When My Portfolio Dropped ¥800,000 in Two Weeks

Last March, I was sitting in our living room, watching Lily play with her blocks while reviewing my investment accounts. The numbers on my screen showed significant declines – my portfolio had dropped ¥800,000 in just two weeks.

My wife looked over my shoulder and expressed concern. "Should we be worried about this?"

I closed my laptop and suggested we have some tea. She seemed surprised by my calm reaction, but this experience taught me something valuable about understanding personal risk tolerance and how it relates to long-term wealth building in Japan.

This situation sparked an important realization: knowing your true risk appetite and building a strategy you can maintain during volatile periods becomes crucial for anyone planning to build generational wealth as permanent residents in Japan.

Understanding Risk: What I Learned Through Experience

When I first encountered financial discussions about "risk appetite," I didn't fully grasp what this meant in practical terms. Through my own learning journey, I've come to understand that risk in investing isn't simply about the possibility of losing everything - it's about understanding volatility and your personal reaction to it.

Key Concepts I've Learned to Consider:

Volatility as Price Movement: I learned that investments naturally fluctuate in value, sometimes dramatically. Market volatility means that investment values can swing significantly - potentially 30% or more in either direction during certain periods, though there's no guarantee about the magnitude or timing of such movements.

Time Horizon Impact: My research taught me that longer investment periods historically have provided more time for recovery from market downturns, though this pattern may not continue in the future. Understanding your actual timeline for needing invested funds becomes crucial for strategy development.

Emotional Response: Through experience, I discovered that people react differently to seeing portfolio values decline. Some individuals can maintain their strategy during market stress, while others find volatility psychologically difficult. Neither reaction is inherently right or wrong.

Inflation Considerations: Living in Japan, I learned to consider how low-return strategies might affect long-term purchasing power, especially with costs like international school fees that tend to increase annually.

My Personal Risk Tolerance Discovery Journey

Several important lessons emerged from my experience with market volatility:

Risk Tolerance vs. Risk Capacity: I learned these are different concepts. Having financial capacity to absorb losses doesn't necessarily mean having emotional comfort with volatility. Both matter for developing sustainable strategies.

Partner Considerations: Since my wife and I make financial decisions together, I discovered that family harmony requires both partners to understand and accept whatever investment approach we choose.

Cultural Background Influence: Through conversations with Japanese colleagues and international friends, I learned that cultural experiences with economic events can significantly influence risk perspectives. Understanding these influences helped me evaluate my own biases.

Market Experience as Education: Actually experiencing portfolio declines taught me more about my risk tolerance than theoretical discussions ever could. The emotional reality of watching account values drop provided valuable self-knowledge.

Different Approaches I've Observed: Educational Framework

Through research and conversations with other permanent residents, I've learned about different philosophical approaches to portfolio construction. Each reflects different circumstances and risk tolerance levels.

Growth-Focused Approach (Often Used by Younger Investors)

Philosophy I've Observed: "I have a very long time horizon and can accept significant volatility for potential long-term growth."

Characteristics I've Learned About:

• Heavy emphasis on equity investments for growth potential

• Acceptance of potentially large short-term value fluctuations

• Focus on very long-term time horizons (20+ years)

• Comfort with checking portfolios infrequently

Historical Context I've Researched: During major market downturns like 2008, equity-heavy portfolios experienced severe declines (40%+ in some cases), but also participated fully in subsequent recoveries. However, past patterns may not repeat.

Who Might Consider This Approach: Based on my observations, this approach appeals to younger investors with stable incomes, no major near-term financial obligations, and high comfort with volatility.

Balanced Approach (Often Used by Mid-Career Investors)

Philosophy I've Encountered: "I want growth potential but also need some stability as my financial responsibilities increase."

Characteristics I've Observed:

• Combination of growth and stability investments

• Moderate volatility acceptance

• Consideration of medium-term financial obligations

• Balance between growth and preservation goals

Historical Context: Mixed portfolios historically showed different volatility patterns than pure equity approaches, potentially declining less during market stress but also participating differently in recoveries.

Who Might Consider This: From my observations, families with growing financial responsibilities, people who monitor portfolios regularly, or those seeking middle-ground approaches often explore this philosophy.

Preservation-Focused Approach (Often Used by Pre-Retirement Investors)

Philosophy I've Learned About: "I've accumulated wealth and now prioritize preservation while maintaining some growth to counter inflation."

Characteristics I've Seen:

• Emphasis on capital preservation

• Lower volatility tolerance

• Focus on stability over growth

• Consideration of upcoming major expenses or retirement

Who Might Consider This: Based on my research, investors approaching retirement, those with funded major expenses, or people prioritizing wealth preservation often investigate this approach.

The Reality of Portfolio Management: What I've Learned

Rebalancing Concepts

Through my education, I learned about rebalancing - the process of adjusting portfolio allocations when market movements cause deviations from target percentages. For example, if strong stock performance changes a 70/30 stock/bond allocation to 80/20, rebalancing would involve selling stocks and buying bonds to return to the target.

Important considerations I discovered:

• Rebalancing requires selling investments that have performed well to buy those that haven't

• This process can feel emotionally counterintuitive

• Rebalancing frequency and thresholds vary based on individual approaches

• Tax implications should be considered in taxable accounts

My Personal Approach to Monitoring

Based on my learning and experience, I developed a simple monitoring routine:

• Annual allocation review in December

• Only considering changes if allocations drift significantly from targets

• Using new contributions for rebalancing when possible to minimize selling

• Keeping the process simple and time-efficient

This reflects my personal approach and may not be suitable for others with different circumstances or preferences.

My Personal Learning from Market Volatility

Reflecting on that ¥800,000 portfolio decline I mentioned: my account values recovered within several months and continued growing throughout that year. However, the key insight wasn't about the financial outcome - it was about discovering that I had chosen a risk level I could maintain during stressful periods.

Important note: This experience reflects one specific market period and doesn't predict future outcomes. Market conditions vary dramatically and unpredictably.

What This Experience Taught Me:

• Understanding personal risk tolerance requires actual experience, not just theoretical consideration

• Having a clear long-term strategy helps maintain discipline during volatile periods

• Partner communication and alignment become crucial during stressful market conditions

• Regular portfolio monitoring needs to be balanced with avoiding emotional overreaction

Developing Your Own Risk Understanding

Based on my learning journey, here are educational steps that might help you develop your own risk tolerance understanding:

Begin Small: Consider starting with smaller amounts to experience market volatility without major financial impact. This provides emotional learning about your reactions to portfolio changes.

Monitor Your Reactions: Pay attention to how you feel when reviewing investment accounts during both positive and negative periods. This self-awareness becomes valuable for long-term strategy development.

Seek Professional Guidance: For significant financial decisions, qualified financial advisors can help assess your individual circumstances and develop appropriate strategies.

Discuss with Family: If investment decisions affect family members, ensure everyone understands and feels comfortable with chosen approaches.

Looking Forward: Continuous Learning

Next week, I'll be sharing what I've learned about implementing investment strategies within Japanese tax-advantaged accounts like NISA and iDeCo - including how different account types might be used for different purposes and time horizons.

This discussion will focus on the educational aspects of account optimization and tax-efficient investing within Japanese systems, always emphasizing that specific strategies depend on individual circumstances.

Best,
Jason from Money Daruma

P.S. Remember: This shares my personal learning journey about risk tolerance and portfolio concepts, not investment advice. Your experiences and optimal approaches will be different. Professional consultation becomes valuable for developing strategies appropriate to your specific situation.

For personalized financial guidance, please consult with qualified Japanese financial advisors who can assess your individual circumstances.