One of the wonderful things about living an international lifestyle, I move back and forth between Australia and Japan to live and work, is that you become more and more aware of the differences that other people may or may not have any idea about. The differences between cultures, business styles, financial systems.... the list could go on indefinitely. It is not my objective to look at every difference here. I want to look at one difference in particular. That difference is the long term interest rates on offer in Japan compared to those available in other parts of the world.
In Japan the long term interest rates are in the vicinity of 2%. When you compare that rate to those on offer in other developed countries it is astounding. In the US they are around 6%, in New Zealand they are near 9%, Australia is looking at 7.5%, the UK near the 6.4% mark... you get the picture. No one even comes close to what is available in Japan.
How is this possible? Because the Japanese government's lending rate is so incredibly low. The Bank of Japan, which has a similar role to the US Federal Reserve, places a .5% lending rate on money it loans to banks. The banks then in turn place an interest rate of between 1% - 1.5% on that to cover their risk and costs involved in lending that money out to borrowers. So you can see how the Japanese interest rate to the borrower is around 2% (often less). And it has been more or less stable over the last 10 years or more.
In the United States (for contrast), the Federal Reserve controls inflation by adjusting the borrowing rate. Every economy has this inbuilt safety feature if you like to stimulate or put the brakes on the economy. Currently they will lend money to the banks are around 5%, the banks in turn do what other banks do around the world, and they add their 1% to 1.5% - covering their risk and giving them a profit. You can see then how the current US rate of 6% to 6.5% is arrived at.
It is interesting to note that the Japanese lending rate from the Bank of Japan has remained more or less constant for many years. It is for all intensive purposes a flat liner. If you were to plot it compared to other rates around the world, the Japanese interest fluctuation line would be almost flat, near the bottom of the table, where as other countries would be represented by lines rising and falling, sometimes dramatically, and in positions well above that maintained in Japan. Basically, Japan offers the lowest and most stable lending rate in the world today.
There are generally two types of investors- those who attempt to time the market, predict stock prices, and make money quickly; and those who build long-term, diversified portfolios based on solid companies. There are many advantages of long term investing of which short term investors will miss.
One of the biggest advantages of long term investing is that while you may not be able to predict the market accurately in the short term, in the long term it is much easier. The history of the market, while allowing for short term dips and corrections, has historically gone up over time. By investing and holding on to stocks for longer periods of time, the chances of having growth is much greater.
Another advantage of long term investing when compared to short term, is cost. Each time an investor buys or sells a stock, there is a cost involved with regard to commissions and transaction fees. Long term investors, by definition, make fewer trades, and therefore incur fewer costs. Short term investors can easily rack up large trade costs when making frequent trades. Each time cost is incurred, profits are lost.
A third advantage of long term investing is with regard to taxation. For any account that is not a tax-sheltered account, such as IRA’s, profits are subject to taxation. Profits in the stock market are subject to capital gains taxes. For short term investors, if a stock has been owned for less than a year, the capital gains taxes are equivalent to the person’s regular tax bracket for the year. That may be as high as 35%. For long term investors, however, the advantage of holding a stock for a long period means that there is no taxation until the profits are realized; and once the stock has been sold, as long as it has been held for over a year, the profits are subject to a long-term capital gains tax, which is either 10 or 15%, depending on the investor’s tax bracket.
A final distinct advantage of long term investing is the effect of compounding. Because many stocks, particularly the type often purchased for holding in long term portfolios, pay dividends, compounding is a great advantage for long term portfolio growth. As savvy investors know, compounding means not only do you earn interest on your money, you earn interest on your interest.
For stockholders, that translates to earning dividends in addition to capital appreciation. They can either accumulate dividend payments into interest paying accounts, or simply reinvest the dividends back into the stock, ending up with more shares and more dividends.
There are numerous advantages to long term investing. The last, and possibly most important to some investors, is the reduced risk that is incurred with the purchase of stocks for the long term. While short term buyers may lose money quickly, by holding on to quality companies for long periods of time, the risk of losing money is greatly reduced.
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Both Graham Fenemore & Ohad Livne Livne are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Graham Fenemore has sinced written about articles on various topics from Property Investment, Golf Guide. Graham FenemoreIs a researcher/writer and shares his insights into cultural and business differences between Japan and other developed nations through articles and blogs. He has lived and worked in the UK, New Zealand, Japan and Australia.. Graham Fenemore's top article generates over 6600 views. to your Favourites.
Ohad Livne Livne has sinced written about articles on various topics from Investments, Property Investment. In Value-Investing-Center we believe in sharing responsible investing education to people who wants to learn.. Ohad Livne Livne's top article generates over 6600 views. to your Favourites.