Alright so it’s Aug 5th and things have developed into the most unpredictable turn of events.

huge drop in USDJPY, huge drop in the JP stock market, and moderate drop in the US stock market.

Losing a lot of net worth sucks a bit, but more important I am needing to take a hard look at my current investment strategy and needing to make some adjustments after some expensive lessons.

Investment Goals and Foundation

So I’ve actually had to ask myself a confusing question over this weekend – am I trying to maximize my wealth in terms of USD/HKD or in JPY?

And investment strategies can actually differ quite a bit depending on which.

For the past 3 years, my assets in HKD terms decreased by HK$300k (HKD2.3M -> HKD2M), but my assets in JPY terms actually increased by ¥7M yen (¥32M -> ¥39M).

So did my wealth shrink or expanded?

And if I had to choose – my HKD assets can stay constant while JPY rise, or HKD assets rise while JPY stay constant, which one will I choose?

I finally had the answer when looking at property prices in Tokyo.

The home I want to buy probably cost around ¥10M in 2020 – HK$7M back then.

Now it costs around ¥14M – but also around HK$7M (well 7.5M as of this moment after the crazzzzzy USDJPY slide)

So seems like the thing I’m most concerned about which is Japan home prices, tends to stay stable in terms of USD instead of JPY.

Meaning if USDJPY rise, home prices rise. USDJPY fall, home prices fall.

And in the long term, I think structually USDJPY will rise anyways, so my final answer is, choosing HKD as my base makes more sense.

So I’ve already lost in the past 4 years in that sense – having assets drop by 300k. I want to make it up now by positioning myself in the place that will increase my HKD assets in the long term.

US Equity

With that said, US equity is the easiest to manage.

When US stocks drop, it’ll automatically take up a smaller portion of my portfolio which in turn reduce my risks.

I can even buy back a little bit with sideline cash so that when it goes back up I can eat up the extra shares.

Same thing on the way up – the portion increase naturally which in turns exposes me to too much risk and I’ll have to trim which becomes profit taking.

So I am not worried whether it goes up or down and I can profit either way as long as the long-term trend is up.

JP Equity

This is a bit more tricky. If the stock goes up but yen goes down, then it mitigates the gain in my HKD-based portfolio, and vice-versa.

So given that I have decided that I will be looking at my portfolio HKD based, I will consider the yen movement and the stocks as a pair and make adjustments accordingly.

If yen rises but stock plunges beyond that (which is what’s happening), then it’ll act as like US stock going down and it’ll automatically reduce the % portion and I can buy back.

So in that sense unfortunately if JP stocks gain a lot but USDJPY also rise substantially, in my perspective there isn’t going to be much of a gain.

Which is originally why I started the USDJPY trade to mitigate this, but turns out it might have been a bad risk-management tool in this case.

USDJPY

So I originally figured, if I already held say ¥8M yen of liquid assets, then I can just short ¥8M yen and reduce my yen exposure – which allows me to fully gain the increase in JP stocks without losing some back to USDJPY.

if USDJPY drop OK because i have assets in JP stocks and cash that can cover the shorts.

Or I can just think of myself borrowing yen and buying JP stocks.

Turns out that’s not a sound strategy, because in the long term that does work, but in the short term – as USDJPY drops, JP stocks also drop and drops even further than the yen shorts.

So I am taking a mild loss on the JP stocks already. And now the amount of yen I owe far exceed the JP stocks I have on hand, because the JP stocks decreased greatly in value.

And I’m left with short yen positions that I eventually have to cover, and the lower the USDJPY goes, the more USD I need to use to cover that short.

Which is opposite to how the US equity works – % of position getting smaller as the price fall.

USDJPY positions get larger as it falls since the yen I own is constant, the USD I lose just balloons as it goes down.

So the nice thing about the carry-trade is earning interest differentials – but at quite a high risk exposure. And the exposure increase, not decrease, as the price goes into the unfavorable side.

If I’m considering my portfolio in terms of YEN, then this trade makes sense as the YEN amount always stays constant, and whenever the dollar gets cheaper, the position gets smaller and I can just move in to buy more. And it yields interest differentials so it’s almost like bond that I can buy on margin – a very good trade.

This was where I got confused and kept looking at my HKD assets while thinking the USDJPY trade as if I’m wielding a YEN asset portfolio.

I think I’ll slowly unwind the entire position and stick with JP stocks for my hedge against USDJPY rise.

In fact I don’t really need any though because naturally JP stocks will rise as USDJPY rise.