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I recently read a great book by down to earth investor, Larry E. Swedroe. In his book, The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly
Swedroe breaks down the large list of alternative investments in to what we calls the good, the flawed, the bad, and the ugly. Obviously his intentions are to lead you down the path of the good alternatives. I would highly recommend that investors read this book as it provides some very interesting details, especially about the downright ugly investment alternatives. Here is a sampling of the investments that fall within each category:
The Good
1. Real Estate
2. Inflation-protected securities
3. International Equities
The Flawed
1. Junk Bonds
2. Socially Responsible Mutual Funds
3. Emerging Market Bonds
The Bad
1. Hedge Funds
2. Variable Annuities
The Ugly
1. Equity-Indexed Annuities
2. Leveraged Funds
As I said, I would recommend that investors read this book, if only to understand how to really evaluate whether an investment asset would fit within your portfolio. Much of the investment world is one big sales pitch, and reading this book further confirmed that for me.
P.S. Other than the Amazon link above, I was not compensated for this post
I haven’t had a chance to read that book yet, but it’s on my list.
I’ve read two others by Swedroe and enjoyed them both. He’s a knowledgeable fellow and a good guy. (Over at the Boglehead forums he can be found giving out free portfolio feedback quite regularly.)
I never really understood people’s fascination with exotic instruments. I stick to the plain old stocks and bonds, and I am doing just fine.
I agree with what DividendGrowthInvestor posted. Haven’t a few university endowments gotten themselves into real traps by plunging into illiquid alternative investments? An illiquid bond still sends out interest payments, as long as the underlying company can pay them, and does send the face amount at maturity if same.
I found it interesting that equity-index annuities were listed in the “Ugly” category.
Hi Daniel,
Equity-linked annuities at their face seem like a good idea, but they are a salesperson’s product designed to bring huge commissions to the companies selling them. They are also very restrictive. That being said, I have not had a lot of exposure to them personally so I am only stating what I have read in the past.
Real estate is #1. I found this quite revealing – and reassuring in my case. As a real estate investor who took all her savings out of mutual funds to buy rental property, I would have to agree. But your statement about dividend investors holds true of real estate investors as well: “There are a number of types of investments out there that [real estate] investors can use to round out their asset allocation, but only a few of them are actually worth pursuing.” I must have looked at 100 properties before finding the one that made sense to buy. But once you get used to analyzing them, it becomes easy and the good ones just pop out at you.
The only bone I have to pick with inflation-protected securities is the tax on their appreciation. How ridiculous is that? =) Still, I own a bunch of TIPS because they’re preferable to cash or CDs (or stocks in 2008!).
I need to do some research about the best investments in inflationary periods.. anything in your archives Dividend Guy? I know gold is the standard answer, but I believe gold prices are more about speculation.
Thank you for the comment. I agree on the tax on TIPS – feels like double dipping.
In terms of investing in inflationary periods, I just stick to my general allocation and not worry about it too much. Sure gold might help but I also agree that it is more speculation. Perhaps holding a index fund with commodities might help. Anyone else might want to chime in?