As someone who specializes in writing about portfolio construction, I frequently explore a wide range of investment options, from reliable core holdings to more niche areas of the market. But what do I personally choose to invest in—or avoid? Here are seven types of investments I’ve decided to steer clear of, along with my reasoning.
1. Actively Managed Funds
I’m generally skeptical about the benefits of active management. By keeping the majority of my assets in passively managed funds, I simplify my portfolio management process. This allows me to focus on ensuring my overall asset allocation aligns with my financial goals and risk tolerance, rather than constantly monitoring whether an active manager is delivering value.
2. Real Estate Investment Trusts (REITs)
I have two main reservations about real estate: diversification and idiosyncratic risk. While real estate is often touted as a great portfolio diversifier, I believe its benefits are frequently overstated. Additionally, real estate investing comes with unique risks that I’m not equipped to mitigate, as I lack specialized industry knowledge.
3. Sector Funds
Sector funds often attract attention when a particular industry’s growth prospects seem promising. However, by the time these opportunities become widely recognized, much of the potential is already reflected in valuations. Moreover, sector funds have historically been challenging for investors to use effectively. For example, Morningstar found that dollar-weighted returns for sector funds over a 10-year period through 2024 lagged behind time-weighted returns by nearly 3 percentage points annually. Given this track record, I avoid them entirely.
4. Alternative Investments
Alternative investments are designed to provide diversification from traditional asset classes, but their performance has been inconsistent at best. While some alternative funds performed well during the 2022 bear market, their long-term results have generally been disappointing. Nontraditional equity funds have fared slightly better, but they still underperform compared to a traditional 60/40 portfolio of large-cap stocks and investment-grade bonds.
5. I Bonds
I don’t have any fundamental objections to I bonds. In fact, they’re an excellent tool for hedging against inflation and offer attractive tax benefits. However, I haven’t invested in them due to practical limitations. The annual purchase limit of $10,000 per individual makes it difficult to build a meaningful position in an established portfolio. Additionally, the requirement to buy and sell I bonds through the Treasury Direct website adds an extra layer of complexity.
6. High-Yield Bonds
High-yield bonds, or junk bonds, offer higher yields in exchange for increased credit risk. Over time, they’ve delivered above-average returns. However, their elevated credit risk makes them behave more like equities than traditional bonds, reducing their effectiveness as portfolio diversifiers. Since my primary goal for fixed-income holdings is to offset equity risk, I’ve chosen to avoid high-yield bonds.
7. Gold
Gold has a reputation as a safe-haven asset during market crises and tends to have a low correlation with other major asset classes. Despite these qualities, I haven’t been convinced to add it to my portfolio. Gold isn’t a growth asset—its inflation-adjusted value typically remains stable over long periods. Since my investment focus is on long-term growth, I rely on cash and short-term bond holdings to provide stability during market downturns.
Final Thoughts
While these seven investment types may work for some investors, they don’t align with my financial goals, risk tolerance, or investment philosophy. By avoiding them, I can focus on building a portfolio that’s simple, diversified, and tailored to my long-term objectives.
