It's Your Money  

How to deal with an underperforming investment in your portfolio

Stock market investing

Investing in the stock market can be a psychological journey filled with ups and downs. One inevitable aspect of investing is encountering underperforming investments in your portfolio.

When faced with this challenge, it's essential to approach the situation with a level head and a strategic mindset. Easier said than done right? For those that find themselves in this position, here are some effective strategies for dealing with underperforming investments:

Assess the fundamentals—Before taking any action, it's crucial to evaluate the fundamentals of the underperforming stock or mutual fund. Look into factors such as the company's financial health, competitive positioning, industry trends, and management team. Determine whether the underperformance is a result of temporary market fluctuations or if there are underlying issues affecting the investment's long-term prospects.

Reassess your investment thesis—Reflect on the reasons why you initially invested in the underperforming asset. Has anything fundamentally changed since then? Is the investment thesis still valid, or has there been a shift in the company's outlook? Be honest with yourself about whether the underperformance is a temporary setback or a signal to reconsider your investment thesis.

Set realistic expectations—Understand that not all investments will perform as expected, and occasional underperformance is a natural part of investing. Set realistic expectations for your investments and acknowledge that some level of volatility and fluctuations is inevitable in the stock market. Avoid making knee-jerk reactions based on short-term performance fluctuations.

Diversify your portfolio—One effective way to mitigate the impact of underperforming investments is to maintain a well-diversified portfolio. By spreading your investments across different asset classes, industries, and geographies, you can reduce the risk of significant losses from any single underperforming investment. Diversification helps cushion the impact of underperformance and improves the overall stability of your portfolio.

Consider tax implications—Before making any decisions regarding underperforming investments, consider the tax implications of buying, selling, or holding onto them. Selling investments that have experienced losses can result in capital gains tax benefits, which may offset some of the losses incurred. Conversely, holding onto underperforming investments for an extended period may allow you to utilize tax-loss harvesting strategies to offset gains in other parts of your portfolio. (You may also want to consider timing of these gains/losses as the capital gains rates change this summer)

Rebalance your portfolio—Periodically review and rebalance your portfolio to ensure that it remains aligned with your investment goals and risk tolerance. If an investment has significantly underperformed and no longer fits within your portfolio's objectives, consider selling it and reallocating the proceeds to more promising opportunities. Rebalancing helps maintain the desired asset allocation and reduces the risk of overexposure to underperforming assets.

Seek professional advice—If you're uncertain about how to handle underperforming investments or if they represent a significant portion of your portfolio, consider seeking advice from a professional financial planner or investment advisor. An experienced (and properly qualified) professional can provide valuable insights, guidance, and perspective on your investment decisions, helping you navigate through challenging market conditions and make informed choices.

Stay informed and remain patient—Stay informed about market developments, economic trends, and company-specific news that may impact the performance of your investments. Keep a long-term perspective and resist the temptation to make impulsive decisions based on short-term fluctuations. Remember that successful investing requires patience, discipline, and the ability to withstand occasional setbacks.

Dealing with underperforming investments requires a strategic approach, patience, and a long-term perspective. By taking an objective and unbiased look at the situation you can avoid making costly short-sighted mistakes and position your portfolio for long-term success.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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