3 Reasons to Calmly Continue Accumulating All-Country/S&P 500 Funds Even When Interest Rates Rise

Surviving the Era of Inflation: The Rationale for Continuing Index Investing Under Rising Interest Rates

Corporate Growth Profits Have No Ceiling! Increasing Assets Through Stock Accumulation Even in a World with Interest Rates

Reasons to Continue Index Investing Even in a “World with Interest Rates”

With Japan’s policy interest rates and long-term interest rates rising, and the arrival of a “world with interest rates,” interest in investing in deposits and government bonds is increasing. However, for those in the stage of wanting to increase assets over the long term (those with 10 to 20 or more years of investment time remaining), it is recommended to calmly continue accumulation investing in index funds such as All-Country (All Country World Equity) or the S&P 500.

1. Basic Overview of Policy Interest Rates and Long-Term Interest Rates

Policy Interest Rate

• Decision-making body: Bank of Japan (BOJ)

• Target: Benchmark interest rate for short-term (overnight) lending between banks

• Benefit of rising: Interest on ordinary and time deposits increases

• Drawback of rising: Variable interest rates on home loans and interest on corporate borrowing increase

• Purpose: To put a brake on excessive price increases (inflation) and rapid yen depreciation

Long-Term Interest Rate

• Decision-making body: Financial markets (supply and demand among trading investors)

• Target: Yield (annual rate) received primarily when purchasing “10-year government bonds”

• How it is determined: Moves based on concerns about future price increases and expectations of future BOJ rate hikes

• Relationship with price: When government bonds are sold and prices fall, yields rise; when they are bought and prices rise, yields (long-term interest rates) fall

Short-Term Impact of Rising Interest Rates on Stocks

• Stock price downward pressure: When interest can be earned from deposits or government bonds without taking risks, capital tends to flee from the stock market.

• Valuation decrease due to yen appreciation: When the yen appreciates due to rising Japanese interest rates, the yen-denominated valuation of foreign currency assets (All-Country or S&P 500) decreases.

2. 3 Reasons to Continue Stock Accumulation Even When Interest Rates Rise

Reason 1: There is no upper limit to corporate growth and profit increases

Bonds (such as government bonds) are mechanisms for receiving interest under promised conditions (with a profit cap), but since stocks represent partial ownership of a company, you can benefit from the company reinvesting its earned profits to expand its business.

• Ultra-long-term (200 years) data: Even after accounting for the effects of inflation, stock returns have an overwhelmingly higher track record compared to long-term government bond returns.

• Business expansion: Because companies try to increase profits by creating new products and services even under rising interest rates, you can enjoy that growth if you are diversified across global stocks.

Reason 2: Stocks are resistant to inflation (rising prices)

Bonds (especially fixed-rate ones) have fixed interest payments and principal repayments, so if the inflation rate exceeds the interest rate, your real purchasing power declines.

• On the other hand, companies try to protect their profits by raising the prices of their products and services in line with increases in raw material costs and prices.

• By holding stocks, you can counter inflation not just as the ‘side being charged more’ (consumer), but as the ‘side responding to price increases’ (company).

Reason 3: Frequently changing your investment policy does not lead to good results

Strategies that involve moving between investments by predicting short-term timing of interest rates and exchange rates (Market Timing) often fail even for experts, and the success rate is low.

• Past research has also shown that investors who trade frequently tend to have lower performance.

• As long as your investment objectives, risk tolerance, and investment horizon have not changed, there is no need to change your accumulation policy just because you are swayed by short-term news.

3. Suitability for Government Bond and Bond Investment

Investing in government bonds itself is not being denied. It becomes a viable option for people with the following objectives:

1. Those entering the withdrawal phase: People who want to manage and withdraw assets while stably protecting them.

2. Those exceeding their risk tolerance: For those who have secured emergency funds but want a place for surplus funds where they do not want to take on any more stock price fluctuation risk.

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