Investments That are ‘Too Hard’ To Invest in

My "Too Hard" Pile is pretty big, and yours should be, too

Christine Benz 22 July, 2021 | 9:00AM
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“Charlie says we have three boxes: In, Out, and Too Hard. You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put.”--Warren Buffett

Charlie Munger says there are three boxes you can put investments in: In, Out, and Too Hard. Too Hard investments just aren’t worth the effort because they fall outside of the Berkshire Hathaway team’s circle of competence.

I’ve recently opined that commodities trackers should be on the Too Hard list for most investors. Why? It’s impossible to know what the intrinsic value of commodities should be unless you have a crystal ball that peers into global demand for oil, lumber, and agricultural products. No such orb exists, so that reduces commodities to speculative instruments, not investments. Moreover, investors’ timing in commodities funds hasn’t been great, and their volatility commodities makes them an imperfect hedge against inflation. (If your goal is to offset the slow but steady corrosive effect of inflation, why buy an investment where you could lose half or more of your investment right out of the box?)

But my "too hard" pile doesn’t just include commodities. In fact, it’s pretty large and getting larger. As I’ve gained more investment knowledge - and more knowledge of myself as an investor and what I’m trying to accomplish - it’s become easier to pass on investments because they’re outside my own circle of competence or require more time or patience than I’m able to give them. In Olympics terms, I’ve identified where I can be competitive and where I’m likely to be eliminated before the trials even begin.

A “too hard” pile is very much a matter of personal preference. What follows is mine.

Individual Stocks

I have a handful individual stocks in my portfolio, and I can make a strong case for me engaging in individual stock investing. Some of the smartest people I know work in Morningstar’s equity research team, and I literally have their up-to-the-minute recommendations at my fingertips. I also like that our equity researchers put a big emphasis on business quality and valuation when rating stocks, which tends to give their recommendations good downside protection. And as an individual investor who’s not having her performance reported on a website every day, I can afford to be patient, even if the stocks in my portfolio don’t pay off in a year - or even a few years.

All the same, I’m increasingly inclined to put stock selection into my "too hard" pile. For one thing, I’ve monitored actively managed funds for many years, so I know how hard it is for even professional active managers to consistently outperform inexpensive index-tracking funds by picking stocks. I doubt I have any sort of edge over the pros. More important, I know that I just don’t have time to oversee a portfolio of individual stocks that’s large enough to make a difference in how my overall portfolio behaves.

(Most) Actively Managed Funds

I’ll acknowledge that the bulk of mine and my husband’s portfolio resides in active funds, but I’ve increasingly come to put most of them in the "too hard" pile, too. As with individual stocks, I trust the ratings put out by Morningstar analysts, and I’ve gotten to know many active managers and strategies firsthand. I also know myself to be quite patient with underperformers, and I've even added to positions in slumping actively managed funds.

So why are active funds, like individual stocks, occupying a shrinking share of my portfolio? For one thing, it’s harder to follow the herd on a group of actively managed funds than it is a portfolio composed largely of broad-market index-tracking investments. My active fund picks may be introducing big bets on a given investment style, for example, or shoving my overall asset-class exposures far out of line with my targets. Managing the asset-class exposures of an all-index fund portfolio is a cinch - doing so with active funds, not so much.

Leveraged Investing and Indebtedness

A recent article in The Wall Street Journal noted that many wealthy investors are borrowing against their stock and bond assets as part of a “buy, borrow, and die strategy.” Rather than crystallise profits, they’re borrowing to buy more assets, the idea being that if the investment appreciates faster than the interest rate on the loan, the investor will be the winner.

That sounds good on paper, but for me, I prefer the peace of mind that comes with being debt-free, and no amount of gains magnified by leverage can offset that that. That’s why I get frustrated when I see the question about whether it makes sense to pay off a mortgage: the return on investment of debt paydown is guaranteed, but investing is not. That means that the risk profiles of these two “investments” are wildly different. But more important, being debt-free delivers a valuable return that can never be quantified: peace of mind. I’ve yet to meet a person who has lamented paying off a mortgage earlier than necessary.

Frequent Rebalancing

“But how often do you rebalance your portfolio?” One of my friends who uses a financial adviser recently asked me that question, knowing that I self-manage our assets. I shrugged and replied, “Not very often.” My friend seemed surprised, noting that her IFA frequently rebalances and claims that doing so helps offset a healthy share of his fee.

Her adviser seems quite competent overall; it sounds like he’s using rebalancing to help reduce risk in his clients’ portfolios while also leaning into undervalued portions of the market. And he may well be adding value with such shifts. For me, though, frequent rebalancing just doesn’t seem worth the time it might take. More important, looking at my portfolio very infrequently helps me be comfortable with an equity exposure that’s quite high relative to most recommendations for people in my age group. At some point down the road, especially as retirement draws close, I may choose to be more active in managing my portfolio’s asset-class or intra-asset-class exposures. For now, though, it’s just too hard. 


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.