In Japan, where market gains have continued, many investors have been taking action on the view that this is a good opportunity to sell.
However, for those managing assets through a defined contribution pension, it is not advisable to follow the current trend even if it appears to be a good time to sell.
In this article, we will explain whether people who have chosen investment trusts in iDeCo or DC should be locking in gains at this stage.
How does a defined contribution pension work?
Some people who joined a defined contribution pension may no longer remember how the system works in the first place.
So first, we will explain the basic structure of a defined contribution pension.
With a defined contribution pension, participants contribute a fixed amount every month, and with an individual iDeCo plan, participation starts from 5,000 yen per month.
One feature of this system is that the money accumulated from the start is managed as contributions, and the available investment methods include deposits as well as financial products such as insurance and investment trusts.
As a general rule, with a defined contribution pension you must continue contributing the amount you set yourself until age 60.
If you are self-employed or a freelancer, you can allocate up to 68,000 yen per month in contributions.
However, one point to note is that office workers at companies without a corporate pension plan are limited to 23,000 yen per month.
Incidentally, a defined contribution pension does not refer only to iDeCo, which individuals join and manage on their own.
In some cases, companies also introduce it for employees as an alternative to a retirement benefit system.
In that case, it is called corporate DC, and instead of contributions being deducted from employees' salaries, the company itself pays a fixed contribution every month.
Defined contribution pensions also offer a major benefit.
That benefit is that they are tax-free.
Normally, interest on deposits and profits earned from investment trusts are subject to roughly 20% tax.
However, investment gains in iDeCo and DC are tax-exempt, which makes it easier to achieve more favorable returns than ordinary investments.
That said, if you choose investment trusts within a defined contribution pension, performance is affected by market movements, so tax advantages alone are not a reason for complacency.
If the market rises, should you lock in unrealized gains?
When markets rise while you are investing through a defined contribution pension, many people wonder whether they should realize gains to avoid the risk of a decline.
So is it the right move to take profits quickly when the market goes up?
【Conclusion】There is no need to rush into taking profits
In conclusion, even if stock prices rise, it is generally considered unnecessary to review your holdings by taking profits or changing funds.
iDeCo and DC investment trusts are structured as a monthly accumulation plan in which a fixed amount is contributed each month.
Even when prices are high, the number of units purchased through a fixed contribution is smaller, while more can be bought when prices are lower, allowing you to maintain a stable investment approach.
Buying a large amount at high prices can lead to the mistake of buying at the top.
Thanks to the stabilizing effect of spreading purchases over time, you can keep the average purchase price under control and build profits steadily over the long term, even if stock prices rise sharply.
What matters in long-term investing is not being swayed by the market
In long-term asset management, many people end up worrying too much about market movements.
Some investors frequently switch investments after taking profits, but the key to successful long-term asset building through stocks and investment trusts is not being misled by price fluctuations.
Investment trusts in particular are designed around the idea of investing a fixed amount every month and continuing to invest consistently.
If concern over market movements causes you to move into deposits or insurance, that is effectively the same as starting over.
In that case, the end result is often a smaller amount available to receive in the future because the contribution level is too low.
With a defined contribution pension, it is important to keep going rather than focusing only on the market.
Steadily growing your assets is the primary purpose of using a defined contribution pension.
What should you do when market volatility makes you uneasy?
As noted above, while it is important not to be swayed by the market, some people may still feel so anxious that it affects their daily lives.
Even in that situation, should you continue holding investment trusts without taking profits?
Next, we will look at what you should do when market volatility leaves you feeling uneasy.
Review your portfolio
Many people feel reassured about the future once they join iDeCo or DC, but when they actually try investing in investment trusts, they may begin to feel uneasy.
At that point, it is worth considering asset management outside defined contribution pensions as well.
Defined contribution pensions are an effective way to invest because gains are tax-free.
However, because values fluctuate with the market, the possibility of losing principal cannot be ruled out entirely.
Other forms of asset management outside defined contribution pensions, such as deposits and real estate investment, also have their own advantages, so when you are unsure, it may be wise to review your portfolio.
Reduce risk based on the time remaining until benefits are received
With a defined contribution pension, where you can receive your managed assets at age 60, an active investment approach may be appropriate when you first enroll, but as you get closer to the age when you will receive benefits, it is advisable to shift to investments with lower risk.
As your asset management gradually becomes more stable with age, you can avoid the risky situation of continuing to invest while drawing down the assets you have built up.
An important period is the late 30s to around the early 40s, when expenses often increase because of children's education costs or mortgage payments.
If you have not reached your target amount, you can build a portfolio designed to recover ground, and if performance is strong, it is fine to slow down.
If you are going to take profits, switching to principal-protected products is also worth considering
With a defined contribution pension, you do not need to limit yourself to investment trusts alone.
You can also allocate funds to deposits or insurance while continuing with investment trusts.
If you feel uneasy, diversify your investment targets.
This can help reduce some of that anxiety even if you are not fully satisfied with performance.
Summary
In this article, we discussed defined contribution pensions, a system whose mechanics many people tend to forget over time.
As for profit-taking, which often troubles participants, doing it casually and repeatedly undermines one of the key advantages of a defined contribution pension: the ability to build assets over the long term.
When you are unsure, take stable measures such as shifting to lower-risk investments or reducing the amount, and continue managing your assets in a steady way.
Frequently Asked Questions (FAQ)
Should unrealized gains in a defined contribution pension be locked in?
Because this system is designed for long-term investing, it is best to avoid fully taking profits simply because the market has risen temporarily.
What is switching in a defined contribution pension?
It is the process of replacing the investment products you currently hold with other products in order to adjust your portfolio balance.
What should you do if market volatility makes you uneasy?
It is important to review your asset allocation through rebalancing and return to your long-term investment policy.
When is the right time to rebalance a defined contribution pension?
It is common to do this once or twice a year, or when your asset allocation has drifted more than 5% to 10% from your target.
