Case for simplified investing: good US stocks and a few bonds

By financial nudism, I mean that investors need next to nothing to be successful. A simple mix of high-quality stocks and low-fee bonds, such as

iShares Core S&P 500

exchange traded fund and

Vanguard Total Bond Market

ETFs each costing 0.03% per year are sufficient. It goes without saying that you should have enough cash on hand to cover the costs of an extended emergency – think years, not months.

Let me review some asset classes that are good for speculation or even investment, but that long-term savers don’t really need. Below I will answer an email question about investing in India. If you haven’t been watching its economy, you might be surprised at how quickly it is displacing China as the darling of emerging market investments.

You don’t need goods. It’s just stuff. Stocks are better than things because they represent companies that turn things into profits. In addition, the S&P 500 index fund now includes commodity producers such as Exxon Mobil and Newmont
.

You may have heard that commodities are a hedge against inflation, but I doubt it. The price of gold, for example, showed a weak correlation with the consumer price index. Speaking of which, the CPI is almost two-thirds service-based. Why should I use things to hedge against services?

You don’t need real estate investment trusts. The S&P 500 already has REITs. And all of his companies own commercial property.

You don’t need options. It’s like betting on a football match. Stocks are like owning a team.

You don’t need private capital. Fees are a shock, and the evidence that PE outperforms stocks is weak. Plus, the S&P 500 includes stocks of PE firms that their founders and CEOs assure me are a great deal when they don’t tell me PEs are better than stocks.

You need bonds—not because they’re good for making money, but because they hold their value better than stocks when the market is going strong. Ask a financial advisor about the right mix of stocks and bonds, but that has more to do with how soon you might need to spend the money than your age. If you start your working years barely covering the family bills and end them with more than you can spend, your risk tolerance may stay the same or increase with age. In this regard, you do not need funds for a specific date.

You don’t need junk. They offer commodity-like returns for commodity-like risk. Just buy stocks.

Life insurance is not an investment. It is based on the same mathematics as casinos; the odds are in the house’s favor. Buy some if your death would put a loved one at a disadvantage, but think of it as a penalty you pay until you’re rich enough to provide for yourself. Prefer cheap term insurance. You don’t need annuities that bundle investments with insurance in a way that makes it difficult for customers to judge whether they’re getting a good deal.

You don’t need thematic funds, sector funds, closed-end funds, business development companies, limited liability companies, convertible bonds, preferred stocks, inflation-protected government bonds, cryptocurrency or collectibles. I’m missing some important asset classes. You don’t need those either.

I understand that the S&P 500 looks dangerously techy right now. But it was tech-heavy a decade ago before it tripled. I tend to stick with it rather than try to outsmart it. My financial nudism does allow for some small and mid cap stocks like via

Fidelity Extended Market Index

fund and some stocks in developed markets, through, e.g.

Schwab International Equity

ETFs.

However, you can skip emerging markets. Heresy, I know. But their main appeal to investors is rapid economic growth, and studies show a weak correlation between this and stock returns, as a country’s economy and the supply of stocks are two different things. China, for example, has been a growth miracle for 30 years, but

iShares MSCI China

The ETF lost money during that period.

This brings me to India. “Is it too late to take advantage of the growth of the Indian economy?” wrote an investor named Jeff. He asks about stock selection.

India overtook China in population last year, and its stock market is on a tear. If you have purchased

iShares MSCI India

ETF a year ago you beat the S&P 500 by three points and the MSCI China by more than 45. At the end of 2020, China made up more than 40% of

MSCI Emerging Markets Index,

and India, less than 10%. China is now down to 25% and India is approaching 18%. Related aside: Apple
,

which has been making low-end iPhones in India since 2017, now makes high-end ones there as well and plans to move 25% of production to India by next year.

The Indian stock market is about as expensive as the US in terms of earnings, but with faster earnings growth. JP Morgan is a fan. Its global markets team cited India’s robust capex and growing investor participation, along with more equity issuance and analyst coverage. Its specialists in India prefer finance, including ICICI Bank; automobiles including Tata Motors; real estate including DLF; consumer goods including Dabur India; and pharmaceuticals, including Sun Pharmaceutical Industries
.

You already know that as a financial nudist I don’t think US investors need Indian stocks. A search of S&P 500 earnings transcripts and slides shows that US multinationals are busy selling cookies, sodas, tractors, fertilizers, phone chips, movies and much more across the subcontinent. Europe too. But based on the long-term plan the Chinese market had before it crashed, and that I’m yet to hear every dermatologist, roofer, basketball dad, and balloon artist bragging about their ETF gains in India, I’m guessing the market there there is something to work on.

Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his podcast Barron’s Streetwise.