Balancing Financial Assets and Real Estate for Optimal Investment Strategy

Understandingfinancialassets has become an essential component ofmodern asset building.

As a real estate investment specialist, I am frequently asked by many investors how to balance financial assets and real estate investment.

When considering asset management, many people start with financial assets such as stocks and bonds, but surprisingly few people understand their essential characteristics and risks, as well as the difference between them and real assets such as real estate.

In this article, we will explain the basic concepts and specific investment methods of financial assets in an easy-to-understand manner for ordinary investors, based on our experience as the representative director of INA & Associates, Inc. in assisting numerous ultra-high-net-worth individuals in their asset management.

A proper understanding of financial assets is an important foundation for your asset building strategy. We hope that this article will help you understand the characteristics of financial assets and consider asset allocation suitable for your investment goals.

Basic Concept and Definition of Financial Assets

What are financial assets?

Financial assets isa general term for assets traded in financial markets and includes cash, deposits, stocks, bonds, mutual funds, and insurance products.

These assets are classified as intangible assets that have no physical form, and their value fluctuates according to market supply and demand and economic conditions. The most important characteristic of financial assets is that they can be converted to cash (liquidated) in a relatively short period of time.

To understand the definition of a financial asset accurately, it is necessary to start with the concept of "asset. An asset is anything of value that has the potential to generate economic benefits in the future. These assets are broadly classified into two categories: real assets and financial assets.

Real assets include real estate, land, buildings, machinery and equipment, precious metals, commodities, etc. These are tangible assets that have physical form. Financial assets, on the other hand, are intangible assets based on contracts and rights, the value of which is highly dependent on the creditworthiness of the issuer and market conditions.

Fundamental Differences between Financial Assets and Real Assets

Understanding the difference between financial assets and real assets is crucial to building an effective asset management strategy.

First,from aliquidityperspective, financial assets are generally more liquid than real assets. Stocks and bonds are traded daily on stock exchanges and can be bought and sold relatively easily when the market is open. On the other hand, real assets such as real estate can take months or years to sell and are relatively illiquid.

There isalsoa significant difference inprice volatility. Prices of financial assets are sensitive to psychological factors and short-term news in the market, and can fluctuate significantly on a daily basis. In contrast, prices of real assets, especially real estate, tend to fluctuate relatively little in the short term because prices are formed based on fundamental factors such as medium- to long-term supply-demand relationships and location conditions.

In terms ofinflation resistance, real assets are often considered to have an advantage. While the value of real assets tends to increase with rising prices during inflation, among financial assets, fixed-income instruments, such as bonds, are at risk of losing their real value due to inflation.

Comparative Analysis with Real Estate Investment

As a real estate investment specialist, the following table compares the characteristics of financial assets and real estate investments.

Comparison Item	Financial Assets	Real Estate Investment
Initial Investment	Small amount possible (from several tens of thousands of yen)	High (millions to tens of millions of yen)
Liquidity	High (immediate to several days)	Low (months to years)
Management effort	Less	Much (maintenance and management, tenant relations, etc.)
Profit stability	Large fluctuations	Relatively stable (rental income)
Tax treatment	Separate taxation and comprehensive taxation	Real estate income (comprehensive taxation)
Inflation resistance	Varies by product	High
Leverage Effect	Limited	High (using real estate loans)
Diversification	Easy	Difficult (due to high cost)

As this comparison chart shows, financial assets and real estate investments have different characteristics, and it is important to combine them appropriately according to the investor's financial resources, investment goals, and risk tolerance.

Economic Role of Financial Assets

Financial assets play an important role not only in personal asset building, but also in the economy as a whole.

When a company raises funds for its business, it collects funds from investors through the issuance of stocks and bonds. Through this mechanism, investors' funds are used for corporate growth and contribute to the development of the economy as a whole. Governments also secure financial resources for public works and social security systems through the issuance of government bonds, and financial assets are also indispensable for the development of social infrastructure.

From an individual investor's perspective, financial assets serve as a means of asset building in preparation for future capital needs. The use of financial assets is essential to systematically prepare funds needed at various stages of life, such as for retirement, children's education, and home purchases.

Furthermore, financial assetsare also important from the perspective ofriskdiversification. By combining different types of financial assets, it is possible to reduce the risk of price declines in certain asset classes and aim for more stable investment results.

Types and Characteristics of Financial Assets

Classification of Major Financial Assets

Although there are a wide variety oftypes of financial assets, the major types can be systematically classified as follows

Cash and deposits

Cash and deposits, the most basic financial assets, are characterized by guaranteed principal and extremely high liquidity. They include savings, time deposits, and checking accounts, and play an important role in daily cash management and emergency preparedness.

Although profitability is limited in the current low interest rate environment, it is recommended that a certain percentage be retained as a basis for asset management. In particular, it is a general asset management principle to hold about 3-6 months' worth of living expenses in cash and deposits as an emergency fund.

Bonds

Bonds are IOUs issued by the government or corporations to raise funds and promise to pay the principal and interest if held to maturity. The main types of bonds are government bonds, municipal bonds, corporate bonds, and foreign bonds.

JGBs are issued by the government and have the lowest credit risk, making them suitable for investors who value safety. Corporate bonds, on the other hand, have variable risk and yield depending on the creditworthiness of the company and are chosen by investors seeking higher returns. When investing in bonds, it is important to properly assess interest rate risk and credit risk.

Stocks

Stocks are securities that represent a portion of a company's ownership and may increase in value as the company grows. They can provide income from both dividend income and price appreciation and play an important role in long-term asset building.

In addition to analyzing the performance of individual companies, stock investment requires an understanding of industry trends and the overall economy. In addition, since the stock market is subject to large short-term fluctuations, investing from a long-term perspective is recommended.

Mutual Funds and ETFs

Mutual funds are a system in which funds are collected from multiple investors and professionally invested in stocks and bonds in a diversified manner. The major advantage is that investors can start with a small amount of money and can diversify their investments without any specialized knowledge.

ETFs (Exchange Traded Funds) are a type of investment trust, but they have the feature of being traded on stock exchanges in the same way as stocks. Index-type ETFs are linked to the movements of the overall market and can aim for market-average returns at low cost.

Comparative Table of Financial Asset Features

The following table compares the features of each financial asset in an easy-to-understand manner.

Asset Type	Risk	Expected Return	Liquidity	Minimum Investment	Main Source of Income
Savings Deposit	Very low	Very low (about 0.001%)	Extremely high	From 1 yen	Interest rate
Time Deposit	Extremely low	Low (about 0.01%)	Medium	From 10,000 yen	Interest
Government Bonds	Low	Low (0.1% to 1%)	Medium	From 10,000 yen	Interest and price appreciation
Corporate Bonds	Medium	Medium (1-3%)	Medium	From 100,000 yen	Interest and profit on price increase
Equity	High	High (5-10% per annum expected)	High	From several tens of thousands of yen	Dividend/gain on price increase
Investment trust	Medium to high	Medium to high (depends on product)	High	From 100 yen	Distribution/gain on price increase
ETF	Medium to high	Medium to high (depends on the index linked to the ETF)	Extremely high	Thousands of yen and up	Distribution/gain on price increase

Relationship between Risk and Return

One of the most important concepts in financial asset investment istherelationship between risk and return.

In general, the higher the return expected from a financial asset, the greater the risk of price fluctuation. This relationship is called the "risk-return trade-off" and is a fundamental principle of investment.

While products with a guarantee of principal, such as deposits, are safe, they can only offer low returns below the rate of inflation. On the other hand, equity investments offer high return potential, but there is also the risk of loss of principal.

Investors need to clarify their own risk tolerance and investment goals before selecting financial assets with appropriate risk/return levels. It is important to construct a balanced portfolio by comprehensively considering personal factors such as age, income, family structure, and investment experience.

Tax Treatment of Financial Assets

Different tax rules apply to income earned from financial assets.

In principle, gains from the sale of stocks and mutual funds and dividends are subject to separate taxation at a rate of 20.315% (15.315% for income tax and 5% for inhabitant tax), but if you use the NISA (small investment tax exemption) system, you can invest up to a certain amount per year tax-free.

By understanding the taxation system and using it appropriately, it is possible to maximize your net income. In particular, we recommend actively utilizing tax benefit programs such as NISA and iDeCo (Individual Defined Contribution Pension Plan).

Advantages and Risks of Financial Asset Management

Key Advantages of Financial Asset Management

Flexibility due to high liquidity

The most importantadvantage of financial assetsis their high liquidity.

Financial assets such as stocks, bonds, and mutual funds can be converted into cash through stock exchanges or financial institutions in a relatively short period of time. In the event of a sudden demand for funds, they can be cashed in within a few days or weeks, giving you the flexibility to respond to changes in your life plans or unexpected expenses.

In the case of real estate investments, it usually takes three months to a year to sell, but with financial assets, you can quickly convert funds by placing a sell order during market open hours. This high level of liquidity is a major advantage, especially for investors of working age.

Start Investing with Small Amounts

Another major advantage of investing in financial assetsistheability to start investing with small amounts.

Mutual funds can be started with as little as 100 yen per month, and stock investments can be started with as little as tens of thousands of yen. This makes it possible for even a novice investor to start asset management within a reasonable range and gradually increase the amount invested.

Real estate investment requires an initial investment of at least several million yen, but with financial assets, you can gain investment experience without placing a burden on your family budget. In addition, by utilizing accumulation investment, a certain amount of money can be automatically invested every month, which can be expected to reduce risk due to the time diversification effect.

Ease of Diversification

Diversificationis relatively easy to achieve withfinancial assets.

By using mutual funds and ETFs, it is possible to invest in hundreds or thousands of stocks with a single product. By combining various investment diversification techniques, such as regional, industry, and time diversification, one can aim for stable investment results without over-reliance on specific risks.

In individual stock investments as well, combining stocks from multiple industries and different company sizes can reduce overall portfolio risk. This ease of diversification is one of the major advantages of financial assets.

Utilization of Professional Management

Through mutual funds, youcan benefit fromprofessional management.

Fund managers have a wealth of experience and expertise, and can conduct in-depth company analysis and market research that would be difficult for individual investors. They also take advantage of their economies of scale as institutional investors to gain access to overseas markets and specialized investments that are difficult for individuals to invest in.

Actively managed funds are actively managed to achieve above-market average returns, while index funds aim for market average returns at low cost. Investors can choose the appropriate fund according to their own investment policy.

Risk Factors for Investing in Financial Assets

Market Risk

Market riskis the most fundamental risk in financial asset investing.

Price fluctuations in the stock and bond markets as a whole can affect the prices of individual issues. When the overall market declines due to factors such as worsening economic conditions, interest rate fluctuations, or political instability, it is difficult to avoid losses even with diversified investments.

In particular, in a major financial crisis such as the Lehman Shock or the Corona Shock, almost all financial assets tend to fall at the same time. Time diversification through long-term investments and diversified investments in different asset classes are effective countermeasures against such market risks.

Credit Risk

Credit riskisan important factor in bond investments and deposits.

It refers to the risk that the financial condition of the issuing country or company deteriorates, making it difficult to pay interest or redeem the principal. Even government bonds are subject to credit risk depending on the financial condition of the issuing country, and an evaluation by a rating agency is an important factor in determining credit risk.

For corporate bonds issued by companies, there is a possibility of losing part or all of the invested principal amount due to deterioration of the company's business performance or bankruptcy. To mitigate credit risk, it is important to analyze the issuer's finances, confirm its rating, and diversify investments in multiple issuers.

Liquidity Risk

Although financial assets have the advantage of high liquidity,liquidityrisk may materializedepending on market conditions.

During market turmoil or when trading volume is low, there is a possibility that you may not be able to sell at the right price when you want to. Particular attention should be paid to stocks, bonds, and small-cap stocks in emerging markets, where liquidity may be limited.

In mutual funds as well, there may be a discrepancy between the NAV and the actual selling price, and especially for funds investing in overseas assets, the effect of time differences should also be taken into account.

Inflation Risk

Inflation riskis an important consideration, especially for fixed income investments.

When the rate of price appreciation exceeds the yield on a financial asset, its real purchasing power decreases. With fixed-income bonds, there is a risk of a diminution in real value over the inflation period.

Stocks are considered inflation-resistant in the long run because corporate sales and profits may rise in tandem with inflation, but in the short run there is also the risk of share price declines due to higher interest rates.

A Real Estate Investor's Perspective

As a real estate investment specialist, I will discuss the combination of financial assets and real estate investment.

Since financial assets and real estate investments have different characteristics, they can be expected to complement each other when combined appropriately. The high liquidity of financial assets complements the low liquidity of real estate investments, and the stable cash flow of real estate investments reduces the price volatility risk of financial assets.

In particular, it is important for ultra-high-net-worth individuals to secure both liquidity through financial assets and stable income through real estate investments in their asset management. An effective strategy is to use financial assets to meet short-term capital needs and use real estate investments to build long-term assets.

There are also advantages to combining the two in terms of taxation. With real estate investments, tax savings from depreciation can be expected, while with financial assets, tax incentives such as NISA and iDeCo can be utilized.

However, in financial asset investment, it is important to maintain a long-term perspective without being distracted by short-term market fluctuations. The concept of "long-term holding" cultivated in real estate investment is an important element that can be effectively utilized in financial asset investment as well.

Conclusion

Summary of the main points of financial asset investment

This article has provideda comprehensive explanation offinancialassets, from basic concepts to specific investment methods.

There are various types of financial assets, including cash, deposits, bonds, stocks, and mutual funds, each with different risk/return characteristics. While there are advantages such as high liquidity, starting investment from a small amount, and ease of diversification, there are also points to be aware of such as market risk, credit risk, and inflation risk.

What is important is to correctly understand these characteristics and select the appropriate financial assets according to your investment goals, risk tolerance, and investment period. In addition, combining these assets with real assets such as real estate will enable more stable asset management.

Next Action Steps

We offer you concrete steps to take when starting to invest in financial assets.

First, assess your current household financial situation and identify funds that can be invested. The basic rule is to hold 3-6 months of living expenses in a deposit as an emergency fund and start investing with surplus funds.

Next, set an investment goal and investment period. Select an appropriate investment strategy according to your objectives, such as a long-term investment of 20 to 30 years for retirement fund preparation, or a medium-term investment of 10 to 15 years for children's education expenses.

For beginners, we recommend starting with diversified investments using mutual funds and ETFs, and be sure to actively utilize tax incentive programs such as NISA and iDeCo to ensure tax-efficient investment.

Importance of Continuous Learning

Continuous learning and information gathering are the keys to success in financial asset investing.

The market environment is constantly changing, and new financial products and systems are constantly being introduced. It is important to regularly read investment books and attend seminars to keep up with the latest information.

You should also regularly review your investment performance and adjust your portfolio as necessary. We recommend that you check your asset allocation once or twice a year to check for any deviations from your original investment policy.

INA&Associates Inc. offers comprehensive asset management advice as well as real estate investment. Please feel free to contact us to discuss the optimal asset allocation that combines financial assets and real estate investments. We will use our professional knowledge and wealth of experience to support you in realizing your asset building goals.

Frequently Asked Questions

Q1:What is the minimum amount of money required to start investing in financial assets?

A1:You can start investing in financial assets with very small amounts.

You can start with as little as 100 yen per month for mutual funds and tens of thousands of yen for stock investments. The important thing is not the amount of money, but to invest continuously. We recommend that you start with an amount that does not place a burden on your household budget and gradually increase the amount invested.

However, it is desirable to have a certain amount of money in order to effectively diversify investments. You should start with a monthly reserve investment of about 10,000 yen and aim to invest 10-20% of your annual income.

Q2:Which should be prioritized, financial assets or real estate investment?

A2:Since they are complementary to each other, it is important to combine them in a well-balanced manner rather than choosing one over the other.

Financial assets are highly liquid and can be started with a small amount, so we recommend that beginners start with financial assets. After accumulating a certain amount of investment experience and funds, real estate investments are generally considered.

The final asset allocation will vary depending on the individual's situation, but it is realistic to start with an allocation of about 70% financial assets and 30% real estate, and adjust according to experience and funds.

Q3:What should I do when the market declines?

A3:How to respond when the market declines depends on your investment period and investment objectives.

If your investment objective is to invest for the long term, it is important to maintain a continuous accumulation of funds without being sad or happy about short-term market fluctuations. Rather, when prices fall, it is effective to consider it as "an opportunity to buy at a lower price" and consider additional investment.

However, if you need the funds in the near future, you should consider selling some of them to prevent further losses. To avoid such a situation, it is important to set an appropriate asset allocation in advance according to the investment period.

Q4:Which should I prioritize, NISA or iDeCo?

A4:Since both systems have different advantages, it is recommended to utilize both if possible.

The iDeCo is particularly beneficial for those with high income tax rates, as it provides reliable tax savings through income tax deductions. However, it has the restriction that withdrawals cannot be made until age 60.

NISA has no withdrawal restrictions and allows for more flexible investment. It is practical to start with NISA first, and if you can afford it, use iDeCo as well.

Q5:What are the key points in selecting investment trusts?

A5:When selecting an investment trust, please focus on the following points.

First,it is important to have lowmanagement costs(trust fees). In long-term investment, a small difference in cost can have a large impact. Second,make sure that theinvestment policyis clear and consistent with your investment goals.

Investment performanceandnet asset value are alsoimportant factors to consider. We recommend that you choose a fund that has been in existence for at least three years and has a net asset value of at least 3 billion yen. Finally, check the fund's handling of distributions. For long-term investments, it is common to choose a distribution reinvestment type.

Glossary

Daisuke Inazawa

Representative Director of INA&Associates Inc. Based in Osaka, Tokyo, and Kanagawa, he is engaged in real estate sales, leasing, and management. He provides services based on his extensive experience in the real estate industry. Based on the philosophy that “human resources are a company's most important asset,” he places great importance on human resource development. He continues to take on the challenge of creating sustainable corporate value.