Why I Avoid Certain Investments

Introduction: My Approach to Portfolio Building

As someone who writes about building investment portfolios, I’m often asked how I manage my own money. My strategy is simple: stick to what works and avoid what doesn’t. Over the years, I’ve learned to steer clear of several investment types that, for various reasons, don’t align with my goals or expose me to unnecessary risks. Here’s a closer look at seven investments I avoid, and why they don’t make the cut.

Actively Managed Funds: A Costly and Complicated Choice

One of the first investment types I avoid is actively managed funds. These funds employ professional managers who try to beat the market by picking stocks or bonds. The problem? They’re expensive, and the odds are stacked against them. Studies show that only a small percentage of actively managed funds outperform their passive counterparts over the long term. The fees charged by these funds can eat into your returns, and I’d rather not pay extra for something that doesn’t consistently deliver. Instead, I focus on low-cost index funds that track the market and require less maintenance. Keeping things simple means I can spend more time on what really matters—ensuring my portfolio is balanced and aligned with my financial goals.

Real Estate Investment Trusts: Overrated Diversification and Hidden Risks

Real estate is often touted as a great way to diversify your portfolio, but I’m skeptical. While real estate can provide income and growth, I believe its diversification benefits are overblown. Real estate markets can be unpredictable, and they come with unique risks like property damage, regulatory changes, and economic downturns that hit the industry hard. Plus, I don’t have the specialized knowledge needed to navigate these waters effectively. Instead, I prefer to stick with investments I understand and can manage more easily.

Sector Funds: Timely but Risky

Sector funds focus on specific industries, like tech or healthcare, and are often tempting when a particular sector is booming. But by the time you hear about the next big thing, the potential gains are already baked into the prices. Worse yet, sector funds are notoriously hard to use effectively in a portfolio. They’re volatile, and their returns can lag over time. In fact, research shows that investors in sector funds often underperform due to poor timing. I’d rather avoid the guesswork and stick to broader market exposure.

Alternative Investments: Complexity Without Consistency

Alternative investments, such as hedge funds or private equity, promise something different from traditional stocks and bonds. But their track record is mixed. While some performed well during tough markets, they’ve generally underperformed over the long haul. These investments are also complex and less transparent, making them harder to incorporate into my strategy. I prefer straightforward, predictable options that I can understand and rely on.

I Bonds and High-Yield Bonds: Practical Trade-offs

I have no philosophical objection to I bonds, which offer protection against inflation and tax benefits. However, practical limitations make them less appealing. For instance, you can only buy $10,000 worth of I bonds annually, which isn’t enough to make a significant impact in a well-established portfolio. High-yield bonds, or junk bonds, also don’t convince me. While they offer higher returns, they come with credit risk and behave more like stocks than traditional bonds, which defeats the purpose of having fixed-income securities in my portfolio.

Gold: A Safe Haven That Misses the Mark

Gold is often seen as a safe haven during market downturns, and it’s true that it holds value during crises. However, it’s not a growth asset—its value doesn’t increase significantly over the long term. My main goal is to grow my wealth, and I’ve already diversified my portfolio with other assets that provide stability. I’d rather not tie up my money in something that doesn’t contribute to that growth.

In conclusion, my investment approach is rooted in simplicity, cost-efficiency, and a focus on long-term growth. By avoiding these seven investment types, I can build a portfolio that’s balanced, LOW-MAINTENANCE, and aligned with my financial goals. Every investor is different, but for me, less complexity means more peace of mind.