On Financial Nudism

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Well, hello there. This is Jack Howe. You're listening to the Barron's StreetWise Podcast, and with me is our audio producer, Jackson. Hi, Jackson.

Howdy.

It's a short week this week. We're going to quickly cover two topics. The first is a listener question that I understand is about India. And the second one, look, I don't want to make this awkward, but I've got some feelings to share on the subject of financial nudism.

It's already awkward.

Which I will, I will define as a minimalist approach fully clothed my YouTube portfolio construction. In other words, it's about all the stuff you don't need. I get emails all the time about this or that is a great deal and you need almost none of it to be successful as an investor. I'll explain that in a little bit. Let's get to our listener question. It's from an investor named Jeff and Jeff sent us first a written question and it had, you know the rule, when someone doesn't record, then we guess what they sound like and Jackson does an impression and it had a couple of y'alls. In there. And I said, Jackson, why don't you try to do that with the King's English on the assumption that this is a British listener who likes to throw in an occasional Americanism to be more relatable?

Yeah.

And let's just say that the result of that, that Jackson's reading, we're best off not hearing that. It was—

I'm gonna burn that hard drive. Yeah.

As it happens, just in time, Jeff emailed us a recording. So let's hear his question.

Hey, Jack and Jackson, I've read a lot of news articles lately talking about how India's economy is expecting to show a lot of growth in the future. And I was just curious to get your take on if this is the right time to invest in India or if that time has already passed in y'all's opinion. To me, I've invested, uh, in an ETF because I don't really know a whole lot about Indian businesses. So I was just curious to get your opinion on that and just to hear what you have to say about it. Thank you.

It's a great question and it's timely just as the US stock market is hitting all-time highs. The Indian stock market is hitting all-time highs. In fact, if you bought the MSCI India ETF, the ticker there is INDA, that ETF has made over 31% over the past year. If you've owned it, you've beaten an S&P 500 ETF by about 3 percentage points, and you've beaten a China ETF by more than 45 percentage points. You could argue really that India is replacing China as kind of the darling of emerging markets investments. If you go back to late 2020, China made up more than 40% of the MSCI Emerging Markets Index, and India made up less than 10%. Now China is down to 25% and India is approaching 18%. It was this past year that India passed China in population. Now you can almost envision it at some point in the near future eclipsing China's stock market. And I think a parallel there is what Apple says about its iPhone production. Apple has long made iPhones in China. It started making them in India in 2017. It was making its, its kind of lower-end phones or its ones that were slightly older, but now it's making its latest phones in India and it wants to raise production there to 25% of its total iPhone production. By next year. Now, Jeff, you ask, is it too late to capitalize on the growth of the Indian economy? And it's an important question, although if I'm nitpicking, I'd say you're just capitalizing on the Indian stock market going up, which is not necessarily the same thing as the economy growing. There is indeed fast growth in India right now. It's outgrowing China. But studies have shown a surprisingly weak link between economic growth in emerging markets and stock returns, because a country's economy is not the same thing as its stock market. Its stock market depends on which kinds of companies have issued shares to the public, for one thing, and its returns depend on the price of those shares. In India, the stock market is about as expensive as the U.S. market relative to earnings. The earnings growth, however, is faster. So I suppose you could make the case that the Indian stock market, although it's gotten pricier, is still relatively attractive. Let me give you JP Morgan's view. JP Morgan, the global asset strategist there, are fans of India. They have what they call a structural overweight call on India, and they say the key drivers are high visibility of growth for multiple years ahead. They see financial markets being in a virtuous cycle of investor participation, deepening and broadening liquidity, rising fundamental coverage, and analysis and capital issuance. In other words, more people in India are buying Indian shares, which is good for the stock market there, and companies are responding by issuing more shares. And there's a growing financial services sector with analyst coverage of those shares. People are excited about the Indian stock market. Maybe that could help propel share prices higher. There's also a lot of capital investment in India, corporate earnings are robust, and so on. The India specialists at JPMorgan, they like— I'll give you some sectors and some stocks— they like the financial sector. One company there is ICICI Bank. I'm sure there's a cooler way to pronounce that. They like the auto sector. Tata Motors is one of the companies there. They like real estate, including DLF. They like consumer staples, including Dabur, D-A-B-U-R. And they like drugs, including Sun Pharmaceutical. Okay, so those are sectors, those are stocks. And of course, you've got that India ETF if you want to take a broad approach to investing in India.

I got a question.

Hit me.

So if a country is, say, growing 7, 8% a year for 10 years and its stock market goes nowhere, where does all that growth go then?

It's a good question. The case of China comes up. China was a growth miracle over the past 30 years in terms of economic expansion. But if you look at MSCI China, the stock market there has gone nowhere over that period. I mean, it went up and then it went down. Net-net, it's actually lost investors a little bit of money over 3 decades. It's a key example of a country with great growth and poor stock returns. And the answer is just that gross domestic product is money whipping around the economy, going to a lot of places. Not nearly all of those are into the coffers of publicly traded companies. There are private companies that are benefiting, there are individuals that are benefiting. So it's not necessarily this direct relationship that you get strong GDP growth and then you profit in your stock returns. Sometimes the companies that are on offer in a particular economy are not really representative of that economy or are not really attractive. And sometimes they're just too expensive as a starting point to have good returns going forward. So, Jeff, you ask if it's too late to invest in India. And of course, I can only guess whether the stock market there will continue to rise. And if I'm going to guess, I'm going to guess that yes, it will. I'll tell you what I base this on. It's not particularly quantitative. It's just that China's stock market had a rip-roaring run for many years before it fizzled a few years ago. So maybe India's market will follow that pattern of having longer to run. Also, I just don't sense that I'm hearing from everyone in, let's say, non-work conversations, weekend conversations around town. I don't have loads of people boasting about their India ETF profits. I feel like that sort of thing happens late in the cycle of a major run-up for a big asset class. You start to hear the humblebrags, you know, "Oh, I got to figure out what to do with this India ETF. I'm up so much on it and I don't know what should I sell at all. What a headache." I haven't yet heard that sort of thing from, you know, dermatologists, roofers, basketball dads, balloon artists, you name it. When I start to hear that, I'll think maybe it's getting a little late in this run for the Indian stock market. But right now my feeling, and it is only a feeling, is maybe there's more room to run.

How many balloon artists do you talk to in the average week?

As many as possible. Great source of investor insights if you can get past all the squeaking that goes on. Now, I'll just add, Jeff, that although I don't think that it's too late to get in on India, I don't think if you're, let's say, a US investor, I don't think you have to, but I should set that up by saying I don't think you need most things. As I mentioned earlier, I'm something of a minimalist, or as I call it, a financial nudist. Country funds are one thing that I think that a US investor doesn't need. I don't even really think they need emerging markets exposure. I understand that that's kind of heresy, but I'll just tell you, if you run a search for S&P 500 earnings call transcripts and slide decks and you search for the term India, you're gonna see all kinds of multinationals that are busy selling cookies and soda and tractors and fertilizer and phone chips and movies and a lot more across the Indian subcontinent. And the same is true about Europe's multinationals. So there are many more ways to profit from India than just buying Indian shares. But I'm getting ahead of myself on financial nudism. That's probably a conversation I should have after the break. What do you think, Jackson?

Is there anything different you think we can call it?

Not financial.

Well, you could say stripping away unnecessary assets to get the perfect exposure with just the bare essentials.

Probably just stick with nudism.

That's coming up right after the break.

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Welcome back. Time to discuss my minimalist approach to investing, what I have called here financial nudism. Jackson, are we ready?

I have some financial nudism facts for you.

Seems unusual, but go ahead.

You know, if you watch the Super Bowl, you might have noticed that they didn't show it, but there was a streaker on the field. It paused action for like 5 seconds. Well, he went to jail and he had to pay a $42,000 fine according to the Las Vegas Review.

That's the fine. That's not bail money. That's the fine.

He is— his quote to the Las Vegas Review-Journal was, quote, and I don't want to be that guy that I'm rich and I'm 50 years old and I'm like, Dang, I wish I would have done that when I was younger. Now I did it now.

Seems expensive.

I'm not sure that that's what you're, you're a 50-year-old guy.

I'm okay with never having done that one. I'm all right with that.

So that was this year. I didn't realize that there was also a streaker just 3 years ago in 2021 at the Super Bowl.

These are both Super Bowl streaking facts. Okay. You're becoming kind of an expert on this subject area.

Go ahead.

Yeah, that's my coverage now. So this, in 2021, the streaker actually had made a bet, a prop bet that there would be a streaker at the Super Bowl, and I guess he made sure that that paid out. But the problem was he told people about it afterwards. He had placed a $50,000 bet and he would've made $375,000, but Bovada got wind of this and froze the payouts and launched an investigation.

Yeah, stinks. This year's guy could have made that bet and then he could have covered his own fines, right?

As long as they didn't figure out who the streaker was.

Yeah, would have broken even on the deal. Okay, well, thanks for bringing us up to speed. Now, look, this concept of mine is basically about all the stuff you don't need as an investor. And that's not to say that you should never buy any of this stuff. There are things you can buy for speculation. Some of this stuff is good for investment. There are plenty of sensible investors who buy the things I'm about to talk about. I'm just arguing that you don't truly need them as a long-term saver. There's very little that you actually need. You need quality stocks and you need quality bonds, and that's about it. And it's fine to use an index fund instead of individual issues. As an example, iShares Core S&P 500 ETF, that's a stock index fund. And Vanguard Total Bond Market ETF. That's a bond index fund. Each of those cost 0.03% a year. In other words, next to nothing. And if you buy those two in a mix that is appropriate for your financial circumstances, I mean, you should have enough cash on hand, it goes without saying, to cover a prolonged emergency, a year's long emergency, not a month's long emergency. And there's some other things you might want to add, but let me run through some things that I think you don't need. Let me start with commodities. There are precious metals like gold and silver. There are energy commodities like oil and natural gas. There are industrial metals like steel.

We talked about lithium and uranium, two other commodities.

So commodities are basically stuff. And my argument is that stocks are better than stuff because stocks represent companies and companies turn stuff into profits. Also, if you have an S&P 500 fund, that already includes some commodity producers, companies like ExxonMobil. There are big miners in there. Now, Jackson, as you say, we have talked about commodities here on this podcast. We've talked about many of the stuff that I'm about to mention. It is okay to buy that stuff. If you're a person who wants to have a few percent in gold in your portfolio because you think gold is going up, Hey, good luck to you. God bless. I just don't think if you're a long-term saver looking to take the least complicated approach possible that you need to do that. You see what I'm saying? In other words, I don't want to impose my financial nudism on anyone. This is for the benefit of people that either they have ended up with what they think are cluttered portfolios because along the way they have bought this thing that seemed like a good idea and that thing that seemed like a good idea. And now they want, they want a Marie Kondo their portfolio, if you know what I mean.

Author of the Tidying Up books.

That's her. And then the other type of investor I'm speaking to is someone who has their stocks and bonds and they receive a pitch from somewhere saying you should add this thing to your portfolio because whatever, whatever, either the long-term return— you should buy collectible wines because the long-term return potential is so great, or because the other thing you hear is because this is going to diversify your portfolio because these returns are not correlated with the stock market. I don't find either of those persuasive. I think stocks are as good as it gets when it comes to long-term returns. And as far as the stuff about using correlations to create a diversified portfolio, what matters is what happens to asset prices during times of stress, not what happens to them over long time periods of calm. And in times of stress, the stuff that is risky tends to move like stocks, and the stuff that is safe tends to move like safe bonds.. So I think if you've got stocks and bonds, you've got enough. But again, this is just me. This is not the orthodox approach. I'm going to run through a few more. I don't think you need real estate investment trusts, REITs. I'm sorry, REIT fans. Again, if you want to put a few percent in REITs, fine, but I don't think you need them. The S&P 500 already has REITs in the index. And if you think about it, every company in the S&P 500 owns commercial property. They got the headquarters, maybe they have some offices, maybe they have some stores, maybe they have some, I don't know, parking, or maybe they have some factories, right? They have commercial property that they're using for profit. They're not pass-throughs, they're not REITs, but you've got plenty of exposure in the index to commercial property already. You don't need to add more, in my opinion. How am I doing so far, Jackson? Convincing at all?

I think you're making enemies with each sentence.

Sounds maniacal, right?

Well, there are people who have these things who want everyone to love them. There are also people who sell these things who want everyone to buy them. I'm not poo-pooing here. I just think that you can use a minimalist approach. I think you don't need options. The whole power of stocks is in your ability to hold them long-term through downturns. Why would you want to add something with a constantly eroding time value? I compare options with betting on a football game and stocks are like owning a football team. I'd rather be an owner.

Jackson? What if you're hedging for a short period of time.

I'm tempted to say that's okay as its own kind of hedge. But really, you know, there are people with very narrow needs for professional hedging and there are most people who hedge who don't need to do it. If you're an investor who's trying to hedge a stock portfolio over time using options, that's really expensive to do. It's going to cut into your returns. It's also a pain in the neck. Let's say you're an airline and you hedge the cost of fuel over time. On average, you're going to lose money on that hedging. Not a lot of money, but hedges are basically like insurance, and insurance uses the same math as casinos, which means that the odds favor the house, which means you're not going to come out ahead. You might come out ahead on one particular bet, but over long time periods, you're not going to. The economically optimal thing for an airline to do is to not hedge their fuel costs. There's at least one example of a big airline that does not hedge its fuel costs, American. There's another example of a big airline that owns a refinery, which helps Delta. But anyhow, back to options. I don't think you need them. And look, if you want to use a conservative strategy like owning high-quality stocks and writing options against them, that's fine if that's your thing. I don't think investors need to do that. That's the difference here between need to do and want to do.

All right. What's on the chopping block next?

I don't think you need private equity. I think we talked about this in an episode of this podcast. The deal with private equity is unlike liquid stocks, private equity funds buy assets that don't trade, and they're supposed to be— there's this mythical theoretical illiquidity premium that you're supposed to get that's supposed to help your investment outperform stocks over long time periods. The evidence I have looked at is really mixed at best on whether private equity does in fact outperform, let's say, a low-fee index fund. I think you do just fine with an index fund. I've spoken with several big private equity CEOs and founders over the years. And they tell me two things. First of all, they explain to me why they think private equity is better than stocks because of this illiquidity premium and so forth. And then they tell me, by the way, I think our shares are a really good deal. You do now.

You think your shares, your stocks are a good deal, although the rest of those stocks, those, those you're better off with private equity.

I see. I just don't believe it. I also think the fees on private equity are atrociously high. So most people don't invest in private equity. So I guess the point here is if you don't and you hear about other people who do and it sounds like everyone's making a killing, Don't believe it. I don't think you need it. Also, by the way, if you own that S&P 500 fund that has private equity firms in it, so you have some exposure. Now you do need bonds and it's not because they're good. It's because when the stock market hits a downturn, share prices go kablooey. Bonds can— they don't always, but they can hold their value much better than stocks. And you do need that kind of diversification. I think, however, that you only need high-quality bonds. I think you need, if you're a US investor, let's say, I think that a mix of treasuries and high-grade corporate bonds is fine. I don't think you need junk bonds. I should point out that these are not stagnant conditions. There are spreads in the market between junk bonds and high-grade bonds. In other words, at some periods in time, junk bonds are a better or worse deal than they usually are relative to high-grade bonds. But I'm just saying in general, When you buy junk bonds, what you're saying is, give me something that's kind of close to stock risk for something that's kind of close to stock returns. And what I'm saying is, don't bother with kind of close, just buy stocks. Okay, by the way, I've talked about this before, the mix of bonds you need, your asset allocation, that's something for you to talk to a financial advisor about. You hear about 60/40 investing, but maybe you're not someone who should have 60% in stocks. Maybe you should have more or less. I'll just point out that the mix that's right for you, you will hear people talk about how it's a function of your age. It is not. It's a function of how soon you might need to spend the money. So if you are someone who starts your working years, let's say, as the breadwinner for a household and you have a lot of people who depend on you and you're just covering your family's expenses with a little leftover for savings, you should not invest that money aggressively. You might need it. Something might come up in just a couple of years where you need to get your hands on that money. You cannot afford to have an aggressive allocation to stocks. And let's say that you work for decades and you grow so wealthy that you can't possibly spend your money during your lifetime. Well, you can afford to be pretty aggressive even if you're old. In other words, it's possible that your risk tolerance through your life will increase rather than decrease. Which brings me to target date funds, which assume that your risk tolerance gradually decreases as you age. You don't need them. First of all, they might not be making the right assumption about you. Second of all, they include maybe some asset classes you don't need, maybe some ones I've already named. And third, they usually have higher fees than plain vanilla index funds. Just buy a mix of stocks and bonds and do your rebalancing on your own according to your circumstances.

What about life insurance?

Well, life insurance, I don't really think of it as an investment. You know you need life insurance if your death would put someone you love in a financial bind. But remember what I said earlier when I was talking about options, about how they're like insurance. Insurance uses probability math, just like casinos do, which means the odds are not in your favor. It's a losing bet on average. Now, for any one individual, the bet might pay off, but over a big pool of people, it's a losing bet. The house wins. So you don't want to buy more than you need, and you don't want to buy it for longer than you need. And I think you don't want to buy fancy insurance that has some kind of investment component. I also don't think you need annuities, which are kind investments and insurance meld together in a way that's kind of complicated for people to figure out whether they're getting a good deal. I think when you buy life insurance, you want to buy cheap term insurance. You buy what you need. And I think of it as insurance is the penalty you pay because you're not yet rich enough to self-insure. So buy what you need, but hurry up and get rich so you can stop buying it. Does that make sense?

Yeah.

Yeah. People aren't going to like that. There's a lot of people out there who sell insurance who are not going to like that either. I'm losing friends by the minute there. What am I leaving out? I'm leaving out a lot of important asset classes, and you don't need any of those either. I haven't mentioned theme funds and sector funds and closed-end funds and business development companies and master limited partnerships and convertible bonds and preferred stocks and inflation-protected treasuries and cryptocurrency and collectibles. I have my reasons for each of these things. I won't run through all of them. Let me look at, for example, TIPS, Treasury Inflation Protected Securities, you have nominal Treasuries which pay you a yield. A 5-year Treasury recently paid about 4.3%. And then you have TIPS. They provide generally a lower yield where you get an inflation adjustment each year. A 5-year TIPS pays 1.9%. So there's a difference between the two. The difference right now for 5-year issues is 2.4%.

So basically if inflation is above 2.4% for the next 5 years, the TIPS is a better investment. And if it's below, the regular old treasuries are?

That's right. There's some nuance there, but I think you've summed it up. It's basically a bet on how high you think inflation is going to be over the next 5 years. And I just don't think you need to be betting on inflation in the bond side of your portfolio. I don't think that's the job of bonds. I think you've got a good hedge against inflation with your stocks. I think it overly complicates your bonds, but there's nothing wrong if you want to replace some of your nominal treasuries with TIPS. I just don't think you need to.

So is there anything besides those two index funds that you need?

I think you could argue— we've talked about how top-heavy the S&P 500 seems with big tech companies, right? The problem is we could have said that 10 years ago and the S&P 500 has tripled since then. So it's kind of hard to figure out how much is too much. Does the index have too much tech, or is it the market telling us that tech is just a huge part of our lives right now and this is what the weighting should be? I don't know the answer to that question, and I don't want to try to outsmart the S&P 500 over time, but I think you can make a case for adding some small and mid-cap exposure. For example, there's a fund, Fidelity Extended Market Index Fund, which is cheap and it has both small caps and mid caps, or you can buy something like a total stock market fund, which has all of the classes. And I think you can make a case for developed markets overseas if you're a US investor. If you buy, for example, Schwab International Equity ETF, you're going to get exposure to markets, chiefly Europe and Japan. I don't think those markets are necessarily better than the US. I do think that they appear cheaper. I'm not sure when that discount for those markets is going to narrow. People have been saying it will for a long time. It hasn't. But I think there's nothing wrong with being globally diversified in your developed markets exposure. As I've already said, I don't really think you need emerging markets exposure. I love you emerging markets. I love your economies. I love a lot about you. I just don't think that I need your stock markets as part of my long-term savings. Yeah.

What about people who look at Japan and look at China and their stock markets and say, hey, those countries had markets that stagnated for 30 years. Why? What if that happens to the US?

I think it is at least possible that something like that could happen here in the US. 30 years seems extreme, but you could have a long period where stock prices are stagnant, especially because the starting level for valuations is pretty high. That's part of the reason I think you should consider adding some developed markets exposure overseas. It's also a good reason to keep returns expectations low when you're doing your financial planning. Basically, be flexible. Think about scenarios where you have to save more or work longer. Be conservative in your assumptions. What do you think, Jackson? Anything I'm missing? I know that this was a sort of frantic pace going through a lot of these asset classes.

Yeah, we covered a lot.

I think we might have opened more questions than we answered for future podcast episodes. And by the way, I reserve the right to talk about any or all of these asset classes individually in future episodes about whether or not they're good deals. There are investors out there who like them, who participate in them, who will want to know. I also could be wrong about everything I've said. This is just my minimalist belief when it comes to investing. And I think one of the merits of it is if you've done nothing else with this approach, you have kept fees exceptionally low. And speaking of things investors can do without, they can do without any more commentary on things they can do without. So let's leave it there. What do you think, Jackson?

I think that's good.

I want to thank Jeff for the excellent India question and thank all of you for listening. If you're someone who's considering streaking at next year's Super Bowl, I'm going to recommend against it. Sounds like it could be expensive.

You don't need it.

You don't need it in your portfolio. And no, the gambling companies are not going to pay out if you bet on yourself streaking. We'll see you next week.

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