Key Takeaways: The key ingredients for a portfolio include equity exposure, fixed-income exposure, and cash investments. Real estate equities lack diversification benefits due to increased correlations with the US equity market. Sector funds experience poor investor timing, with cash flows in and out not painting a good picture. Thematic funds duplicate themes present in the broad market, leading to unnecessary exposure. Long-term bonds can increase volatility in a portfolio, while high-yield bonds may not provide significant diversification benefits.

Investments Everyone Should Have in Their Portfolio: Essential ingredients for every investor include equity exposure, fixed-income exposure, and cash investments. Equity exposure is crucial at all life stages, with non-US equity exposure also recommended. Fixed-income exposure provides stability, while cash investments cover emergency expenses.

Why Real Estate Doesn’t Have a Good Diversification Benefit: Real estate equities have seen increased correlations with the US equity market over the past decades, reducing diversification benefits. Holding real estate for dividend yields or cheap valuations may not justify ongoing allocation due to correlation with home equity.

Why Investors Don’t Need Sector Funds: Sector funds show poor investor timing and low correlations that may not persist over time. Low correlations with the broad equity market can change, making it challenging to construct a portfolio based on sector funds.

How Investors May Be Duplicating Their Exposure With Thematic Funds: Thematic funds often launch after themes have performed well, leading to duplications in exposure. Themes like AI may already be present in a broad market index, causing investors to double down on certain exposures unnecessarily.

Why Long-Term Bonds Could Lead to More Volatility in Your Portfolio: Long-term bonds may not be foolproof diversifiers for equities and can exhibit equity-like volatility. Holding a core fixed-income portfolio may provide adequate diversification without the need for additional long-term bond exposure.

Why Investors Don’t Always Need High-Yield Bonds: High-yield bonds may not offer significant diversification benefits relative to equities. Correlation with the equity market can lead to simultaneous downturns, making high-yield bonds unnecessary for diversification purposes.

Read more at Morningstar: 5 Investments You Don’t Really Need