The securities industry has a vested interest in making investments complicated and opaque. Confusion, obfuscation, fear and anxiety are often the basic tools of its trade. While purportedly “market-beating” brokers and advisors tend to profit handsomely in all market conditions, the performance of the typical investor over the past 20 years has been accurately described as “shockingly poor,” in the words of Business Insider’s Sam Ro.

The average investor’s investments underperformed the returns of almost every asset class, including three-month Treasury bills. Part of the reason for this underperformance is the tendency of investors to buy high and sell low. In times of market volatility, many investors panic and dump their stocks.

Investors also make poor investment choices. They are seduced by the promise of high returns from investment products that are difficult to understand and encumbered with high fees.

Here is my ranking of investments, from terrible to terrific, so you can distinguish the duds from the cream of the crop.

Investments ranked from most to least terrible:

1. Hedge funds. These should be at the top of any list of terrible investments. The fees are obscene, and the historical returns have been terrible. Recently, the California Public Employees’ Retirement System, the largest U.S. pension fund, announced it was pulling all $4 billion it had invested in hedge funds. Its reasoning was interesting. It said it found them “too costly and complicated.” It should also have noted the subpar returns.

2. Private equity investments. The allure of this asset class is the promise of high returns and the cachet of being part of an elite group. However, as my colleague Larry Swedroe, director of research for the BAM Alliance, noted at ETF.com, it would be reasonable for investors in these funds to at least expect the returns of an index that is similarly risky, such as publicly available small-value stocks.

The reality, according to a 2003 paper, “The cash flow, return and risk characteristics of private equity,” by Alexander Ljungqvist and Matthew Richardson, is quite different. It can take between eight and 10 years for the internal rate of return of private equity funds to turn positive and eventually exceed the returns of listed stocks. Relatively few investors understand the patience required to reap these returns.

3. Individual stocks. Extensive studies, such as the 2005 paper, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” by Laurent Barras, Olivier Scaillet and Russ Wermers, did not find evidence of stock-picking expertise in 99.4 percent of mutual fund managers. Why do you think your chances are any better?

There’s another problem with trying to pick outperforming stocks. Owning individual stocks, rather than diversifying through ownership of an index fund made up of similar stocks, significantly increases your risk without increasing your expected return. Think about well-known companies that once were “sure things,” but are no longer around, such as Lehman Brothers, Enron and Bear Stearns.

4. Actively managed mutual funds. These are funds where the manager attempts to beat the returns of a designated index, such as the Standard & Poor’s 500 index. Despite the fact that actively managed funds have higher management fees than comparable index funds, which investors pay, in theory, in exchange for higher returns, the majority of active funds underperform their index counterparts in every period studied, according to an S&P Indices Versus Active scorecard.

There is also no way to predict which of the very few active funds that manage to outperform in a given period will continue doing so. Relatively few are able to consistently stay at the top of their game.

With actively managed funds, you pay for what you don’t get. Don’t be fooled into believing higher fees mean better performance. For the majority of actively managed funds, this is simply false.

Good investments. Given the poor performance of most actively managed funds, you will likely earn higher expected returns if you invest in a globally diversified portfolio of index funds with low management fees in an asset allocation suitable for you. There is exhaustive, overwhelming research supporting this recommendation. You can find it in my series of books, and in books authored by John Bogle, Larry Swedroe, Burton Malkiel, Rick Ferri and William Bernstein, among others.

Terrific investments. In my view, evidence-based, or passive, investing is the gold standard. Many investors confuse buying index funds with passive investing. However, there are some significant differences between the two.

Passive funds have greater flexibility than index funds. The passive fund manager can create buy-and-hold ranges that permit the fund to hold the stock even when it is no longer part of a designated index. This flexibility can reduce turnover and increase tax efficiency.

Passive fund managers can screen out classes of stocks (like initial public offerings) that have poor historical returns. Passive funds can also screen out riskier stocks that may still qualify for listing on stock exchanges. Passive fund managers have other tools at their disposal, such as block-trading techniques, tax management strategies and dividend management.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is “The Smartest Sales Book You’ll Ever Read.”

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The Good, The Bad and The Ugly of Investments originally appeared on usnews.com