If you manage your own investments, changes are good you read dozens — if not hundreds — of articles every year offering advice on what to buy in your retirement portfolio. Most of the standard financial planning advice is, perhaps surprisingly, pretty solid. Ultimately, the size of your retirement portfolio is a product of the amount of money you are able to save over your lifetime and returns you are able to generate on those savings, which in turn depend on your asset allocation.
But unfortunately, most financial planning articles also leave a gap wide enough to drive a truck through: They give no guidance on what not to buy in a retirement portfolio.
Charles Ellis, a renowned investment consultant and an early champion on indexing over active management, famously called the stock market a “loser’s game” in that the average investor wins by not losing.
As an example, Ellis likens investing to tennis. In a professional match, the player with the greater skill will generally win. But for the rest of us: “The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.”
Over the course of an investing career, we will all make mistakes. But keeping those mistakes to a minimum is the secret to “winning.” One big loss due to poor asset allocation can erase a lifetime’s worth of gains.
With that, let’s take a look at some asset classes best avoided in a retirement portfolio.