Question

lists five categories of unsuitable investments and discuss them

Answer 1

The suitability of investments cannot be generalized for all investors. The suitability is determined based on the investor's risk-return objectives, ability to bear risk, willingness to bear risk, liquidity requirements, time horizon of investment etc.

For the sake of discussion, let us take the case of an average middle-aged individual investor. In their case, the following investments may be unsuitable :

1. Hedge funds - Hedge fund investments have asymmetric risk-returns, and are complex investments. They are more suitable for portfolios of high-net-worth investors and sophisticated investors who can understand the risk-return characteristics of hedge funds
2. Venture capital - Venture capital investments are high risk, and required in-depth understanding of their working. They are unsuitable for the type of investor we have assumed
3. Cryptocurrency - Cryptocurrencies are complex, and there is substantial disagreement regarding whether they are to be classified as currencies, asset classes, or something else. Their future is very uncertain. They are unsuitable for the average investor
4. Options and Futures - They are highly leveraged instruments with much higher risk than equities, bonds or mutual funds. There is a potential for large losses. Hence they are unsuitable for the average investor
5. Real estate - Investing directly in property is unsuitable for the average investor because of real estate's indivisibility. Indivisibility means that a real property cannot be sub-divided into smaller units. Hence, investing in real property can require an investment outlay that is much beyond the average investor's capacity.