When constructing my investment portfolio, I delve into a variety of asset types, from fundamental core holdings to the more arcane segments of the market. Here’s a transparent look into where I choose not to place my money and why.
Firstly, I tend to avoid actively managed funds. I question the overall value that active management brings, favoring instead a primarily passive approach to my investments. This strategy not only simplifies management but allows me to concentrate on maintaining an asset mix that aligns with my financial objectives, rather than constantly evaluating an active manager’s performance.
I also steer clear of real estate investment trusts (REITs) due to concerns about diversification and unique risks associated with real estate. The purported diversification benefits of real estate are often exaggerated, and the sector carries its own specific risks. Without specialized knowledge to navigate these risks, it seems prudent to abstain.
In terms of sector funds, I find them unappealing since the growth potential of specific industries is usually reflected in the price by the time they garner interest. Studies show that investor returns in sector funds notably lagged behind market returns over the past decade, suggesting a tricky landscape for these investments.
Another category I avoid is alternative investments. Despite their aim to offer distinct advantages over traditional asset classes, their performance history is inconsistent. While certain alternative funds thrived during recent market downturns, their long-term results often fall short. Nontraditional equity funds have had some success but still trail behind a balanced 60/40 portfolio.
I bonds, despite their inflation protection and tax efficiency, aren’t part of my strategy due to the practical issues like purchase limits and platform restrictions. The maximum annual purchase is $10,000, inadequate for building a substantial stake in an already large portfolio. Moreover, transactions are restricted to the Treasury Direct website, adding inconvenience.
As for high-yield bonds, the allure of higher returns does not outweigh their increased credit risk. They resemble equities more than bonds, which diminishes their value as diversifiers in my portfolio. My primary fixed-income goal is to counterbalance the risk associated with equities, so high-yield bonds, also known as junk bonds, do not fit my criteria.
Finally, I choose to bypass gold. Despite its reputation as a crisis safe haven and its low correlation with mainstream asset classes, gold lacks growth potential. Its long-term value remains flat when adjusted for inflation. Since I prioritize growth over stability in my long-term investment strategy, gold does not make the cut. I rely on my allocation of cash and short-term bonds to stabilize my portfolio during turbulent times.
In summary, while these investment types offer potential, their inconsistency or misalignment with my investment goals leads me to exclude them from my personal portfolio strategy.
