When we asked readers in a recent post to our Personal Finance discussion board to share what's on their investment blacklists--that is, which investments are off-limits for them--we expected to hear a number of different answers. But nothing could have prepared us for the tremendous variety of what readers had to say. Some responses were more predictable; gold, hedge funds, and long-term bonds were particularly unpopular. However, the final tally almost reads like a laundry list of investment vehicles available to today's individual investor. Stocks, bonds, mutual funds, commodities, master limited partnerships, annuities, nontraded REITs, options, and target-date funds each were out-of-bounds for someone.
In some cases readers jumped in to defend a particular investment type, showing that, when it comes to investing preferences, one person's trash can be another person's treasure. But perhaps the broader point is that there is no perfect investment. Each comes with its own risk/reward profile. It's up to us, as individual investors, to figure out what works best for each of us.
Below is a selection of some of our reader responses to the question "What's on your investment blacklist?" broken down by topic. To read all the responses, click here (http://news.morningstar.com/articlenet/article.aspx?id=612212).
Gold Holds No Allure
Among the most frequently mentioned investments on our respondents' "no-go" list was gold. The traditional inflation hedge and raw material for jewelry was seen as the ultimate sucker's bet by some of our readers.
"It appears to be more gambling than anything else," said willt65. "I don't know enough about it to attempt an entry/exit point. And it's much too volatile for my taste."
AndrewT complained that the precious metal "operates on a bigger fool theory. Unlike silver or copper, it doesn't have many practical, industrial uses. In the event of a truly catastrophic market collapse, who's really going to exchange a few months' worth of food and water for an ounce of gold? Not me."
Phildmet listed the reasons he shies away from gold: "1) Its value is the purest expression of the 'greater fool theory' of investing. 2) [There are] no dividends, no interest paid and no tangible assets to support its value except emotions and the promise of a late-night pitchman. 3) It's pricing is Newtonian--what goes up will come down. 4) A bond and gold are similar in that both are usually obtained or disposed through a broker. A bond, if virtuous, will pay interest and finally its par value. Gold? 5) Where do you store the stuff?"
Won't Hedge Their Bets
If gold were the most disliked investment, hedge funds weren't far behind. Several readers decried their high fees and lackluster results. As Darwinian wrote, "Las Vegas has better odds, and doesn't claim 20% of your winnings."
OceanMinded was somewhat more open-minded, writing, "There are a couple hedge funds that have crossed my radar. But the fee structures are outrageous, and most have really strict redemptions. So I pass on these all together."
And AndrewT said of hedge funds, "Seems they are there to play games more than make investors money (see:Carl Icahn)."
Not Interested in a Long-Term Bond Relationship
A number of posters mentioned the current rising-interest-rate environment as a reason to steer clear of long-term bonds, though some argued that they rarely ever make sense as an investment.
Darwinian complained that long bonds are "more volatile than intermediate-term [bonds], without enough higher yield to compensate."
Gary11112 took the argument one step further, writing that, "Several months ago [long-term bonds] became the first investment vehicle in my life I shorted."
Their Tip: Say No to TIPS
Also on many readers' blacklists were Treasury Inflation-Protected Securities, which also are vulnerable to rising interest rates.
"Their remarkable positive performance over the past few years was driven by declining long-term interest rates--not inflation rates," wrote capecod. "Now that interest rates may be rising or simply 'normalizing,' TIPS must reverse those interest rate-driven gains, quite possibly in the absence of significantly rising inflation. Neither the behavior of retail investors holding TIPS nor the market performance of the product itself have been tested in a genuine rising-rate cycle."
Several posters took the opportunity to single out specific stock sectors and explain why they won't be appearing in their portfolios anytime soon. Among those most mentioned were technology, financial-services, and airline stocks.
Explaining his aversion to tech stocks, BillKilgore wrote, "They're only as good as their last product. Witness Apple (AAPL). And they seem to last only as long as they retain their 'cult' status. Again, witness Apple."
"Yes, I know there is money to be made," stockvapors wrote, "but tech innovation and change are so rapid that today's star can be tomorrow's dud. Even now, all eyes are on Apple. If its next phone or iPad is ordinary or a failure, investors will assume the Apple era is over and will run for the exits. There is just too much risk for me."
Meanwhile, SFElSid expressed a frustration familiar to some investors regarding financials stocks. "I can't really analyze them," this user said. "And they blow up every 20 years. I would not buy stocks like Goldman Sachs Group (GS) and J.P. Morgan Chase (JPM) and a few others like those, based on a creepiness factor. Those companies seem to be more like parasites on the real economy rather than offering many positives via their traditional function, which was to channel money to other businesses in order to accommodate commerce."
RJHanks expressed a disdain for airline stocks. "No matter what, they tend to lose money, go bankrupt, and take investors' money," this user opined. "Besides, they provide lousy service that is deteriorating."
For at least one reader, the decision not to invest in a sector was more of a moral choice than anything else. BobVermont said he swears off tobacco stocks. "I do not want to profit on the misery of smoking cigarettes and their related illnesses," he wrote. "I am an ex-smoker, off them for 30 years."
In the Long Run, They Shun Annuities
Securities weren't the only investment types readers considered off-limits. Several mentioned insurance products, and annuities in particular.
"There are things to avoid always and things to avoid buying only when they are too expensive. The first category includes sucker plays such as high-commission annuities, viaticals, and many life insurance products, and also games such as active stock and futures trading, where the odds are too greatly in favor of the big players," wrote retiredgary.
Another Gary, gary11112, also singled out annuities for criticism. "I can do without booklet-sized contracts with so many small-print contingencies working against the purchaser while the advisor (a.k.a. salesman) is hand-waving rosy returns. There may be some decent ones out there but, to me, it's not worth the risk and effort to find them."
Beyond the Blacklist
Aside from specific investment types, some posters mentioned broader themes they use to invest. For example, some said they would never invest in anything with fees higher than 1%.
Interestingly, a pair of readers said they avoid investing in individual stocks while another pair said they avoid investing in mutual funds. Here's what they had to say about their positions.
"I have concluded that I am not smart enough to buy and sell stocks, so I purchase only mutual funds," wrote Billyp. "I have a balanced portfolio of Vanguard index funds and let them do the work."
"The pros have too many advantages over the rest of us [when it comes to individual stock investing], including access to more info and tools, supporting staff, contacts in business for insider/semi-insider information, and often they're just smarter," wrote skepticalG. "Oh, and they studied this stuff for a number of years, which counts for something. To me, it's like a high school athlete (even if extremely talented) competing with the professional ball players."
Taking a very different approach was cliff, who said, "I believe 1) that costs matter, 2) that simplicity beats complexity, and 3) in staying the course. Therefore, I don't invest in mutual funds because 1) they cost money, 2) with often hundreds of holdings, are far from simple to understand/analyze, and 3) are constantly buying and selling, which is not 'buying right and holding tight.'"
For orygunduck, the reason to stick with individual stocks was part of a broader theme. "As an 'investor,' the best I can hope to do in this environment is to pick and choose those to 'invest' whose interests are most closely aligned to mine," this user said. "This means my blacklist is made up of anything that involves financial middlemen, which means just about everything. So I have 'blacklisted' all forms of mutual funds, insurance products, anything tied to an investment bank or brokerage or anything else that has someone promoting it. Instead, I stick with individual stocks that make things we all need, have made a commitment to pay out a portion of their earnings each year to shareholders, and whose key executives have a stake in the company's future through the company stock they hold."
One of the more creative responses to our question of what's on investors' blacklists came from Chief K, who said his or her blacklist consists of "pretty much any investment whose description includes two or more of the following terms: new, low-risk, stable, undiscovered, gold, tactical, strategic, opportunity, modest genius (counts as two), algorithm, modern, focused, future(s), option(s), hedge. If an investment cannot be described in 'dull and/or boring' terminology, I have a bias against being a purchaser."
A few posters said their blacklist was empty and that they'd consider buying almost any investment under the right conditions. One even mentioned using readers' responses to our question in formulating a new investment strategy.
Wrote sfs137, "As Warren Buffett said: One pays a high price for a cheery consensus--or, in other words, I am compiling a list of the most blacklisted assets shown on this board and buying them."
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