The New NISA “Wasn’t Supposed to Happen! …The “investment insanity” trap perpetuated by the heated NISA press
Simulation is a “picture-perfect”
The “New NISA” will start in January ’24. Every day, news and articles related to NISA are distributed on the Internet. However, some of them are so eager to emphasize the benefits of NISA that they deceive individuals. Moreover, the guidebook of the Financial Services Agency (FSA) is also proudly mentioning it. What is the problem? Let us clarify the reality.
Excessive appeal of NISA is going too far
The media coverage of NISA (National Institute for Savings and Investment Promotion) has become heated, as the name implies, a government program that allows individuals to pay zero tax (tax rate of approximately 20%) on their investment gains. This alone is a sufficient merit, and the new NISA will also greatly expand the tax-exempt investment limit and make the tax-free investment period indefinite. There is no doubt that this is an epoch-making system that will revolutionize individual asset management.
However, in an effort to promote the benefits of this system, explanations that are misleading or, to put it bluntly, “lies” are rampant. If people believe such explanations, it is possible that many people, especially those who started investing with NISA, will later find themselves thinking, “This is not what I thought it would be! If you believe them, there is a possibility that many people, especially those who started investing with NISA, will later find themselves thinking, “This was not supposed to happen!
Do not be fooled by “asset management simulations.
The problem is the simulation of asset management in NISA. The most common pattern is “if you accumulate and invest X amount of money every month and invest it at X% interest rate per year,” and the profit after 20 or 30 years is estimated. For example, the latest edition of the Financial Services Agency’s “Let’s Start! NISA Quick Guidebook” (the latest edition) shows a simulation of the effect of long-term investment: if 10,000 yen is set aside every month and invested at an annual interest rate of 3%, 2.4 million yen will become 3.3 million yen over 20 years, and 4.8 million yen will become 9.3 million yen over 40 years. The FSA states that the annual interest rate is 3%.
The FSA uses a conservative figure of 3% per annum for the interest rate, but other articles often set the interest rate at 5% per annum, and the article is full of such statements as “your retirement will be secure” if you invest the money for 20 or 30 years. Indeed, if one were to accumulate 30,000 yen per month and invest it for 30 years at an annual interest rate of 5%, 10.8 million yen would become approximately 25 million yen.
What is the problem with such simulations? Simulations of this kind are always based on “compound interest. The term “compound interest” is used in the sense of “investment of profits earned from investments in addition to the principal amount,” and it is assumed that profits from investments are re-invested, and as a result, profits generate new profits, and profits keep growing.
Those who do not question these simulations and explanations are in trouble. They are unaware that the term “compound interest” is being used incorrectly.
