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Stock Portfolio Underperforming: What should you do?

ICICIdirect 8 Mins 02 Jan 2024

Investing in the stock market comes with highs and lows, and periods of underperformance are not uncommon. If you find your stock portfolio lagging behind expectations (market), it is crucial to approach the situation with a strategic mindset rather than panic and sell everything.

Stock Portfolio Underperforming

If your stock portfolio is underperforming, the first thing you need to do is evaluate why it is happening. There could be multiple reasons for it and you will only be able to take the right action when you know the underperformance reason. Here are some common reasons why a stock portfolio might be underperforming:

Market Downturns: General market trends can have a significant impact on stock performance. Economic downturns, recessions, or periods of market volatility can lead to widespread declines in stock prices. At present (Dec 2023), the market is at an all-time high. Your portfolio should be doing well now. When the overall market falls, and your portfolio is also not performing, there is nothing to worry about. There is not much you can do in such a situation.

Company-Specific Issues: Next, if the overall market is doing fine, but your portfolio is still bleeding red, you need to look at specific stocks. Individual stocks may underperform due to company-specific challenges such as poor financial performance, management issues, legal problems, or a decline in product demand. In recent months, we have seen how stocks of certain new-age companies have fallen because of negative news around the business. 

Sector-Specific Trends: Certain sectors may experience cyclical downturns or face challenges due to changes in regulations, technological advancements, or shifts in consumer preferences. If your portfolio is heavily concentrated in a struggling sector, it can drag down overall performance. For example, in the second week of December, sugar stocks took a hit and fell considerably as the government put a curb on ethanol production.

What should you do?

Now, if you know the reasons, it will be easy for you to act. However, if you are still unsure, continue reading, and as we discuss various steps you can take when the portfolio is underperforming, you may get the idea. Here are the things you can do:

1. Assess Your Investment Goals and Time Horizon

Before making any decisions, revisit your investment goals and time horizon. Are you investing for short-term gains or long-term growth? Understanding your financial objectives will help determine whether the underperformance is a temporary setback or a more significant issue requiring a portfolio adjustment.

If you had a short-term view, you would probably not have the hit to make the correction and may need professional help to get out of the situation. However, if you have a long-term view, you have the time to make changes to your portfolio and get better returns.

2. Evaluate Individual Stock Performances

Unless your portfolio is down because the overall market is down, you need to exercise this step. You must check the performance of individual stocks in your portfolio. Identify whether the underperformance is isolated to specific holdings or if it is a broader market trend affecting your entire portfolio. This step helps you pinpoint areas for improvement and potential rebalancing.

Check the individual stock XIRR to get a better idea of how they have done for you since you started investing in it.

3. Diversification Analysis

Assess the diversification of your portfolio. A well-diversified portfolio is less susceptible to the impact of poor-performing stocks. If your investments are concentrated in a particular sector or asset class, consider rebalancing to spread risk more evenly.

4. Stay Calm and Avoid Emotional Decision-Making

Emotional reactions can lead to impulsive decisions, often exacerbating losses. You should stay calm and rational during periods of underperformance. Remember that markets go through cycles, and short-term setbacks are a natural part of investing. Even if you have made bad choices of stocks, you can still turn the tide in your favor. 

Available options

Once you have done the analysis as we have discussed above, at the core, you have three options. You will have to take one of them based on your analysis outcome:

  • Hold: If you are super-confident that stocks in your portfolio are good, and it is only a matter of time (market or sector-related issue), then you can continue to hold them.
  • Buy: If the quality companies are down, you must find the reasons. Has something changed since your last analysis? If not, you can consider buying more. If under-diversification is an issue, you may need to buy stocks from other sectors for diversification.
  • Sell: You know the reasons for stock portfolio underperformance. If it is unlikely to change, the only option may be to sell the stocks. 

Before you go

Experiencing underperformance in your stock portfolio can be challenging, but it is essential to approach the situation with a clear and rational mindset. By reassessing your goals, evaluating individual stock performances, and staying informed, you can make informed decisions to navigate through market fluctuations and work towards achieving your long-term financial objectives.

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