Asset management means allocating the money and assets you own among savings, government bonds, stocks, investment trusts, FX, and other options in order to manage and increase your assets for the future.
When people hear the term “asset management,” they may imagine transactions with large price fluctuations, such as stock investing or FX trading, but ordinary bank deposits, time deposits, and government bonds are also, in a broad sense, methods of managing assets.
Each financial product involves not only potential returns but also different risks, including price fluctuations, loss of principal, foreign exchange fluctuations, credit risk, and liquidity risk.
This article organizes the basics for learning about asset management, including what asset management is, what kinds of methods are available, how profits are generated from each method, and what kinds of risks are involved.
Note:
This article is a personal study note for learning about asset management. It does not recommend investing in any particular financial product, stock, currency, securities company, or other investment. When actually investing, make your own decisions after checking the latest product details, interest rates, fees, taxes, prices, risks, and other relevant information.
- What Is Asset Management?
- The Difference Between Saving and Investing
- Consider “Returns” and “Risks” Together in Asset Management
- Ordinary Deposits and Time Deposits
- Government Bonds
- Stock Investing
- Investment Trusts
- ETFs
- REITs
- What Is FX?
- What Is a CFD?
- Comparing Asset Management Methods
- Lower Risk Generally Means Lower Returns
- The Idea of Not Concentrating Assets in One Place
- What Are Long-Term Investing, Regular Investing, and Diversification?
- Separate Living Expenses from Investment Funds
- Do Not Choose Investments Based Only on the Rate of Return
- Financial Products Cannot Simply Be Divided into “Safe” and “Dangerous”
- Things to Check Before Starting Asset Management
- Asset Management Options Vary Depending on the Objective
- Summary
- References
What Is Asset Management?
Asset management means managing the money and other assets you own according to your objectives and maintaining or increasing those assets through bank deposit interest, bond interest, stock dividends, price appreciation, and other forms of return.
There are many different methods of asset management, ranging from those with very small price fluctuations to those in which both large profits and large losses may occur.
Representative methods include the following.
- Ordinary deposits and time deposits
- Government bonds
- Corporate bonds
- Stocks
- Investment trusts
- ETFs
- REITs (Real Estate Investment Trusts)
- FX (foreign exchange margin trading)
- CFDs (Contracts for Difference)
It is not possible to determine universally which product is superior.
The appropriate method varies depending on whether you prioritize safety, want to earn a certain level of income, aim for capital gains, invest over a long period, or trade over a short period.
The Difference Between Saving and Investing
When considering how to manage assets, understanding the difference between “saving” and “investing” makes the concept easier to understand.
| Item | Saving | Investing |
|---|---|---|
| Main purpose | To store money | To aim to increase assets |
| Examples | Ordinary deposits and time deposits | Stocks, investment trusts, bonds, etc. |
| Price fluctuations | Generally small | Occur depending on the product |
| Expected returns | Generally small | Vary greatly depending on the product |
| Loss of principal | Very unlikely under certain conditions | May occur with some products |
However, saving does not mean that there is absolutely no risk.
Even if the numerical balance of a deposit does not decrease, rising prices can reduce the number of goods and services that can be purchased with the same amount of money, reducing the real value of that money.
This type of risk is called inflation risk.
Consider “Returns” and “Risks” Together in Asset Management
When comparing financial products, it is necessary to consider not only the potential returns but also what kinds of risks must be taken in order to obtain those returns.
In investing, the word “risk” does not simply mean “danger.”
It is used to express the degree of uncertainty regarding how much the returns of a financial product may fluctuate.
In general, financial products that offer the potential for higher returns also tend to have larger fluctuations in prices and returns.
| Main Risk | Meaning |
|---|---|
| Price fluctuation risk | The risk that the market prices of stocks, bonds, and other assets will fluctuate. |
| Credit risk | The risk that a country, company, or other issuer may become unable to pay interest or repay principal. |
| Interest rate risk | The risk that changes in market interest rates will cause the prices of bonds and other assets to fluctuate. |
| Foreign exchange risk | The risk that changes in foreign currency values will cause the value of assets converted into yen to fluctuate. |
| Liquidity risk | The risk that an asset cannot be sold at the desired price when you want to sell it. |
| Leverage risk | The risk that gains and losses become larger because a large transaction is conducted with a small amount of capital. |
| Inflation risk | The risk that rising prices will reduce the real value of money. |
Ordinary Deposits and Time Deposits
Bank deposits are a representative method of storing assets.
Ordinary deposits are easy to deposit into and withdraw from at any time, making them convenient places to keep money needed for living expenses or emergencies.
Time deposits are based on the assumption that money will be deposited for a specified period and may offer higher interest rates than ordinary deposits.
Main Returns from Deposits
The main return from deposits is deposit interest.
Main Characteristics of Deposits
- There are generally no price fluctuations
- Ordinary deposits can be withdrawn easily when needed
- Returns are generally low compared with investment products
- Inflation may reduce their real value
Government Bonds
Government bonds are bonds issued by governments to raise funds.
When you purchase a government bond, you receive interest according to predetermined conditions, and when the bond reaches maturity, the face value is generally repaid.
Government bonds that individuals in Japan can relatively easily consider purchasing include JGBs for Retail Investors, New Over-the-Counter JGBs, and previously issued government bonds sold by securities companies and other financial institutions.
Main Returns from Government Bonds
- Interest received periodically
- For some bonds, the difference between the purchase price and redemption price
- For government bonds that can be sold on the market, capital gains may arise if the price increases
Main Risks of Government Bonds
- Credit risk of the issuing country
- Price fluctuation risk when selling on the market
- For fixed-rate bonds, opportunity loss if market interest rates rise after purchase
- Decline in real value due to inflation
JGBs for Retail Investors and ordinary government bonds traded on the market differ in how early redemption or sale works.
Government bonds will be examined in more detail in another article, including the differences among JGBs for Retail Investors, New Over-the-Counter JGBs, and previously issued government bonds.
Stock Investing
Stock investing is a method of investment in which shares issued by corporations are purchased.
If the price of purchased shares rises, it may be possible to earn capital gains by selling them.
In addition, if a company pays dividends, shareholders may receive dividend payments simply by holding the shares.
Main Returns from Stocks
- Capital gains from rising stock prices
- Dividends
- Shareholder benefits, depending on the stock
Main Risks of Stocks
- Losses caused by falling stock prices
- Deterioration in company performance
- Dividend reductions or suspension of dividends
- Company bankruptcy
- Liquidity risk caused by low trading volume in some stocks
Stocks tend to experience larger price fluctuations than deposits and government bonds, but if a company grows, there is also the possibility of achieving large long-term capital gains.
Investment Trusts
Investment trusts are financial products that pool money collected from many investors and invest it in stocks, bonds, real estate, and other assets.
Some investment trusts allow investors to diversify across many stocks and bonds simply by purchasing a single investment trust.
Main Returns from Investment Trusts
- Gains from increases in net asset value
- Distributions, depending on the product
Main Risks of Investment Trusts
- Declines in net asset value
- Price fluctuations of the stocks, bonds, and other assets in which the fund invests
- Foreign exchange fluctuations when foreign assets are included
- Costs such as management fees
An investment trust is not necessarily safe simply because it is an investment trust. The level of risk varies greatly depending on what the investment trust invests in.
ETFs
An ETF is a financial product known as an “Exchange-Traded Fund.”
It is a type of investment trust, but it is listed on a stock exchange like a stock and can be bought and sold at market prices during trading hours.
There are ETFs designed to track various indexes and assets, including the Nikkei Stock Average, TOPIX, U.S. stock indexes, bonds, gold, and REITs.
One characteristic of ETFs is that they make it relatively easy to diversify across multiple securities with a small number of products.
REITs
REIT stands for Real Estate Investment Trust.
REITs use funds collected from investors to invest in real estate such as office buildings, commercial facilities, residential properties, logistics facilities, and hotels, and distribute rental income and gains from the sale of real estate to investors.
They allow investors to invest in real estate with less capital than would be required to purchase physical real estate directly, but they are affected by declines in market prices, real estate market conditions, interest rates, natural disasters, and other factors.
What Is FX?
FX means “foreign exchange margin trading,” a type of transaction in which different currencies are traded with the aim of earning profits from changes in exchange rates and other factors.
Examples include USD/JPY, which involves trading the U.S. dollar and Japanese yen, and USD/CHF, which involves trading the U.S. dollar and Swiss franc.
Main Returns from FX
- Foreign exchange gains resulting from exchange rate movements
- Swap points arising from factors such as interest rate differentials between currencies
Main Risks of FX
- Sudden changes in foreign exchange rates
- Expansion of gains and losses due to leverage
- Reduction in swap points or reversal from receiving to paying swap points
- Changes in required margin
- Forced liquidation caused by a decline in the margin maintenance ratio
FX allows traders to use margin to conduct transactions larger than the amount of money they have deposited.
This can improve capital efficiency, but increasing leverage also increases potential losses.
When using FX, it is important to understand not only potential profits but also leverage, margin maintenance ratios, and forced liquidation mechanisms.
What Is a CFD?
CFD stands for “Contract for Difference.”
CFDs allow traders to trade the price movements of a wide range of assets, including stock indexes, individual stocks, gold, and crude oil.
Rather than purchasing the underlying asset itself, profits and losses are settled based on the difference between the price at which the transaction was opened and the price at which it was closed.
Main Returns from CFDs
- Profits resulting from price movements in the underlying asset
- Some products allow transactions to be opened by selling as well as buying
Main Risks of CFDs
- Losses caused by price movements
- Expansion of losses due to leverage
- Forced liquidation
- Holding costs such as interest adjustments
- Foreign exchange effects when trading products linked to overseas markets
CFDs are margin transactions similar to FX, but unlike FX, which focuses on currencies, CFDs can cover a wide range of assets, including stock indexes, commodities, and stocks.
Comparing Asset Management Methods
The main asset management methods can be compared roughly as follows.
| Method | Main Return | Price Fluctuation | Leverage | Main Risks |
|---|---|---|---|---|
| Ordinary deposits | Interest | Almost none | None | Inflation, etc. |
| Time deposits | Interest | Almost none | None | Inflation, restrictions on access to funds, etc. |
| JGBs for Retail Investors | Interest | The structure generally reduces the need to consider market prices | None | Credit risk, inflation, etc. |
| Ordinary government bonds | Interest and gains or losses from sale | Yes | None | Interest rates, prices, credit risk, etc. |
| Stocks | Capital gains and dividends | Yes | None for cash transactions | Stock prices, company performance, etc. |
| Investment trusts | Capital gains, distributions, etc. | Yes | Generally none | Depends on the investment target |
| ETFs | Capital gains, distributions, etc. | Yes | Usually none | Depends on the investment target |
| REITs | Capital gains and distributions | Yes | Usually none | Real estate, interest rates, prices, etc. |
| FX | Foreign exchange gains and swap points | May be large | Yes | Foreign exchange rates, interest rates, leverage, etc. |
| CFDs | Price differences | May be large | Yes | Prices, leverage, etc. |
The position of a product in this table alone does not determine its safety or superiority.
Price movements differ from one stock to another, and the risk of an investment trust also varies greatly depending on what it invests in.
Lower Risk Generally Means Lower Returns
In asset management, financial products with smaller fluctuations in prices and returns generally offer lower expected returns, while pursuing higher returns generally requires taking corresponding risks.
For example, deposits and government bonds are less likely than stocks and FX to produce large capital gains, but they also tend to make it easier to avoid large fluctuations in asset value.
Stocks may generate large capital gains as companies grow, but stock prices may also fall sharply if a company’s performance deteriorates.
FX and CFDs allow large transactions to be conducted with relatively small amounts of money through leverage, but this also means that losses can become larger.
Rather than comparing only the size of potential returns, it is important to check how much loss could potentially occur in order to obtain those returns.
The Idea of Not Concentrating Assets in One Place
In asset management, there is a concept known as “diversification,” in which funds are divided among multiple products or assets rather than being concentrated in a single product.
For example, if all funds are invested in a single stock, a deterioration in that company’s performance could have a major impact on the entire portfolio.
On the other hand, dividing funds among assets with different characteristics, such as deposits, government bonds, and stocks, may reduce the impact that a decline in one asset has on the portfolio as a whole.
Another method is to spread investments over time.
Instead of investing the entire amount at once, purchasing a fixed amount each month can help avoid concentrating funds at a particular price level or interest rate.
What Are Long-Term Investing, Regular Investing, and Diversification?
A commonly used approach to asset building is “long-term investing, regular investing, and diversification.”
Long-Term Investing
This means holding assets with a long-term perspective rather than buying and selling based only on short-term price fluctuations.
When profits earned through investment are reinvested, the effect of compound interest can become greater over longer periods.
Regular Investing
This is a method of investing funds at regular intervals, such as every month, instead of investing a large amount all at once.
By spreading investment timing, it is possible to avoid investing all funds at a single point in time.
Diversification
This means spreading funds among multiple assets, regions, currencies, securities, and other investments that behave differently.
However, long-term investing, regular investing, and diversification do not guarantee profits. Financial product prices may continue to fluctuate in the future, so the possibility of losing principal remains.
Separate Living Expenses from Investment Funds
When beginning asset management, it is important not to invest all available cash but to separate money needed for daily life from money that can be used for investment.
If daily living expenses, money that will be needed in the near future, or emergency funds are invested in products with large price fluctuations, it may become necessary to sell those investments while the market is falling.
For this reason, one approach is to keep money that may be needed soon in highly liquid places such as bank deposits and consider investing only surplus funds that are not expected to be needed for the time being.
Do Not Choose Investments Based Only on the Rate of Return
When comparing financial products, focusing only on high yields or large potential profits may cause you to overlook the risks behind those returns.
For example, even if one product offers an annual return of 1% and another is expected to offer 10%, the latter is not automatically superior.
It is necessary to compare factors including fluctuations in principal value, the possibility of losses, how long funds are tied up, ease of redemption, leverage, and foreign exchange fluctuations.
If the same return can be obtained, it may be more efficient to obtain it with less risk.
Financial Products Cannot Simply Be Divided into “Safe” and “Dangerous”
Each financial product involves different types of risk.
Stocks may experience large price fluctuations, while deposits face the possibility of losing real value because of inflation.
Government bonds are affected by the creditworthiness of the issuing country and changes in interest rates, while foreign bonds are additionally affected by foreign exchange fluctuations.
FX involves not only foreign exchange fluctuations but also leverage, changes in swap points, and other factors.
Therefore, rather than simply deciding that “this product is safe” or “this product is dangerous,” it is important to understand under what conditions losses may occur and what causes them.
Things to Check Before Starting Asset Management
- When will the money be needed?
- How much loss can you tolerate?
- Is there a possibility of losing principal?
- Can the investment be redeemed or sold before maturity?
- How are profits generated?
- What could cause the price to fall?
- How much are the fees and taxes?
- Is leverage being used?
- If the asset is foreign, is it affected by exchange rates?
- Are funds concentrated in a single product?
Before purchasing a financial product, understanding the mechanism well enough to explain not only “how much profit can be earned” but also “under what circumstances losses may occur” makes it easier to compare products.
Asset Management Options Vary Depending on the Objective
There is no single correct answer when it comes to asset management.
A person who prioritizes stability of principal and a person who aims for long-term capital appreciation will choose different financial products.
Even the same person can use different asset management methods depending on the purpose of the funds.
For example, money needed for daily life may be kept in deposits, long-term funds for which price fluctuations should be limited may be invested in government bonds, and funds intended for growth may be invested in stocks or investment trusts.
What is important is not to seek the maximum possible return with all funds, but to consider how much return is desired for each portion of funds and how much risk can be taken to achieve that return.
Summary
Asset management means allocating the money and assets you own among deposits, bonds, stocks, investment trusts, FX, and other options according to your objectives and managing and investing them.
Different financial products generate returns in different ways and involve different risks.
| Method | Main Return | Characteristics |
|---|---|---|
| Deposits | Interest | Suitable for storing assets |
| Government bonds | Interest, gains or losses from sale, etc. | Suitable for considering asset management with relatively limited price fluctuations |
| Stocks | Capital gains and dividends | Allow investors to seek returns from company growth |
| Investment trusts and ETFs | Capital gains, distributions, etc. | Make diversification across multiple assets relatively easy |
| REITs | Capital gains and distributions | Allow indirect investment in real estate |
| FX | Foreign exchange gains and swap points | Affected by foreign exchange rates and leverage |
| CFDs | Price differences | Allow margin trading across a wide range of assets |
Financial products that offer higher potential returns are not necessarily superior.
It is necessary to consider expected returns, the possibility of losses, when the funds will be needed, liquidity, price fluctuations, foreign exchange rates, leverage, and other factors, and choose methods that suit your objectives.
Future articles will examine deposits, government bonds, stocks, investment trusts, FX, CFDs, and other products individually, including their mechanisms and risks.
References
