As someone who writes about building portfolios for a living, I research many types of investments, from tried-and-true core holdings to more esoteric corners of the investment world. But what do I actually do with my own money? Here are seven investment types that I’ve decided to take a pass on.
I’m fairly skeptical about the value of active management in general. Keeping the bulk of my assets passively managed also simplifies portfolio management. I can focus my time on making sure my overall asset mix is appropriate for my financial situation and goals instead of keeping track of whether an active manager is still adding value.
There are two key reasons why I’m skeptical about real estate: diversification and idiosyncratic risk.
On the diversification side, I think the value of real estate as a portfolio diversifier has often been overstated. And there are a lot of risks specific to real estate investing. I don’t have any specialized industry knowledge that would give me a unique capability to mitigate these risks.
By the time people start getting intrigued by the growth prospects for a given sector or industry, much of the potential is already priced in to valuations.
What’s more, sector funds have been incredibly difficult for investors to effectively use in a portfolio. Morningstar recently found that dollar-weighted returns for sector funds over the 10-year period through 2024 trailed time-weighted returns by nearly 3 percentage points per year. With a track record like that, I’m staying far, far away.
Alternative investments are designed to offer something fundamentally different from mainstream asset classes.
But their track record is mixed at best. Some alternative-fund categories were successful during 2022’s bear market. But over longer periods, they’ve generally disappointed.
Nontraditional equity funds have fared a bit better. But they’re still well behind the return of a traditional 60/40 mix of large-cap stocks and investment-grade bonds.
I don’t have a philosophical objection to I bonds. They’re one of the best ways to hedge against inflation, and they also boast tax benefits.
Why haven’t I bought them? The reasons are pretty mundane: purchase limits and other practical drawbacks. Individual investors can only purchase $10,000 worth of I bonds per year, making it tough to amass a big enough position to make a significant difference in an already-established portfolio. And I bonds can be bought and sold only through the Treasury Direct website.
High-yield bonds offer a yield premium in exchange for their additional credit risk. They’ve also generated above-average returns over time.
But they also have some drawbacks. Because of their added levels of credit risk, they tend to be more equitylike than bond like. That makes them less useful as portfolio diversifiers than other fixed-income securities.
Overall, high-yield bonds don’t look that compelling to me. My main goal for fixed-income holdings is to offset the risk of my equity assets, so I’ve given junk bonds a pass.
Gold has a relatively solid record as a safe haven during periods of market crisis and also sports a low correlation with most major asset classes. But I haven’t been impressed enough to add it to my portfolio.
Fundamentally, gold isn’t a growth asset: Its value typically remains stable in inflation-adjusted terms over long-term market cycles. My primary investment goal is long-term growth, and I have enough cash and shorter-term bond holdings to add ballast during market drawdowns.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance
Amy Arnott is a portfolio strategist at Morningstar.
Related links:
1. ‘Diversification is back’—-Why 60/40 portfolios are working https://www.morningstar.com/markets/diversification-is-backwhy-6040-portfolios-are-working
2. 4 reasons not to buy into the real estate hype https://www.morningstar.com/personal-finance/4-reasons-not-buy-into-real-estate-hype
3. 3 asset classes that could raise your portfolio’s risk level https://www.morningstar.com/portfolios/3-asset-classes-that-could-raise-your-portfolios-risk-level
4. It’s time to clean your investment portfolio https://www.morningstar.com/portfolios/its-time-clean-your-investment-portfolio
