Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Financial experts and business owners on their ETF strategies

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Regular readers of this site are probably well aware of ETFs (Exchange Traded Funds). Indeed, many blogs here have covered their role either as Core holdings of Retirement portfolios or portfolios still in the Wealth-building phase. Some espouse ETFs as a Core holding but play around at the fringe with so-called “Explore” investments either in high-conviction individual stocks or in more tactical specialized ETFs. Many espouse a “hybrid” strategy of mixing ETFs with individual stocks, perhaps by “skimming” the same ETFs for particular stocks that appeal at some level, whether for income, growth or other reasons.

Roughly once a month for much of the existence of this site, Featured.com has provided useful content on investing and retirement. In the past year, it changed its strategy so editors like myself could have more input into the creation of its blogs. Now the process is one of posting a question or general request to its site, soliciting input from a wealth of largely US-based financial experts and business owners.

Today’s blog focuses on various strategies on ETFs and variants of using them as Core or Explore holdings, plus the pros and cons of the “hybrid” approach mentioned above. Most of these experts are on LinkedIn, as you may see by clicking on their company names below each entry.

Here’s how we posed the opening question for respondents:

When it comes to managing your personal Retirement Funds or that of clients, what role do ETFs (Exchange Traded Funds) play: Core, Explore, Tactical or what? If you do use ETFs, do you prefer to use them exclusively or do you like hybrid strategies where you also pick individual dividend-paying or growth stocks; or do you also cherry-pick individual stocks from favorite ETFs?

So with no further ado:

Hybrid Strategies of mixing ETFs with individual stocks can lead to trouble

When it comes to the role of ETFs, for the vast majority of people — especially the ones I see in my practice trying to build stable long-term wealth — they belong in the “Core” position. ETFs are a brilliant legal and structural innovation: they provide instant diversification, they are incredibly low-cost, and they are tax-efficient. They allow you to own the market rather than trying to guess which individual company will win, which is essentially an impossible game for most humans to play consistently over 30 years.

The hybrid strategy — mixing ETFs with individual dividend or growth stocks —is tempting, but it is often where people get into trouble. “Cherry-picking” individual stocks is not investing; it is gambling with better marketing. I have represented clients who lost their retirement savings because they became over-concentrated in a single “favorite” stock that cratered. When you cherry-pick, you aren’t just betting on the company; you are betting against the market, the sector, the economy, and your own lack of inside information.

If you are a professional investor with the time to research, the discipline to rebalance, and the stomach for volatility, go ahead. But for the average person, or even the professional focused on their own career, the most successful strategy is usually the simplest: Core, boring, broad-market index ETFs.

The most successful retirement portfolio is often the one you forget you own, not the one you tinker with every week based on a “hot tip” or a gut feeling. I’ve never seen a client file for bankruptcy because they were too boring with their index funds. I have seen clients file because they tried to get clever with individual stocks and got decimated by a market downturn. Complexity is rarely your friend in long-term wealth building. Keep it simple, keep costs low, and let time do the heavy lifting. That isn’t just good investment advice; it’s sound risk management. — Lyle Solomon, Principal Attorney, Oak View Law Group

ETFs are foundational to my plan for retirement. The consistency and broad market exposure that they represent allow them to be at the core of all of my other investment decisions. I use a blended model. In order to achieve this blend, I have selected low cost indexed products (that provide for consistency) in addition to specific dividend producing stock selections to provide additional income. — Zack Moorin, Founder, Zack Buys Houses

ETFs as Core with individual Satellite positions like Crypto

My personal approach to retirement portfolio construction uses ETFs as the core, with a satellite allocation to individual positions including crypto assets.

The core ETF layer serves a specific purpose: broad market exposure at near-zero cost, with automatic rebalancing and no single-company risk. For U.S. equity exposure, a total market or S&P 500 ETF handles this. For international exposure, a developed-markets ETF. For bonds, a total bond market ETF scaled by risk tolerance and time horizon. This core doesn’t require active management or conviction: it just needs to capture beta.

The satellite layer is where I allocate capital I’m willing to analyze actively and hold with genuine conviction. For me, this includes individual positions in companies I’ve studied deeply and blockchain assets backed by whitepapers I’ve read and evaluated (through ChainClarity’s own research process). The satellite allocation is sized so that a complete loss wouldn’t materially affect the core goal.

Why I don’t go pure ETF: I find that having no individual positions reduces my engagement with the market as a learning mechanism. Tracking companies or protocols I own forces me to read earnings reports, understand industry dynamics, and notice when my thesis was wrong. That active attention makes me a better analyst, which has compounding value beyond the direct investment return.

The hybrid strategy I’d caution against: owning both an S&P 500 ETF and individual U.S. large-cap stocks. The ETF already owns those companies: you’re just adding concentration risk and management overhead without meaningful diversification. If you’re going to pick stocks, pick categories the ETF doesn’t cover adequately.

Roman Vassilenko is the founder of ChainClarity (chainclarity.io), an AI platform that makes blockchain whitepapers accessible to investors and developers. — Roman Vassilenko, Founder, ChainClarity

Active Strategies only work if you a demonstrable Edge

The statistics don’t favor an active equity allocation strategy. Over the 10 years ending 2021, 84% of U.S. large-cap growth funds lost to their benchmark, the S&P 500. Even if we add back some of those funds to the universe that died along the way, the failure rate only drops to 91%. You might still have to explain why you’d invest money for a 0.66% expense ratio, which is what active equity funds average compared with 0.03% for their passive alternatives (SPY, VOO). On $500K invested for 30 years that grows at a real rate of 7% annually, you can expect to have spent nearly $387K in fees over your investment horizon. Half of this goes to the active funds manager, whether they perform well or poorly.

The exception to this advice comes if you feel an edge exists. Perhaps you work in Silicon Valley and have insight into Netflix or perhaps have engineer-level technical understanding on why a company’s underlying product will prevail over competitors, but unless you genuinely possess such an asymmetric advantage, most of the advice below comes from investing in low-cost ETF cores, keeping a few per cent in cash or cash alternatives and picking one or two individual stocks that you’re willing to lose money entirely, without jeopardizing your Financial Independence. I think anything beyond that could fit onto one side of a sheet of paper. — Jere Salmisto, Founder, CalcFi

ETFs remove the big risk of your own Decision-Making

Most investors treat ETFs as a convenience tool, but their real power is that they quietly remove the biggest risk in portfolios: your own decision-making.

I think of ETFs as a “behavioral anchor.” In most retirement strategies, they should be the core, not because they outperform everything else, but because they reduce the chances of overtrading, emotional decisions, and concentrated mistakes. They create a stable base you’re less tempted to interfere with.

In practice, I’ve seen this play out repeatedly. Clients who built portfolios purely on individual stock picks often drifted into overexposure or reactive selling during volatility. In contrast, those with ETF-heavy cores made fewer impulsive changes and stayed aligned with long-term goals. When we added individual stocks, it was deliberate and limited, more of a satellite layer than a competing strategy.

The takeaway is simple. ETFs are not just about diversification, they’re about discipline. Use them as your foundation, then layer in individual stocks only where you have conviction and a clear reason. The goal isn’t to outperform the market every year, it’s to avoid the mistakes that quietly destroy returns over time. — Omer Malik, CEO, ORM Systems

ETFs are my core. Period.

ETFs are my core. Period. I don’t have the time or the ego to think I can outpick the entire market with every dollar I own. My retirement strategy is built exactly like our risk models at Insurance Panda: you need a massive, diversified base to survive the outliers. I put the vast majority of my capital into broad-market index funds and let them ride. It’s the only way to ensure you actually have a pile of cash when you’re ready to exit the game.

But I’m a business owner, so I can’t help but look for an edge. I use a hybrid model. I keep the boring foundation in ETFs, then I pick individual growth stocks in sectors I actually understand: specifically digital infrastructure and software. I don’t bother “cherry-picking” individual names from a favorite ETF. That’s just over-analytical busywork. If I see a company we’re actually using in our own tech stack that’s clearly dominating its niche, I buy the stock directly.

And here is the hard truth. Most people mess this up by being too tactical with money they can’t afford to lose. They treat their Retirement fund like a casino. Don’t do that. Secure the base layer first with low-cost funds. Then, and only then, use your actual industry knowledge to take a few shots on individual winners. If you don’t have a clear information advantage, stay in the index. — James Shaffer, Managing Director, Insurance Panda

ETFs should be the core 70 to 80% of your Retirement Portfolio

To any of our MintWit readers who are saving for retirement, my advice will be to build the bulk of your retirement portfolio using ETFs because they provide instant diversification and very low fees. In essence, ETFs will form the basis, or the bread and butter, as part of your investment strategy, making up 70%-80% of your retirement portfolio. The message we always preach is that you use the ETFs as a safety measure; then you explore by buying a few stocks, such as those paid by dividends from companies such as Johnson & Johnson and Coca-Cola, to make up the remaining 10%-20%. –– Scott Brown, Founder, MintWit

ETFs as Core help maintain Target Allocations

ETFs are most useful as core holdings in a retirement portfolio because they offer broad exposure and make it simple to maintain a target allocation. I recommend using ETFs to establish the backbone of a portfolio, then layering in individual dividend or growth stocks only when they serve a clear, specific purpose. Relying exclusively on ETFs can work for many investors, but a hybrid approach lets you target income or single-stock opportunities without losing diversification. Keep the overall asset allocation aligned with your risk tolerance and time horizon. Automate contributions and set a regular rebalancing schedule so ETFs and any individual holdings stay within your intended ranges. Consult a qualified advisor for tax and account-structure considerations before making changes. — Amir Husen, Content Writer, SEO Specialist & Associate, ICS Legal

Hybrid Strategy uses indexing and select individual stocks

I view EFTs (Exchange Traded Funds) as my base of operations for overall market exposure and stability. I prefer to implement an index fund or hybrid strategy which incorporates both index investing and selected individual stock investments into my portfolio. The Hybrid Strategy will allow me to maintain broad based investment diversification by utilizing index fund(s), and also pursue greater returns on investment via selected individual equities. At times, I review the top holdings in the most popular EFTs to see if they are among my potential long-term investment options. — Mike Otranto, Founder, Wake County Home Buyers

ETFs belong in the Retirement core bucket but not a fan of Index Skimming

I’m coming at this as someone who’s been in estate planning since 2008 and now leads operations at Safeguard in Arizona, where retirement planning and asset protection are part of the same conversation every day. My view is that ETFs usually belong in the core bucket because retirement money needs clarity, liquidity, and a structure that’s easier to coordinate with the rest of the estate plan.

What matters most to me is not “ETF vs stock” in isolation, but whether the investment setup works cleanly with beneficiary designations, trust funding, and the reality of incapacity or death. A simple ETF-based core is often easier for a spouse, successor trustee, or family to understand and manage than a scattered collection of hand-picked positions.

I’m generally more comfortable with a hybrid only when there’s a clear purpose for it, not because someone wants more activity. For example, if a family has a living trust and wants long-term retirement assets organized so a successor trustee can step in smoothly, broad ETF holdings tend to create fewer administrative headaches than a portfolio full of one-off stock ideas.

I’m not a fan of cherry-picking names out of favorite ETFs just because they showed up on a list. In retirement and wealth preservation, I’d rather see a plan that accounts for inflation, Social Security timing, healthcare costs, and smooth transfer to heirs than a portfolio that becomes harder to administer when the family needs simplicity most. — Julie Jewett, Director of Operations, Safeguard.

ETFs should have a clear purpose, like Targeted Income or Tactical Exposure

I view ETFs as core building blocks of retirement portfolios, especially for taxable accounts, given their tax characteristics. Asset location is critical, so I often favor index ETFs in taxable brokerage accounts to help control when gains and income are realized.

Dividend-paying stocks and corporate bonds are typically better held in tax-advantaged accounts to avoid current taxation on dividends and interest. ETFs that do not distribute frequent income also give more control over timing because you generally recognize gains when you sell.

However, I do not use ETFs exclusively. I treat them as the foundation and layer individual securities when they serve a clear purpose, such as targeted income or tactical exposure. The precise mix depends on a client’s tax situation, income needs, and retirement phase, with asset location guiding those choices. — Clint Haynes, Financial Planner, NextGen Wealth

The point of ETFs is to provide exposure to an idea without taking single-stock blowup risks

ETFs are immensely diverse, that’s the first thing to clear up. Income ETFs, dividend-growth ETFs, low-volatility ETFs, broad-market index ETFs, growth ETFs, and speculative covered-call funds (YieldMax, Roundhill) are all ETFs, but they serve fundamentally different roles. Their shared job is to express an investment thesis with diversification. The point of an ETF is to give you exposure to an idea without taking the single-stock blowup risks (management, execution, etc.) that come with picking individual names.

For Retirement, low-volatility and dividend-growth ETFs are the natural fit, because they prioritize stability of distributions and capital preservation, which is what matters when you’re drawing down rather than accumulating. Speculative income products like YieldMax or Roundhill weekly-pay funds can play a role, but they’re a speculative income tilt, not a core retirement holding. The high headline yields often come at the cost of NAV erosion that trailing yield figures don’t show. A retiree leaning on these without understanding the option-writing mechanics underneath can find their principal halved over five years even while collecting “income.”

Growth ETFs are a different beast entirely. Their volatility and lower (or zero) distributions don’t suit the liquidity and income needs of someone in retirement, but they’re the right call for accumulators in their 20s, 30s, or 40s with decades-long time horizons. Different season, different tool.

On methodology: the right way to think about an ETF is bottom-up, not top-down. If you research the underlying stocks and like what you see, the businesses, the dividend track records, the valuations … you buy the ETF as a convenient, low-cost container for that thesis. It’s not a common or advised investment strategy to cherry-pick individual stocks out of an ETF you like, without having done the individual fundamental work. That’s reverse-engineering: you’ve already paid for the diversification, picking out individual names just adds concentration risk while losing the structural benefit. If you want concentrated exposure to one or two names, buy the stocks directly. If you want diversified exposure to a thesis, hold the ETF that expresses that thesis.

Across age cohorts and goals, the principle is the same: an ETF is a way to express a stock thesis efficiently, not a substitute for having one. — Ignacio Planas Gonzalez, Founder, YieldMaxCalc Continue Reading…

AI Stock Bifurcation: Why Hardware Soars while SaaS Fails

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AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

The technology sector is currently experiencing an historic AI stock bifurcation. While semiconductor giants are reaching all-time highs, many established software companies are struggling to maintain their valuations.

This “inner fight” in tech has created a massive performance gap. For example, the iShares Semiconductor ETF (SOXX) has skyrocketed by over 150% in the last year, while the iShares Expanded Tech-Software Sector ETF (IGV) has decline 8% over the same time period.

As an investor, understanding why this split is happening is crucial for protecting your portfolio. We are witnessing a transfer of value from the application layer to the infrastructure layer.

The Rise of Infrastructure: Why Hardware is King

Currently, the market is in the “Build” phase of the AI revolution. Companies are racing to build the data centers required to train Large Language Models (LLMs).

This has created a massive tailwind for companies that provide the “physicality” of AI. These are the “picks and shovels” of the modern gold rush.

  • Nvidia (NVDA): The undisputed leader in AI training chips.
  • Broadcom (AVGO): A dominant force in networking and custom AI silicon.
  • Vertiv Holdings (VRT): A crucial provider of cooling and power systems for data centers.

The Software Struggle: The Fear of “Seat Compression”

The AI stock bifurcation is most painful for traditional Software-as-a-Service (SaaS) providers. The primary reason is a phenomenon known as “seat compression.” The sharp decline in software stocks is called the SaaSpocalypse and we can blame it all on Claude.ai, which is powerful enough to do the work that many of those software companies were doing for a small fraction of the cost.

Historically, software companies sold licenses per human user. However, as AI agents become more capable, companies may need fewer human employees to perform the same tasks. If an AI agent can do the work of five people, the software provider loses four paid “seats.”

The companies affected most fall into three categories: horizontal point solutions, “per-seat” model giants, and UI-heavy applications.

1. Most Impacted Public Companies (2026 Performance)

The following heavyweights have seen significant year-to-date (YTD) declines as of early 2026 due to fears of AI disintermediation:

2. Why These Companies are Struggling

The crisis isn’t just about stock prices; it’s a fundamental challenge to how these companies make money.

  • The “Death of the Seat”: Traditional SaaS revenue is tied to the number of human users (seats). As AI agents like Claude Cowork or OpenAI Frontier handle the work of multiple people, enterprises are demanding consumption-based or outcome-based pricing rather than paying for idle software seats.
  • Vibe Coding & Low Barriers: New AI tools allow startups to replicate complex software features (“vibe coding”) much faster than before, eroding the “moats” that protected billion-dollar companies.

  • Budget Cannibalization: Enterprises are not increasing total IT spend; they are shifting funds away from “incremental” software updates to pay for expensive AI compute and specialized AI agents.

3. The “Safe” Exceptions

While the sector is in turmoil, analysts (including those from JP Morgan and HSBC) suggest that “mission-critical” infrastructure is more resilient. Companies like ServiceNow (NOW), Microsoft (MSFT), and CrowdStrike (CRWD) have fared better because their software acts as the “operating system” for the enterprise, making them harder to replace with standalone AI agents.

Summary of the “SaaSpocalypse” Narrative

This narrative drove the S&P Software & Services Index down over 20% in early 2026. While some view this as an overreaction, the shift toward Vertical SaaS (industry-specific tools for healthcare or manufacturing) and AI-native architectures is now a requirement for survival in the public markets.

The Winners of the Software Pivot

Not all software is doomed. The winners will be those who control the “System of Record” or successfully pivot to outcome-based pricing. It’s important to distinguish between companies that provide disposable tools (vulnerable) and those that provide essential infrastructure (resilient).

Here are the software sectors and specific companies currently showing strength:

1. The “Orchestrators” (AI-Native Infrastructure)

These companies don’t just sell a “seat” for a human to sit in; they provide the brain that runs the enterprise.

  • Palantir (PLR): While it felt the initial market tremors, Palantir is emerging as a winner. In early 2026, it projected 61% growth, positioning itself as the “operating system” for AI. Unlike traditional SaaS, Palantir thrives on complexity—integrating AI into massive, messy datasets that standalone agents can’t handle.
  • ServiceNow (NOW): Despite a 30%+ price drop in early 2026, it is being touted as a “value opportunity.” By acquiring Moveworks and launching Autonomous Workforce, they’ve pivoted to selling “AI agents” that resolve 90% of IT issues, effectively shifting their model to capture the value AI creates rather than just charging for human logins.

2. The Cybersecurity “Moat”

Security is non-negotiable, and the rise of AI agents has actually increased the “threat surface” for companies.

  • CrowdStrike (CRWD): Recognized as a core “safe” play. They have integrated AI into their Falcon platform to secure the very AI infrastructure everyone else is rushing to build.

3. Vertical SaaS & High-Complexity Platforms

Software that is deeply embedded in a specific industry’s regulatory or physical workflow is much harder to replace.

  • Shopify (SHOP): Standing out with a 26% gain recently. Because Shopify controls the physical flow of commerce — payments, shipping, and inventory — it isn’t as easily “disintermediated” by a coding agent as a simple marketing or HR tool might be.
  • Datadog (DDOG): As companies deploy more AI models, they need more monitoring to ensure those models aren’t “hallucinating” or breaking. Datadog’s observability tools are seeing a 30%+ gain as they become essential for the AI era.

Summary: What Makes a “Winner” in 2026?

The Bottom Line: The companies doing well are those that have stopped fighting the AI agents and have instead started becoming the platform that manages them.

The Next Layer: Where to Focus Now

If you feel you missed the initial semiconductor surge, you can take a look at the Secondary Infrastructure layer — often called the “Physical Layer” — is arguably where the most durable value is being built right now.

While chips get faster every 12 months, the power grids, cooling loops, and transformers being installed today are 20-to-30-year assets. The “Secondary” layer extends into three specific sub-sectors:

1. The “Power Hungry” Layer (Electrical Equipment)

As GPU density increases, the electrical bottleneck isn’t just the chip; it’s the ability to get high-voltage power to the rack without melting the wires.

  • Eaton (ETN): It is the “blue chip” of this layer. They manufacture the switchgear and power quality hardware that prevents AI data centers from blowing out the local grid. It recently committed over $30 million to a new Nebraska facility just to keep up with data center demand.
  • Schneider Electric (SBGSY): A global leader in data center energy management. Its EcoStruxure platform is the standard for managing the complex power architectures required for liquid-cooled AI clusters.
  • Powell Industries (POWL): A “hidden gem” in this space. It specializse in custom-engineered switchgear. It recently reported record earnings and announced a 3-for-1 stock split due to the surge in massive-scale industrial power orders.

2. The “Nuclear & Grid” Layer (Utilities)

Hyperscalers (Amazon, Google, Microsoft) are now the world’s largest buyers of clean energy. They need “always-on” power that solar and wind can’t provide alone.

  • Vistra Corp (VST) & Constellation Energy (CEG): These are the primary owners of the U.S. nuclear fleet. They have signed massive, long-term power purchase agreements (PPAs) directly with hyperscalers. Vistra is currently seen as a high-conviction “power-as-a-service” play.
  • GE Vernova (GEV): Since spinning off from GE, they have become a pure play on the electrification of the world. They make the gas turbines and grid orchestration software that utilities use to balance the sudden, massive loads from AI campuses.

3. The “Cooling & Enclosure” Specialists

Air cooling is dead for AI. Liquid cooling is now the industry standard for racks exceeding 50kW.

  • nVent Electric (NVT): While Vertiv handles the overall system, nVent specializes in the “liquid-to-chip” manifolds and high-tech enclosures. It recently raised their three-year organic sales growth targets specifically because of the data center supercycle.
  • Modine (MOD): Originally an automotive cooling company, it has pivoted hard into data center liquid cooling. It is   often viewed as a smaller, more specialized alternative to the larger players.

Summary Comparison for the Secondary Layer

Frequently Asked Questions

1. Why is software falling while chips are rising? Investors are prioritizing hardware because it is a tangible requirement for AI. Software faces uncertainty due to “seat compression” where AI replaces human users who previously paid for licenses.

2. Is it too late to buy semiconductor stocks? While valuations are high, the transition to the “Inference Era” suggests long-term demand remains strong. However, focus on companies providing cooling and power (the infrastructure) rather than just the chips.

3. Which software stocks are safe? Software companies with a deep “data moat” or those that own the “System of Record” are safer. Look for companies moving toward usage-based or outcome-based pricing models.

 

Alain Guillot is a part time event photographer, part time Salsa teacher, and part time personal finance blogger. He came to Quebec as an immigrant from Colombia. Due to his mediocre French he was never able to find a suitable job, so he opened a Salsa/Tango dance school and started his entrepreneurship journey. Entrepreneurship got him started into personal finance and eventually into blogging. Now he lives a Lean FIRE lifestyle and shares his thoughts in his blog AlainGuillot.com. This blog appeared first on his blog and is republished here with permission.  

Arbitrage in the Stock Market is your Friend, Especially with an AI Assist

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If you are Canadian and you buy or sell U.S. stocks, you need to remember that arbitrage in the stock market is your friend, all the more so when it has an assist from AI, or Artificial Intelligence.

Arbitrage is the simultaneous purchase and sale of an asset in different markets, to exploit tiny differences in prices. We take advantage of it for our Portfolio Management clients whenever we can, to cut their trading costs. Here’s how it works:

If we’re selling a Canadian stock for a client and plan to use the proceeds to buy a U.S. stock, we offer the Canadian stock (on a Canadian or U.S. exchange) for sale in U.S. funds. When we want to sell a U.S. stock to buy Canadian, we reverse the order and offer the U.S. stock for sale in Canadian funds.

Now that you can buy and sell in either currency on both sides of the border, arbitrageurs (also known as “arbs” — traders who buy and sell in two different currencies simultaneously) constantly monitor trading activity to spot slight differences in one currency versus the other. When they spot any such difference, they simultaneously buy the stock where it’s cheaper and sell it where it’s more expensive, eking out a tiny profit on the difference.

This trading activity serves to cut cross-border share-price differences to the point where they are, for practical purposes, negligible. This makes the markets more liquid. It cuts trading costs for everybody. Continue Reading…

The Case for an All-Weather Portfolio

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By Dana Anspach for Fritz Gilbert and The Retirement Manifesto  
Special to Financial Independence Hub

 

Like many teenage girls, I had my high school bedroom walls covered in posters. Actor Rob Lowe took center stage, with a bit of Matt Dillon sprinkled in. (Ladies of the ’80s … any of you relate?)

Mixed in with the heartthrobs were glossy posters of red sports cars. Ferrari. Lamborghini. Later, in college, an Acura NSX.

Looking back, it’s strange. I’ve never been much of a car person:  especially not sports cars. I don’t see well out of them. They’re low to the ground. I scrape rims, bump curbs, and the quick handling leaves me feeling slightly queasy.

So why the fascination? 

I think those cars represented success. Flashy. Fast. The kind of thing people ‘oohed’ and ‘ahhed’ over.

Defining success by external standards is dangerous business. Thankfully, I outgrew that particular distortion: though I’m sure plenty of others remain.

As an adult, I gravitate toward practical, balanced cars. What I think of as the all-weather vehicle. I don’t need to go 200 mph down the autobahn. But I do want traction in heavy rain. I don’t care about making a statement at the valet. I care about glancing in the rearview mirror and seeing my dog’s smiling face as we head to his favorite place on earth: the park.

That preference for balance turns out to matter far beyond cars. It’s also the way I believe we should approach retirement planning and investing.

The Case for an All-Weather Approach

In hindsight, those sports car dreams and investing have something in common.  Sometimes, it’s hard not to hop into the shiny red sports car and drive away.

In investing, a shiny investment (like the shiny red sports car) promises speed and excitement. It may not be as reliable, but for a brief moment, it makes us feel brilliant. Powerful. Maybe even a little invincible. In touch with our inner James Bond. And who doesn’t want to feel like a secret service spy just once in their lifetime?

Often, it shows up as a single stock. Sometimes it’s a real estate deal. Or a business venture. It feels adventurous. Sophisticated. Like we’re seeing something others don’t.

In the late 1990s, tech stocks were the shiny red sports car.

The firm I worked for at the time offered a Science and Technology Fund that rose 99% in twelve months. One day, a middle-aged couple came in and asked me to move their entire portfolio into it.

Durability vs. Speed

Their portfolio had been built for durability:

  • blue-chip stock funds,
  • international exposure,
  • a few bond funds,
  • and a small allocation to the Science and Tech Fund.

They had spent a year watching the tech fund soar, while everything else stood still.

I balked at their request. I explained the logic of balance. Sure, in perfect weather, the shiny red sports car looked great. But the weather wouldn’t always be so accommodating.

My logic sounded silly to them: like a mom insisting you put on your helmet to ride your bike down the street.

They insisted on the change. I acquiesced on one condition: they sign a disclosure acknowledging that this was against my recommendation. They signed without hesitation.

I left that firm before the dot-com crash and the miserable weather that followed. I’ve often wondered what happened to that couple. The allure of speed was too strong.

You can go all in with a play account. But a professional financial advisor can get sued if they do the same thing with your entire life savings. That should give you pause. Risk and return are sides of the same coin. But each time you flip, if it’s several years of heads, it is all too easy to forget that the coin even has another side.

Beware the Slight Upgrade

Not everyone is tempted by flashy sports cars. Sometimes the pull is subtler.

We start to think maybe a small upgrade will help. Something just a little faster. A little more responsive. Even if it doesn’t handle storms quite as well.

I watched this at the end of 2024 when a long-time client, whose retirement plan and portfolio were in solid shape, left because they felt they should be earning higher returns. Continue Reading…

The Problem with Alternative Investments

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Why I do not recommend them — private or liquid — and what most investors do not fully understand

Unsplash: Markus Winkler

By Steve Lowrie, CFA

Special to Financial Independence Hub

I am often asked about alternative investments. My first response is always the same: alternative to what?

Because most of what is being presented as “alternative” is not something new or better. It is often the same wine in a different bottle.

I do review alternative strategies, as I look at all types of investment strategies, but from a high-level, evidence-based perspective. Not by spending time on the individual deals and marketing pitches that arrive almost daily.

Let me be direct. Despite the heavy marketing push behind private credit, private equity, liquid alternatives and similar strategies, I do not recommend them. I have not recommended them in the past, and I do not recommend them now.

In my experience, investors in these structures often do not fully understand what they own, how they are priced, when they can access their money, or the underlying risks.

Those are not minor details.

A recent reminder

At a portfolio manager roundtable a few months ago, one advisor shared that more than half of his clients’ assets were invested in private alternative structures. It was presented as a sign of sophistication.

Only a few months later, U.S. press coverage began highlighting private-credit funds facing large redemption requests. In response, many of these funds have been limiting withdrawals or placing restrictions on how much investors can redeem.

Closer to home, several large, well-known Canadian alternative asset managers have recently halted redemptions, leaving investors unable to access their money for extended periods. If you have lived through that, you already know how it feels. If you have not, the experiences of those investors are worth taking seriously before you ever considered investing.

None of this should be surprising. If you invest in illiquid assets, there will be limits on liquidity. The underlying investments, such as private loans or real estate, cannot be sold quickly. That is how the structure is designed.

The concern is that this reality is often lost in how these investments are presented.

When new information becomes available, it should shape how we think about risk.

It raises a more important question. Is this actually improving outcomes for clients, or is it introducing risks that have not yet surfaced?

Concentrating that much of a portfolio in illiquid, opaque investments is not sophistication. It is risk, just not the kind you see right away.

What are alternative or private investments?

Alternative investments are investments that are not publicly traded. They include private credit (lending directly to businesses), private equity (ownership in private companies), direct real estate or infrastructure assets held in pooled structures.

The key difference is not what they invest in, it is how they are structured. These investments vehicles are:

  1. Not continuously priced
  2. Not easily sold
  3. Not fully transparent

The underlying exposures, corporate lending, real estate, business ownership, can all be accessed through public markets. The issue is the structure, not the asset class. I have made this point before in the context of real estate, where publicly traded REITs offer a cleaner path than direct property ownership, and in the context of gold, where exposure already exists indirectly through the broader market.

Why are these strategies being sold so aggressively to individual investors?

The pitch typically centres on three claims: better diversification, lower volatility, and higher expected returns. These claims do not naturally go together. Higher expected returns typically come with higher risk, not less.

There is some historical basis for this, but only in a very specific context, and one that is not usually explained clearly.

What about the endowment model?

A common argument from advisors recommending alternative investments is that large U.S. university endowments, such as those at Harvard, Princeton, and most famously Yale, have used meaningful allocations to private investments for decades and have generated strong long-term returns.

A bit of background: The Yale Endowment, under the late David Swensen, became the most well-known example of what is sometimes called the “endowment model” – a portfolio approach that allocated heavily to private equity, hedge funds, real assets, and other alternatives, rather than to traditional stocks and bonds. The strategy delivered strong results over an extended period, and many other institutions tried to copy it.

That history is real. But two things are worth noting before applying it to an individual investor’s portfolio.

First, those results depended on advantages most individuals cannot replicate: first-look access to the very best private fund managers, negotiated fee structures, multi-decade time horizons that genuinely do not need liquidity, and full-time investment teams to perform deep due diligence.

Second, the asset class itself has changed. As private investments have been packaged for broader distribution, more capital is chasing the same opportunities, the return advantage has narrowed, and the best managers are generally not the ones marketing to retail and mass-affluent investors. Even some of the original endowment-model institutions have been reassessing their allocations.

What has worked well in the past is often difficult to repeat going forward.

In some cases, sophisticated investors are reducing exposure while less experienced investors are being encouraged to step in. Whether intentional or not, that raises an important question. Is this about better investing, or better marketing?

Is the illiquidity a problem?

Yes, it can be.

There is a concept known as the illiquidity premium. If you give up access to your money, you should expect a materially higher return in exchange.

For that trade-off to make sense, two things must be true. You actually receive the higher return, and you fully understand and accept the loss of liquidity.

What we are seeing now raises questions about both. Liquidity rarely feels important until the moment you need it and that is typically when it matters most.

As an example, several large alternative asset managers, including in Canada, have had to limit withdrawals, delay redemptions, or fully gate funds. Gating means you ask for your money back, but you cannot get it on your timeline. You get it at the manager’s discretion. And this often happens at the same time the underlying investments are under pressure, which is usually the reason for the restrictions in the first place.

Why do private investments appear so stable?

Because they are not priced in real time.

Private investments are typically valued periodically, often using models rather than actual transactions. That creates the appearance of smoother returns. But smoother does not mean safer.

Lower reported volatility often reflects how the investment is priced, not what is actually happening underneath.

It often just means changes in value are being reported more slowly.

A recent Dimensional article makes this point clearly. Without continuous pricing, it is difficult to assess the true condition of private credit investments, and publicly traded proxies may provide a more current signal. Exhibit 1 in the Dimensional piece shows that while broad stock and bond markets were positive over the past year, a publicly traded proxy for private credit declined by more than 13 per cent.

That difference is not trivial, and it highlights how private valuations can lag what is happening in real markets.

What about liquid alternatives?

A common response to the liquidity concerns above is: “But what about liquid alternatives, the ones offered as ETFs or mutual funds with daily liquidity?”

These products solve the liquidity problem on the surface. You can buy and sell them like any other fund. But they do not solve the underlying problem with the strategy.

The fees are still high, often well above what you would pay for traditional equity or fixed income exposure. The strategies inside are often complex, opaque, and difficult to evaluate. And the long-term net-of-fees track records of many liquid alt strategies have been weak or negative.

There is also a more subtle issue. When a fund offers daily liquidity for strategies whose underlying instruments are not themselves daily-liquid, the wrapper is promising something the underlying cannot reliably deliver. Under normal conditions, this is not visible. Under stress, it can be.

Changing the wrapper does not change the strategy. If the underlying approach is expensive, complex, and unlikely to add value over time, putting it in a more liquid package does not fix that. It just makes it easier to buy.

So no, I do not recommend liquid alternatives either.

A simple framework for evaluating any investment

When clients ask me about a new investment idea, I encourage them to ask three questions before going further:

  1. Does it produce a reliable expected return that compensates me for the risk?
  2. Can I access my money when I need it?
  3. Can I clearly understand what I own and how it is priced?

Most alternative investments, private or liquid, struggle to meet all three.

There is also a common belief that access to private investments provides an advantage. In reality, broader access often comes after the most attractive opportunities have already been captured.

That does not make them useless in every context. But it does make them difficult to justify as a meaningful holding in a long-term portfolio. Continue Reading…