesn’t express all there is to know, so we usually use a combination of the average and the variance, expressed as standard deviation. I won’t get into the details, but just know that the larger the standard deviation, the more variance you can expect.

One last example: Average height

We know that different people are different heights. If the average height of men is 175 cm, then that means if you measured the height of millions of men and averaged the results, you would get a result of 175 cm. Generally, the farther you get from this average, the less likely it is. For example, if you take a range of 170-180 cm, it may be that 85% of men fit into this bracket. If you change the numbers to 165-185 cm, perhaps 95% of men fit into the bracket.

In the case of height, extreme case are not really possible. We can say with confidence that no men are ever measured to be 10 cm or 3 m. Not only have we never measured such a person, but we know it to be biologically impossible. Such limitations don’t exist with things like coin tosses or diffusion, but when you are far enough away from the average, it doesn’t really matter.

The “Normal” distribution

I think everyone is familiar with the so-called “Bell curve” which was often used to adjust the scores when grading exams.

The idea is this, some people will always do better than average, and some will always do worse – but there will always be an average, and there will always be people who aren’t exactly average. The farther away you get from the average, the fewer people you expect to get that score.

For example, if the average score is 80%, you might expect that few people get 100% and 60%, and still fewer people get 0%.

Professors manipulated test scores to fit this distribution in order to account for differences in test difficulties. For example, if the average score was 95%, then they may decide the test was too easy, and so therefore 95% shouldn’t indicate an A, it should indicate a C.

Likewise, if the average test score was 60%, then 60% shouldn’t be a D, it should be a C.

Scaling the score linearly would probably work fine (and I suspect that’s what many professors did), but making it fit the normal distribution is theoretically better, since it is thought that test scores are in fact normally distributed when the sample size (number of test takers, in this case) is large enough.

This assumption may be incorrect, but it was believed to be true because so many phenomenon follow such curves.

A normal distribution is a statistical data distribution where data is evenly distributed around a central mean, and this happens most of the time in nature. It also seems to happen with most data from the stock market. That is, stock market data when viewed in volume seems similar to random patterns found in nature.

But what does standard deviation actually mean?

Well, if you assume bell curve mentioned above (which we normally do), then 68.2% of all data falls within one standard deviation of the average (mean). For two standard deviations, the number is 95.4%, and for three standard deviations, the number is 99.7%.

For a real world example: You might say the S&P has average annual nominal returns of 10% and a standard deviation of 15%. That means that based on this model, for any given year the expected return is 10%, but there is a 68.2% chance that the returns will fall between -5% and 25%.

Two standard deviations is 30%, so that means that there is a 95.4% chance that the return for any year will be between -20% and 40%.

Three standard deviation is 45%, so there is a 99.7% chance that returns will be between -35% and 55%.

That’s a pretty wild ride, but it’s a good indicator. There is only a 0.03% chance that you will lose more than 35% or gain more than 55% in any given year.

Put another way, standard deviation quantifies how far returns deviate from the average. The bigger the number, the more variance.

How valuable is a model based on past data?

I should note at this point, there are two ways to create a model:

1. Create it from scratch, based on what you assert to be true. This is what we did for our coin flip experiment. We decided ahead of time that the chance on landing on heads for each coin flip was 50%
2. Measure it from data in the real world. This is what we did for the men’s height experiment. We don’t know ahead of time what the average or standard deviation “should” be, we just collect data and analyze it to find these numbers.

With the stock market, we need to look at the actual data and come up with a model for practical purposes. There are limitations to this, the main one of which is: What time period should we use?

The time period connundrum

Looking at the S&P 500, there is data since 1926 – That means nearly 100 years of data! There is also 77 years of data for the Nikkei 225.

That’s a lot of data, and in general, the more data the better. For example, in determining people’s average height and the standard deviation in height, the more data we collect, the more accurate our model will be.

But… in many countries, the average height has been increasing over time.

Statistics from MEXT show that the average height of a 17 year old boy was 160.6 in 1926, and 170.8 in 2024. That’s over a 10 cm difference in average height in just 98 years.

What data should you use when creating a model for male height in Japan? Should you include all of the data since 1926? Should you include only more recent data? If so, how many years?

In the case of height, the trend rises from 1926 until around 1985, and then seems stable from there – so I would use data from 1985 or so until now. This is because in the case of height, we know there is a clear trend, and we also know that causes likely include things which aren’t likely to reverse – like better nutrition.

With the stock market, though, it’s less clear. For example, the average returns of the S&P 500 for the last 2 years have been well above 10% – but such a short term numbers tell us very little.

If you just look at the time period when COVID happened, the declines were rapid, and if you calculated standard deviation based on that alone, it would be 80%.

Likewise, if you calculated the standard deviation around the time of the Lehman Shock, it would be over 40%.

Which of these number is “right”? Well, probably none of them is exactly going to predict the future precisely – that’s the nature of random occurances.

The real question to ask yourself is “Has the basic nature of the market changed?”

Looking back, it seems clear that the advent electricity didn’t change things as drastically as one would think. In hindsight, neither did the Internet, 5G, of cryptocurrency. Businesses still exist: Manufacturing, farming, mining, you name it – they existed back then and will exist in the future. If something like smart phones or AI makes them more efficient, great. If not? Well they won’t be adopted.

The fundamental nature of business hasn’t changed. The equation is still Revenue – COGS = profit. Based on that, I see no reason not to use the full history of data at our disposal.

If we do that, then we can be fairly sure that average returns will stay somewhere above 7%, and the long term standard deviation is something like 15% – 17%.

Decline of the American Empire and USD

But what if you think America (or Japan) is in decline? What if you think the USD or JPY will be worthless in a decade.

Well, it’s certainly not impossible. In the past France, the UK, Spain and Japan had empires, but the influence of all has faded over time. Rome was once the center of the universe as far as anyone is concerned, but that’s clearly not the case now.

Japan has dropped in the GDP rankings recently, but that isn’t necessarily bad for Japanese companies. In fact, the falling Yen is good for exporters. Likewise, the situation in the United States is complicated to say the least. Various structural problems have been looming for decades, while the national debt continues to climb in both the US and Japan.

It’s not unthinkable that the relevance of Japanese and US companies fades over time with the rise of China, India, and Africa. In the short term, it’s also completely possible that the next blockbuster drug comes from a European or Korean drug company.

It’s true, investing outside of Japan shouldn’t mean just the US. The US may be the largest market in the world right now, but that may shift long term.

For example, the US had a GDP of $31.82 trillion USD in 2026, while the EU had $22.52 trillion. The means that the US economy was 41% larger than that of the EU – but the EU has actually been growing faster, so in a decade or so, the GDP of the EU may surpass that of the US.

All of this is pure speculation, of course, but that’s kind of the point.

Numerous companies were removed from the S&P 500 over the past 10 years, including Xerox, Tiffany & co, Western Union, and FLIR. At the same time, companies like NXP, Ceridian, and Enphase were added.

Enter the Global Index

Fortunes rise and fall, and just as different companies have their time in the spotlight, the same is probably going to be true for countries as well.

This is why you can invest in global index funds such as the eMAXIS Slim All World Equity All Country fund. The US currently makes up 64% of this fund, but this number will fluctuate with the fortunes of countries as time goes by. If the influence of Japan or the US wanes and developing markets continue to grow, you can participate in that success by holding such a fund. What this means in practice is that not only can you diversify your investment across companies and sectors, but even countries.

So why doesn’t everyone invest in global indexes? Well, in recent years the S&P 500 has beaten the global indexes.

• If you believe that the US will continue to outperform other countries, then you might be interested in investing in something like the S&P 500 or the Russel 2000.
• If you want to invest domestically, then there are many funds that track the Nikkei 225, TOPIX, and other benchmarks.
• If you want to diversify to the maximum extent possible and take advantage of the long term gain made by other countries, then something like an All Country fund might be a good idea.

Many times when try to dissuade someone from “investing” in FX, Crypto, etc., and steer them towards stocks, I get back “Well aren’t stocks a form of gambling too?” Let’s take a look at that.

The financial definition of “Investment” from Wiktionary is as follows:

(finance) A placement of capital in expectation of deriving income or profit from its use or appreciation

The definition of “Gambling” is as follows:

An activity characterized by a balance between winning and losing that is governed by skill and/or chance, usually with money wagered on the outcome.

There is an important difference between these two very different definitions: The “expectation of deriving income or profit” part. It isn’t simply what you “expect”, as in “I expect Toyota stock will go up 10% tomorrow!”

The word “expectation” as in “expected profit” or “Expected value” has a specific and mathematical meaning in finance. Basically, it’s a weighted average of all of the scenarios.

For example, if you have a 50% chance of earning a 10% profit and a 50% chance of earning nothing, then your “expected” profit is 5%.

Stocks are ownership

Sometimes people forget this, but stock certificates represent ownership in a company. Each share of stock is only a small fraction of the company, but if you owned all of the stock, you would own the company outright. Stocks are simply a way to share ownership of a company among many people.

Let’s start with a tame example, Tokyo Waterworks (Formally: “Tokyo Metropolitan Government Bureau of Waterworks”, also known as TW).

TW has a business model that is well understood and has been around a long time. They pump fresh water out of ponds, lakes, or rivers, filter it, disinfect it, and pump it to businesses and residential customers.

The water itself is free, but cleaning it requires equipment, chemicals, other supplies, and manpower. Water mains must be constructed so that water can be delivered to customers, and those pipes need maintenance.

So although the water itself is free, there are expenses. The company charges enough fees so that the costs are covered, and a small profit remains. Actually the amount of profit is quite large, but when viewed as a percentage of revenue, it is on the order of 3-4% annually.

Most of this profit is distributed back to the stock holders as dividends, so if you bought a stock of TW for 10,000 JPY, you would see a dividend of somewhere around 300-400 yen each year.

The amount goes up and down year by year depending on investment, expenses, etc. – but the long term average is relatively stable. They are the only game in town, and everyone needs water.

So, if you invest your money in TW, you can expect to earn a relatively stable profit for decades to come. They aren’t going to suddenly have a blockbuster year due to an explosion of demand for new innovative products, nor is demand for water going to go away. Likewise, the cost of the water they pump from lakes isn’t going to change much.

Salaries and equipment prices may go up, and it may take them a while to compensate with rate hikes, but overall the situation is relatively stable.

Since the dividends are stable, so is the stock price.

Clearly, investing in TW is not like “betting it all” on black or red at the roulette wheel. You are not likely to find yourself bankrupt tomorrow.

Still, you can imagine scenarios where having all of your eggs in the TW basket would leave you in trouble:

1. There is a financial scandal like Enron. This is very unlikely, but always possible.
2. There is a giant earthquake that destroys lots of infrastructure. This is always a possibility.
3. Some other unforseable event or trend.

In order to improve your already good chances, you could also invest in other utilities like Tokyo Gas, Tokyo Electric, and Internet companies. These also all have a long history and well understood business models. Since most electricity in Japan in generated from natural gas, and most gas is imported, gas and electricity prices can change rapidly – but people will always need electricity, and probably gas too.

Still, a large earthquake or other natural disaster could cause infrastructure to all of these companies since they are all located in Tokyo.

To mitigate that, you could also invest in utilities in Okinawa, Kyushu, Osaka, and Hokkaido.

You could even invest in utility companies overseas, like Philadelphia Electric Company, etc. – but then of course you start to run exchange rate risk. Since many things you buy are probably imported if you live in Japan, this actually could be a good thing.

Why am I talking about utilities? Because they have captive customer bases, regulated rates, long history, and well understood business models. This means they are usually very stable, as companies go.

Hopefully you can see that investing in a portfolio of utility companies across Japan and other countries would be relatively “safe”, while also providing more income than something like government bonds.

Looking at the polar opposite type of companies, the likes of Amazon, Apple, Google, etc. are much more likely to surge in price when a new product turns out to be more popular than expected, or drip in price when a new product flops, expenses rise, etc. These types of companies also don’t typically pay dividends either, and since nobody has a crystal ball, it’s hard to know the “correct” price for these stocks.

Betting on any single one of these companies is indeed gambling. Imagine you invested in Apple or Google 25 years ago. Now imagine you invested in Blackberry or MySpace.

One thing is still true, though, though it would take a crystal ball or time machine to know which of these companies would succeed – the winners always make more than the losers lose, so if you had a wide portfolio of such companies, you would always make money in the long term.

Consumer product companies like Kao in Japan and Proctor & Gamble or Unilever overseas are much more stable than technology companies since everyone needs soap and toilet paper – but they usually pay somewhere between what tech companies and utilities pay.

Drug companies tend to do well even in a recession, when restaurants and bars struggle. After all, everyone still needs their medicine.

So, if you invest in a big basket of all of these things, then you can, over the long term earn a pretty penny. When the tech companies, movie studios, and the like hit it big, or there is a blockbuster drug, you will earn big as well. When there is a recession or some companies die out, you will also need to ride out low, or potentially negative returns – but if history is any guide, the market will return to growth.

If you aren’t betting on any specific company when you buy a stock index like the eMaxis All Country fund, then what are you betting on? Well, basically, the progress of humankind.

Despite all of the bad news we hear every day, the scandals, the wars, the human rights abuses, etc. – the trust is that poverty has been decreasing almost every year. More people than ever have running water, electricity, washing machines, etc. These people will live better lives, and have more time to contribute to society instead of barely surviving. They will start companies that need investors to grow beyond a certain point, and you can be a part of that.

That said, it’s important to remember that buying stock is investing into a business. Buying a stock index is just investing into lots of businesses at once. It doesn’t make any sense to buy a stock and sell it tomorrow than it does to invest in your friend’s dry-cleaning business or restaurant and then ask to pull out your funds the next day.

Most businesses survive because they are doing something useful to society. They are producing vegetables and fruits, new drugs, microprocessors, tasty bread, useful chemicals, winter coats, bicycles and microwaves, or the latest movie or killer app. They stay in business because people pay for their goods and services, and they in turn provide jobs for their employees. This is why it makes sense to invest in a company.

Compare this to day trading. You buy a share of Toyota today at 8,000 yen, not because you have done some analysis of their dividends, assets, and liabilities to determine that 8,000 yen is a fair price – but because you “expect” someone else will go up to 8,500 tomorrow. That’s not helping anyone or contributing anything to society in any way – and it is very much gambling, since there is also a decent chance it could drop to 7,500 tomorrow instead.

Betting on FX or Cryptocurrency is even worse.

A friend of mine recently asked me “Oh yeah? Then why does FX exist?” FX has legitimate uses. For example, if you have a contract in a foreign currency that is due several months in the future, you might want to convert the money now so that you aren’t at risk of the rates changing. (Or, you might want to buy options so that you minimize your risk due to currency fluctuations without actually converting the money now).

These things are important and necessary for international business, and there may even be instances where they are useful for personal use (Are you saving up for a house overseas?) – but betting that the price of the Dollar or Euro will go up or down is pure speculation. Gambling in the truest sense.

What about Cryptocurrency?

Well, talking about the well established “currencies” like Bitcoin and Etherium, I can simply say this – there is no reason why they should go up except for inflation of the yen- and if that’s your concern, precious metals are a much better option.

The original goal of Bitcoin was to be an international money system free from interference from banks and governments. Free from sanctions and censorship. Perhaps a noble goal, but along the way things have changed.

The main uses of Bitcoin and similar “coins” has been for criminal activities, money laundering, and speculation. Bitcoin itself is completely worthless. It can’t be melted down to make jewelry like Gold, and it can’t be used to pay taxes or other debts like government currencies. Almost no stores most people shop at will accept it, and so you need to convert it back into Yen or another actual currency to buy much of anything.

And… not only to transactions take a long time to clear, the value fluctuates wildly, making it a poor currency.

If it’s not a currency, it must be an investment, right? Well not so fast, it’s not like a business. It doesn’t provide valuable goods and services to society, so it can’t be “expected” to earn a return. In fact, the only ones who can “expect” (in the financial sense) to earn a return from Bitcoin are the exchanges – just like stock exchanges earn nice commissions from day traders.

What’s more, other cryptocurrencies like “memecoins” are almost all just scams. I can only shake my head when I hear people act surprised at losing money on these schemes. Of course they did!

Someone I knew told me about a complex scheme they “invested” in, where they would get paid 1% per month, “risk free”. 1% per month is 12% per year. I mean, just use a little bit of critical thinking. If anyone could earn 12% per year, risk free, everyone would be doing it. What magic does this cryptocurrency company do that they earn more than Toyota, all while taking on no risk? What’s more, why would they pay 12% to you to borrow your money when they could just borrow money from the bank at something closer to 2-4%?

At best, cryptocurrency is akin to electronic beanie babies or trading cards. When people are interested in it, they will bid up the price, when they lose interest, the price will fall. That sure sounds like gambling to me.

So, is stock investing akin to gambling? Well, it can be. If you invest all of your money into one risky company, then you are very much gambling with your future. If you invest your money long term into an index that includes thousands of countries in dozens of industries many countries around the world then you are investing in the future of humankind – and helping to ensure prosperity for everyone.

If you study finance in college like I did, one of the first terms you will hear is “risk” – but what does it mean, really?

I would propose the following: “Risk” as it is defined in finance does not mean what many people think it does.

You will often hear “High risk = high return” and conversely “Low risk entails low returns”. This is used to mean that investing in stocks is riskier than investing in corporate bonds, which is riskier than investing in treasury bonds, which is riskier than holding cash – but as you take on more risk you will get a higher average return. Risk in this context means volatility – how much the market price varies from day to day.

For example, let’s suspend reality and assume for a moment that the notions we hold about the US stock market are true. We will assume that the average return, and the standard deviation of those returns are a set fact. I believe this is actually more or less the case for the foreseeable future, but it’s a matter of opinion, so let’s just stipulate that it’s mathematical fact for purposes of argument.

If this is the case, then there is roughly a 50% chance that the stock market will lose money on any single day. Looking at the opposite extreme, there is a 100% chance that you will make money in the stock market if you buy and hold the market for 20 years. This is historically true, and if you believe the statistical properties you can derive from past data, then it is also basically true going forward. So, you might say that investing in stocks for a period of 20 years or more is “risk free”.

Since we are talking about Japan, we can look at inflation adjusted numbers for the Nikke 225 and TOPIX over the last 20 years for comparison:

• 142% for the Nikkei 225
• 238% for the TOPIX

In fact, neither of these indexes has ever lost money in real terms over a rolling 20 year period.

On the other hand, holding onto cash is very risky – or put a different way, “risk free” in the negative sense. There is nearly a 100% chance that it will lose significant purchasing power over the same 20 years. Yes, Japan did have a bout of deflation, but that is a blip in the history of currency movements world-wide. Even with the long period of deflation, the real value of the yen fell 21% over than last 20 years.

That means if you started with 10 man yen invested in the Nikkei 225 10 years ago, you would now have 310,000 JPY today. If you held it in cash, you would have, well, 100,000 JPY today. The Yen has dropped in value in either case, but at least by investing in the Nikkei you gained a lot more than the Yen lost (And this is ignoring the dividends you would have received in the meantime).

The fact that you would have gained more by investing isn’t really the point – that’s almost a given. Rather, the point is that if you believe that we know the statistical properties of the market, and that those aren’t going to fundamentally change in our lifetimes, then you made those gains by taking on now additional risk. We “knew” that over 20 years, you had basically a 100% chance of making money, and we knew on average how much it would be.

So when you hear the financial news talk about “risk”, know that they are talking about the day to day swings. Technically speaking, this usually means variance or related measures like the standard deviation – but what they are really talking about is the difference between the expected returns (i.e. the average returns) vs. the actual returns. These are just measurements to tell you how random the market is, how messy the trend line is.

Since we endorse index funds, this mainly refers to systematic market risk. To be sure, the market can fall because of an earthquake, a pandemic, or a rainy day. The market can also rise with a new PM, new treaties, or nice weather.

If you zoom out, though, all of this noise fades into the background. In this context, “Risk” means the waviness of a line, which really just indicates how long you should look to stay invested to ensure making a profit.

Assuming there are no large fundamental changes to the market, risk fades to zero over the long term. Importantly, this long term is still much shorter than a human lifetime.

So that’s it, then, right? Simply invest all your money into the market for at least 20 years, and you have guaranteed profit? Well, sort-of.

The problem in real life is that there are different kinds of “risks”, like the risk that you will lose your job, that the economy will tank, that you will need to fix your roof, move, etc. Those risks require a buffer of money so as to avoid needing to remove money from your investments – otherwise you can’t keep your money invested for 20 years.

In my experience, people underestimate the chance that something surprising will happen. Nobody expected 9.11 or 3.11, and people don’t expect to get divorced, hate their job, or get into a car accident, etc., either.

To those who think that the stock market has, or will fundamentally change – maybe you’re right, but everyone who has thought so in the past has been wrong. I believe that sitting on the sidelines is a far greater risk. If you aren’t confident about Japan’s future, fine, invest internationally. If you are worried about the global stock market, then what you are really worried about is the future of humanity. The stock market is made up of businesses, and I believe that profitable businesses will always exist and that it will always make sense to invest in them.

What has changed is that our generation has the ability to easily invest in thousands of businesses worldwide at the touch of a button, starting with small amounts, and often for free – and tax free. Investing used to be only for those who were already wealthy, so I treat this democratization of finance as relatively recent privilege that that more people should take advantage of.

In the end, I believe you can make money in the stock market “risk free” – but it requires having enough of a cushion to cover life’s risks. I think more people should invest, and people should invest more, but I also think that many investors keep too little of their portfolio cash. How much is the right amount? The amount that lets you cover the unexpected and lets you sleep at night. Any more than that, and you are missing out on the returns of the stock market. Any less, and you might be tempted to sell at the worst time – and that is the worst risk.

If you ask most people with little investing experience how much they want to make, the answer is usually something like “As much as possible”. Likewise, if you ask about their target date, they will say “As soon as possible!” Yes, sure, we all want to be wealthy today, not tomorrow. That’s not how things work though.

Let me be the first to say I am not the biggest fan of “life plans”. When you go to see the average financial planner, they will set up some parameters, using your current age, income, expected retirement date, etc., and say “Okay.. the market average returns are X%, and you have Y years. You will want to have Z% of your salary to spend in retirement, of which W% should be covered by the national pension, so there is a gap of G JPY. In order to get that, you need to start saving C JPY per month now”.

That’s great and all, but what if you don’t really want to retire? What if the future market returns are different from the past? What if the returns do average what is expected, but your retirement just happens to start during a major recession?

Don’t get me wrong – I think you should save and invest – I just don’t think you should have hard targets and dates in mind so much as a mentality to curb your lifestyle, create a margin to save and invest, and build your wealth. How and when you use it should remain flexible.

The main issue I see is that once people realize and accept that investing in stock market index funds really is the most reproducible path to wealth in the long term, they say “Well, in that case, let me just invest 100% in stocks!”

I’m not saying that this is never the right answer – in fact, that’s basically what I do – but it’s not for everyone. In fact, it’s probably not for most people. I know it’s okay for me because I have seen the market drop more than 30% multiple times and I haven’t lost any sleep over it. I have an emergency fund and s stable income from working, and realized both mathematically and emotionally that the stock market can and will flail around. I know that money is in the bouncy castle, and I am okay with that.

Yet I have spoken with many people who just can’t help themselves. They check their 401k balance every week, and feel sick when it goes down 5%, much less 30%. They start imagining eating porridge every day during retirement, not being able to send their kids to college, etc. Then, of course, they think it was a scam all along and want to sell at the worst possible time. They thought they had an appetite for risk and wanted to go all in to maximize returns, but ended up selling at the bottom of the market – which is literally the worst thing to do.

Those people made the mistake of not factoring in their emotions. If your emotions are going to make you want to sell at the bottom of the market, then the best strategy for you is not to invest 100% in stocks. There is no shame in holding more cash. For example, you might keep a portfolio of 45% cash, 5% gold, and 50% stocks. Will it grow more slowly than pure stocks? Without a doubt – but it will also grow faster over the long run than getting out of the stock market at the worst possible time.

Even for the most confident of us, leaving room for error is important. There is no guarantee that the stock market will perform the same in the future as it has in the past. I truly believe that anyone who says “It’s different this time!” is flat out wrong – but hey, maybe it really is different this time.

Even though robots didn’t take our jobs, and the internet didn’t do away with classrooms, even though 5G didn’t revolutionize the world… maybe AI, cryptocurrency, or some as-of-yet unseen force or technology will emerge and change everything forever. I doubt it, but you never know. If you couldn’t handle that happening, then maybe keep more cash, and save more in general.

I don’t save what I would need for retirement, I save a lot more than that. Why? Well, money in the bank is flexibility. If I need to stop working due to an injury, or pay hospital bills for a sick family member, or … whatever. Projections on a spreadsheet are nice and logical, but the world is messy and unpredictable. You never know what is going to happen tomorrow, but you can control today.

In my case, I am a risk taker in that I invest almost all my money into stocks, but I am also risk adverse in that I save a much larger percentage of my income than I have to. I would advise people to think long and hard about not only whether they have enough of a cash position, but also about whether they can shave a little bit off of their living expenses to save more.

Saving need not have a specific purpose. Maybe my attitude will change and I’ll decide to retire early. Maybe I will lose my sight and be unable to work. Maybe a huge earthquake will topple my house. Maybe Russia will attach Japan next week. Nobody knows what might happen. For example, I knew about the 2008 Lehman shock about a year before it actually happened – but I didn’t know the exact timing when everything would come tumbling down, how bad it would be, or what other things would be affected.

I know now that inflation has resumed in Japan after decades of deflation many people will be thinking “Save more?! Are you crazy?” – but I have known a lot of people who claimed they couldn’t save while spending money they clearly didn’t have to.

I used to be in charge of enrollment at the DC fund where I worked, and I recall drinking with a coworker after work one day. He asked me “Do people really invest in that thing?” “Sure”, I told him, “but not everyone”. He insisted that he couldn’t spare even 5,000 yen per month, while he proceed to spend about that much at the bar with me. I suggested a relatively painless option “Look, when you get your nest raise, just start contributing the minimum of 3,000 yen per month, and then every time you get a raise after that, put half of the salary increase towards the fund – your take home pay will still increase, just not by as much”. Our company had a matching policy, so if he had put the 3,000 yen into the DC, the DC balance would have increased by 6,000 yen each month, while his take home pay would have decreased by something like 2,000 yen. Even if he just held it as cash in his DC, he would have gained over 4,000 yen per month. I doubt he would have even noticed that 2,000 yen loss in his take home pay, but he would have been accumulating he would have been saving 72,000 yen per year. Even just keeping that in cash, he would have accumulated 720,000 yen in 10 years even if he never increased the contribution. That’s not a huge amount, but it’s a whole lot better than nothing in return for a barely noticeable reduced increase in take home pay.

A more recent anecdote involves a person I know who has a decent salary but basically every bit of their income is promised to something. They have a large house, basically the maximum they could afford with their dual income, they have multiple children, and two cars. They confided in me “Boy, I sure hope my bonus ends up being at least as large as last year’s bonus!” I mean, we all hope that, but i still asked “Why?” Their answer was “Well because I took the kids to Disney Land and we stayed at the hotel there… it cost a lot of money” – so not only are they spending future income now by buying houses and cars on loan, but they are spending their bonus money on vacations as well. I explained my strategy as follows “Well, I assume I will get no bonus. That way, if it turns out to be zero this year, I am not going to struggle. If it turns out to be 1 man, I am happy is wasn’t zero. If it turns out to be the same as last year, then I am pleasantly surprised”. They looked at me like I was a crazy person, so I said “Okay, for budgeting purposes I assume it will be 60% of last year’s bonus – but I also assume that 90% of that will go towards savings”. Realistically, the risk they were running was that if the economy is bad, then company performance may be bad, and then the bonus will be smaller than expected. Since the money has already been spent, they will have for put things like groceries on the credit card in order to make their mortgage and car loan payments.

While I am aware that some large traditional Japanese companies have bonus payments that are more or less predetermined, the fact that Japanese credit cards have a “bonus” repayment option is to me an atrocity. Sometimes even these large companies run into financial difficulties and need to cut bonus amounts. Spending your salary (or bonus) before you get it is the opposite of having a margin of error. It’s not my place to tell other people how they should handle their finances, but I I can speak to what I would do in a similar situation, so said “If I was planning to take the family to Disney Land nest year, I would start saving now, and build my own ‘bonus’. If your real bonus comes, you can use it for following year’s trip”.

What’s my point? You can probably suffer a lot more loss in short term income than you think, and savings add up quickly. With DC, iDeco, and NISA, Japan now has the tools to really help you save and invest in tax smart ways. You just need to be willing to take a small hit now to build a safety net. If you can’t bear a loss of 5,000 yen per month then how on earth are you going to handle a sudden job loss or other disaster? We all need to expect the unexpected and build a margin for error into our life.

There have been multiple articles in the newspapers and segments on the news lately about how the Bank of Japan (Nichigin) has been making a tidy profit on the Japanese stock marker.

BoJ has been buying Japanese stocks for some time for various reasons, so it’s no surprise that they own a lot of domestic stocks. It also shouldn’t be surprising that they make a profit doing this, if these stocks are making a profit overall – but the profit that BoJ has been making is larger than would be expected.

Why? It’s simple, they have a daily budget which they spend each day to buy stocks – but on days where the market has dropped a significant amount in the morning, they raise their daily budget for buying stocks and buy more than average in the afternoon. In other words, they buy more stocks when stocks are on sale. This lowers their average purchase price.

If you and BoJ own the same stocks, but they bought them for less, then obviously they will have earned more of a profit than you.

The question is: What can you learn from this as an individual investor?

Well, on average, getting into the market earlier is still a better strategy than waiting for prices to drop – but if you have a normal budget you invest per month, and you are also able to lower your disposable income in order to invest more in certain months, then perhaps you too can employ a similar strategy.

As an example, say you have a take-home pay of 40 man Yen per month, and you normally invest 10 man Yen. You technically could live on a tighter budget and invest 15 man yen. Financially speaking, you should invest 15 man yen every month then – but you don’t want to be that austere all of the time. One thing you could do is invest 15 man yen whenever the market is at least 10% lower than it was at the start of last month, and 10 man yen the rest of the time.

Implementing a daily system like BoJ would be more complex, time consuming, and depending on your fees, not worth the effort. Depending on your situation, you might define your cash to stock ratio as a range, say “I want to be 20-30% in cash”, and start the month with 10 man in cash. That means that using the 30% number, you plan to invest 7 man in stocks over the course of the month. Every day, you invest 2,333 JPY. On days where the market went down in the morning, you invest 2,666 JPY instead. Again, emulating the bank’s approach assumes free real time trades are possible.

Doing this with individual stocks would be incredibly dangerous since it may well mean your are pouring money into companies sliding towards bankruptcy – but doing it with the market in general isn’t a bad approach.

The more important takeaway, however is probably that there is no need to run when market drops. If you feel the need to sell, then your cash position wasn’t large enough in the first place, so rather than selling, you should start saving more in cash each month until you are in a position where the market dropping 50% overnight wouldn’t bother you that much. Stocks might offer the highest return, but being able to sleep at night is important as well, and panic selling can erase any gains you might have had. The best asset allocation is the one that keeps you in the market and lets you sleep at night.

How to become wealthy in Japan? Well, being a salaryman (or office lady) working for a large company is about the worst say, structurally speaking. While Japan is a first world country with a decent standard of living and very good social benefits, the cost of living has been creeping up in recent years while salary lags behind.

What’s more, a normal office worker will have to pay not only national and local income taxes, but also pension, unemployment & health insurance premiums, etc. Besides mandatory taxes and social insurance premiums taken out of their paycheck, they also have to pay consumption taxes on everything they buy, along with property taxes on any property they own.

In general, working for foreign companies can mean higher total salaries (in exchange for more variable and generally lower bonus payments) – but a higher salary means paying more taxes.

The highest tax bracket is 55%. We all might think “Well if someone makes enough to fit into that bracket, they deserve to pay”, but remember this is by year. If you work at a typical Japanese company it will take you a long time to get to that level, and then you only have a few years left to try to contribute a little extra to your retirement fund. It’s not surprising that it feels unfair to many people that when they finally start making enough money to be able to save more, suddenly now they need to pay more taxes instead.

To be clear, I am not against paying taxes. Japan has some of the best social services in the world, and running them requires money. I am in favor of having universal health insurance, for example, even if it means healthy people have to pay slightly more. I’m in favor of paying my fair share to keep the streets clean, safe, and lit. On balance, I am happy with the Japanese government and I am happy to help fund it – and I hope you are too.

Likewise, I don’t mind some people getting discounts. People with disabilities, single mothers and the like – it makes perfect sense to me that people with limited means should get a break, and I am proud to live in a country where the government tries to make life bearable for everyone.

That said, I also think 55% plus social insurance is a bit too heavy of a load for some people to pay just because they are relatively well off – especially if they are only able to start saving later in life. After all, high salaries often come from jobs with a high bar to entry. If you’ve borrowed a huge amount of money to go to college and graduate school, and accepted a low salary early in your working life to do internships and work at famous companies to build up your reputation – then you also have a higher debt load than the average person.

In this kind of case, the worst position to be in is actually a permanent worker for a large company. You get a small standard deduction for deemed expenses, a deduction for dependents, and maybe you can use the hometown tax system. Other than that, you don’t have a lot of options to lower your taxes. You can contribute to a 401k style DC if your company has one, or an iDeco otherwise, but your money will be locked up until retirement age with no chance to use it for (for example) a down-payment towards buying a house, etc.

If in addition to working a normal job you are a freelancer or another type of personal business, the situation is better, and if you run your own corporation, things are even better.

Why?

If you have a “main job” and a “side job”, you only pay taxes on the side job, not social insurance – and you can claim some expenses.
Having a corporation makes it easier to claim expenses for many things.

Likewise, if you own stocks or real estate, these are treated advantageously as well.

If you own stocks, the typical tax rate is only 20%, and again, there are no social insurance implications.

With real estate, it’s easy to claim interest, property taxes, management & repair fees, and depreciation as expenses even if it’s personally owned.

So, how can you find money for investments? Well to start with, pay down debts if you have any so that you are paying less money on interest, and of course work on your budget to decrease your expenses. Most people have lots of recurring expenses that can reduce or eliminate. After that, you can try to increase your salary at your main job – but in the long term, if you are a salaryman or office lady, your best option is to decrease your taxes by creating other income streams where you are not an employee, but a freelancer or business owner.

During a recent Winter, I finally had a chance to do something I had wanted to do for several years: Take a friend of mine skiing. I go every few years, sometimes more than once, but they had never been.

Every time I tried to convince them, a barrage of excuses came out. “I don’t know how”, “Isn’t it dangerous?”, “I can’t afford it”, etc. The truth was just that they thought going skiing was something wealthy fancy sporty people did, and they don’t consider themselves to be in that category. Put simply: People like them don’t go skiing.

This all changed one Winter when some of their other less wealthy friends posted photos of themselves skiing. Suddenly my friend was envious of them, even though they hadn’t been envious of me – because now they saw skiing as something “people like them” could reasonably do.

“How come I can’t go skiing?”, they asked. “You can”, I answered. They protested that they wouldn’t even know where to start, so i said “Okay, it’s more fun as a group, so I’ll invite someone else, and you invite someone else, and we’ll all go” together. I’ll pick the location, and plan the trip”. – so we did.

When we went on the trip, the result was very predictable. I have been skiing with first-timers many times, so I knew the pattern. They fall down every few meters for the first half of the day, and complain constantly that it’s cold and they will never get the hang of it. By the early afternoon they start being able to make it a few dozen meters, and by the late afternoon they can do hundreds of meters at a time. They gain confidence, stop falling so much, and warm up from all the exercise. They start to have fun, and when it’s time to close, they say “But I don’t want to go yet! When can we come back?”

In this particular case, social media was a positive force, because it pushed someone out of their comfort zone and got them to try something new – but sadly it’s often the case that it ends in envy, jealousy, or causes them to spend money they shouldn’t.

Luckily, the friend mentioned here is not to easily swayed by such things, and the skiing was an exception. When people post photos of their fancy new coat that costs more than their monthly salary, my friend doesn’t plop down their credit card to copy this behavior.

Likewise, when their friends post photos of trips to Paris of Dubai, my friend doesn’t immediately book a plane ticket. They do, however, feel a quiet sense of “people like me can’t do that”, and have some mild disappointment.

To me, that alone is enough reason to stay off of social media. For people who are persuaded to spend money they shouldn’t, staying off social media is even more important.

I am not saying you should never use social media – just that perhaps you should consider using it with a purpose.

For example, I have accounts on Instagram and Twitter, but I have completely turned off all notifications. The apps don’t draw me in. If I want to check something specific, I open the app, search for it, and then close the app. I may not open it again for a few weeks or months.

Social media apps like Facebook, Instagram, and Twitter – even LinkedIn, typically use the one-to-many model. One person makes a post, and many people see it. To me, this means that the posts aren’t actually meant for me.

After all, there is a big difference between a person absent-mindedly posting photos from a recent BBQ or beach trip to Facebook for all of their “friends” to see, versus them sending the photos to me.

If they are really my friend, and they care about me seeing the photos, they can send them to be directly via email, Line, or SMS. That may sound old-school, but that’s what real communication is.

More to the point, if someone I actually know personally is having a conversation directly with me, then it will probably include things like “I saved up for 2 years to go on this trip to Paris” or “I bought this expensive coat instead of going on vacation this year”, etc. People don’t tend to post those kinds of things when they are posting to the world at large.

Then there is the simple math of the situation. Even assuming you only “friend” your actual real-life friends on social media, you might have 20 or more people you met on the job, in school, or through other friends. Just like having the same birthday as someone else in a group is not that uncommon, if you have 20 people on your feed who all take a vacation or buy something expensive once every two years, you will see something like that on your feed almost every month. That can lead to the false impression that people are doing these things monthly when in fact they aren’t. Now add in the 300 or so “friends” that you don’t really know well, and it can feel like people are going on overseas trips or buying luxury goods every day of every week. Sure, someone is, but with hundreds of connections, of course they are.

Now add in the fact that the business model of almost all social media apps and sites is based on advertising, and it becomes clear that their main goal is to monetize your fear of missing out.

The other thing to note is that people don’t tend to be as open about the negative things going on in their life, or even the every day happenings.

People might post when they buy that Gucci bag, but they don’t usually post a photo of their credit card bill when it arrives. They don’t post about how they are eating cup ramen and moyashi for the next month to make up for spending money they didn’t have on a bag they didn’t need. Most people don’t post photos of their neighborhood with a caption saying “No vacation for me”. Much like the news focuses mostly on negative stories, social media focuses mainly on positive ones.

So what you see is to a large extent lavish spending, and it can make some people start to believe that it’s normal and everyone is doing it all the time. Then you might start to think “Hey, everyone else is doing it, why can’t I?”

I’ve seen the same phenomenon offline in fancy bars. There are some customers who are out drinking every night of the week, paying an average bill of $100 or more. If you see numerous people doing this, you might start to think it’s normal – but it isn’t. Most people don’t spend $3000 a month on drinking at fancy bars. Many of the people who do are CEOs of small businesses or wealthy retirees – and you shouldn’t try to copy them if you don’t have the same means.

Given that these facts should be pretty much common knowledge by now, why subject yourself to this? Yes, we all craze human connection, but much of what happens on so called “social media” is not really that. Watching people you don’t even know well brag about where they have been or what they have bought is not really legitimate social connection.

Obviously I can’t tell you what to do, however I can make some recommendations.

1. Turn off notifications on your social media apps.
2. Open them only when you want to check something specific. Check it, and then get out.
3. Pare your friends down to your real, actual friends.
4. Use an app like Nora or something like Revanced to reduce or remove ads.
5. Let your friends know you don’t check social media much and encourage your friends to contact you via 1 on 1 methods.

I’ve seen this question posted online a lot, and I have asked it of myself plenty of times, particularly by single people.

First, I have to admit that I myself have changed my opinion on this topic over the years. I used to make excuses, including mainly these two:

1. By the time I buy all the stuff I need to cook one thing, I have spent a lot more than that meal would cost. I could just go to a restaurant for cheaper.
2. My time is worth money, and it takes time to buy groceries and cook.

The first argument basically goes as follows: Say I want to cook yakisoba. I need whatever I am going to put into the yakisoba. For sake of argument, let’s say tomatoes, broccoli, eggs, ginger, cabbage, yakisoba sauce, and… soba noodles.

Maybe eggs are 250 yen for 6, broccoli is 200 yen for a head, tomatoes are 300 yen for 3, cabbage is 100 yen, the noodles are 400 yen for 4 servings, etc. Say I start with none of the required ingredients, so I buy all of them, and it costs me 1500 yen. Some people will say “Well you could go to Go Go Curry, Saizeria, or Yoshinoya for cheaper than that” – and they may be right.

Of course, the reality is that now only would the home-cooked yakisoba be far healthier than any of those options, it is also cheaper when you factor in the fact that there will be left-overs. You will only use 1 or 2 eggs, one serving of noodles, and a small fraction of the yakisoba sauce. In fact, you won’t use more than half of anything on the list above, so you could make yakisoba at least twice for that 1500 yen, probably three times or more.

If we assume 3 meals, that’s 500 yen per meal for something with balanced nutrition. Maybe the 4th time you make it, you have run out of broccoli and eggs, but then you just have to buy say.. bell peppers and tofu to replace them. That might cost you 400 yen, and you can have another meal. Now you are out of noodles, but for another 400 yen, you will have enough noodles for another meal, etc.

I picked yakisoba for this example because it’s easy to make and you can switch up the ingredients as you go along, but yakisoba is not the only thing like this. Fried rice and Okonomiyaki are much the same. Soup is even more flexible. Since you can change the ingredients for these things on the fly, you can buy whatever is cheap and in season. Maybe tomatoes are expensive but onions are cheap right now, or bell peppers are expensive but asparagus is cheap. Just use whatever you like that is on sale.

I promise you, it’s possible to have tasty, healthy, and filling food for 500 yen per serving on average. This does mean that you need to look at that you have on hand, and might require some planning to make sure your stock doesn’t go bad before you eat it.

Before COVID, I ate out a lot, and so sometimes stuff I bought would go bad in the refrigerator. During COVID, I started cooking almost every meal, and so I would start out with “What do I have?”, which would turn into “What can I make?”, and finally “What do I need to buy?” I could always find something that I could make with what I had on hand, or something I could make if I bought just one or two items.

Let’s say that you don’t have the time to go shopping that often, and you are going to end up eating out a few nights a week. Having a lot of perishable food might not work for you. Maybe you simply don’t have time to cook. You can’t be away from the computer, or the kids for more than 10 minutes at a time.

There are still options. Rice keeps for months, so you can buy a fairly large bag of rice and use it when convenient. Even 1 Kg of rice is quite a lot of servings – over 6 Japanese rice cups. You can buy preserved curry ready to eat, and pair one pack of curry with one half of a cup of rice. All you have to do is put rice and water in the rice cooker and wait a while. When it’s done, you put the curry in a bowl, microwave it, and add the rice. And curry comes in a lot of styles and flavors: Japanese, Thai, and Indian, with lots of flavors for each.

How much does this cost? Well at the high end, it might be 500 yen for a pack of really good high quality curry, and something like 200 for a cup of fairly expensive rice. So even if you ate an entire cup of rice in one sitting, it would only be 700 yen. If you are eating half a cup and a cheaper curry, it would be as little as 300 yen. You can even mix in some left-overs from the refrigerator for “free”.

Speaking of curry, instead of pre-made curry, you can buy the block style curry and make your own by adding in potatoes, carrots, onions, again – whatever you like. For example, you can buy a 1 kg block of S&B Golden Curry for about 1500 yen. That’s 50 servings! I remember having one of those in my refrigerator for at least 3 months before I managed to finish it all. At the very least, it’s a good back-up plan.

Even if you plan to properly cook, having things like pre-made curry and canned soup around is always a good option because if you are short on time you may be tempted to go out to eat – unless there is something you can make in less than 15 minutes.

That brings us to the second issue, the time it takes to shop and cook.

First of all, I believe that unless you are billable 24 hours per day, counting your time as if you could get paid for it is just silly. Do you say “I shouldn’t have spend time going to the movies with my friends! That took 3 hours, and I get paid 2500 yen per hour – I could have been paid 7500 yen!” No, of course not.

If the time you spend grocery shopping could have been spent working and getting paid more instead, then by all means – pay someone to do your grocery shopping, or use a delivery service.

For the rest of us, though, shopping is not that much of a burden. This is especially true if you shop at least once per week (which you should be doing since fresh ingredients have more vitamins), and have some idea what you want to make so you know what ingredients to buy.

If I am doing a maintenance run to the local supermarket, I can easily be in and out of the supermarket in 15 minutes. I often like to shop slowly at lots of small specialty shops on the weekends, so then I may take my time – but that’s because I enjoy it, not because I need to.

Likewise, cooking doesn’t have to take a long time. Sure, baking and such can take a long time, but the things discussed on this list don’t. Yakisoba, for example should take 30 minutes at most, probably half that if you are organized used to making it. The same goes for fried rice. Soup may take longer, but you don’t have to be paying attention most of that time.

Cooking rice can take over an hour if you are cooking brown rice with a cheap rice cooker – but you can do something else while it cooks.

What’s more, eating fewer times per day (“Intermittent fasting”) has been shown to have health benefits – so you don’t even have to cook 3 times every day.

If you cook twice per day, and you use in-season ingredients common and readily available in Japan, you can easily cook for 700 per meal or less, spend less than 30 minutes per meal cooking, and spend less than an hour per week shopping.

So take a step back and ask yourself – so you really, honestly get away from restaurants spending less than that on average? Keep in mind that cheaper restaurants often make most of their profit on drinks. You can buy a 2 liter bottle of green tea or soy milk for something like 100-200 yen, but a single cup will usually cost you more than that in a restaurant.

The reality is, if you are serious about minimizing costs living within your means, you will probably decide that eating at home is the sensible option most of the time.

I still go out to eat, I just save the occasion for when I can go with friends and have a great experience together. I save enough money cooking for myself that I can go wherever I want when I to decide to eat out, and it won’t break my budget.

All of the above pertains to people whoa re single (or cook only for themselves because their partner always eats out with co-workers, etc) – but the equation only tilts more in favor of cooking at home as the number of people increases. The time spend shopping and cooking won’t increase much with the number of people you are feeding increases, and economies of scale often exist with groceries. Larger items are often lower cost per unit, and you can buy those items if you aren’t worry about them going bad before you can eat them.

Finally, people asking this question are often saying things like “Buy I can eat a Yoshinoya for 500 yen!” Sure, you can – but should you? Is your longevity and health not important to you? Slurping down a bowl of grade D beef with no vegetables is not something that should be a daily habit.

I’ve heard multiple authors talk about the “scarcety mindset” and the “wealthy mindset”, advocating that we should all think like rich people – as if becoming wealthy is something we can just will into reality.

At some level this makes sense. Clearly, some people who struggle financially do so because of poor choices. Likewise, many who have achieved financial freedom have gotten so far because they made the right choices.

If you think “I’m never going to be free… I may as well go play pachinko some more…”, then yes, you probably never will be finacially free.

If you think “I am going to save 30% of my pay check for the next 10 years, even if it means giving up some things”, and you stick to it, then you will probably be well on your way to having a nice nest egg.

The problem is that life is much more complicated than that. Some people are poor, or in debt because of circumstances beyond their control. Other people are born into wealthy families and have everything that money can buy from a young age.

At the very least, I think that “normal” people should look to the wealthy people who weren’t always that way for direction.

Example: Warren Buffet serves as a better example than the Cornelius Vanderbilt, and Ronald Read and Robert Morin serve as a better examples still.

We also need to look for people who have maintained and grown their wealth, and who have reproducible strategies for doing so.

Bill Gates and Larry Page may not have always been as wealthy as they are today, but they both hit upon successful strategies in the technology market when the timing was perfect. Luck also played a big part in their success. This isn’t something the rest of us can easily reproduce.

Likewise, most can’t copy the success of professional sports players, famous actors, or lottery winners. Many people in those categories end up poor (or worse, in debt!) once their income dried up.

In particular, I think the people we shouldn’t copy are the upper middle class. In both Japan and overseas, this group of people has the potential to become truely wealthy – but it often goes untapped. People who have a moderate amount of money often want to look rich – so they spend money on cars, fancy hand bags, designer clothes, and more.

In the book “The Millionaire Next Door“, the authors find that people living in “affluent or white-collar communities” are less likely to be millionaires than those living in blue collor or lower middle class communities.

The main reason attributed to this is purchases of luxury goods by the affluent communities. In other words, they were trying to “keep up with the Joneses” instead of living below their means.

I’ve seen the same thing in Japan in the 1980s. Everyone could suddenly afford more or everything back then, and so a lot of people did. They mistakenly assumed the magic stream of wealth would continue forever, and spent money like it was water.

People who could take the subway bought fancy cars just to keep in their driveways, you saw everything from Gucci sandals to young teenagers with Lois Vuitton handbags. Once it started, everyone around would try to keep up. It was oppulant, decedant, and ultimately grotesque. This kind of extreme “Conspicuous Consumption” has died down for the most part in Japan, but I see it in China now.

Of course, economies can’t grow at that rate forever, and when reality caught up, there were a lot of people who were caught off guard.

Getting back to the point, most of us can only earn so much money, so the real question is how we can make that money work for us. To do that we need to invest it, and to invest it we simply need to not spend it.

Warren Buffet, Ronald Read, and Robert Morin understood this, but their examples might be a bit extreme. Saving every penny you make forever might make you very rich – but it may not make you happy if you end up with money and nothing else.

On the other hand, it’s clear that spending money on luxury goods can quickly make one poor. This doesn’t just relate to the obvious suspects like overpriced handbags and watches, but also things like exspensive appliances, new cars, clothes, and more.

If you buy more stuff in general, and more expensive stuff, then you are just “investing” in things that rapidly lose value.

At the end of the day, most people you see who look wealthy, aren’t. If you have limited income, you can either spend it on looking wealthy, or invest it in being wealthy. The vast majority of people simply can’t afford to do both.

So should you think like a wealthy person? Sure. Think like the Millionaire next door.