Sometimes, investments “go wrong” despite the best of planning and intentions. No matter how well you craft your portfolio, there is always risk involved with investing. As such, there will likely be times when certain assets fail to meet expectations. In those cases, what should you do?
Reacting impulsively can make the situation worse (e.g. crystallising losses). Instead, investors need to respond strategically – detached from strong emotions. In this guide, we offer some tips on how investors can navigate the “internal storm” when investments underperform.
Performance diagnosis
If an investment is underperforming, it helps to gain a thorough understanding of why this may be happening. After all, not all declines are the same. Here are some factors to consider:
- Market cycles. Sometimes, corrections occur in an industry or national economy. These could drag down your investment and “mask” its otherwise strong performance.
- Management. Are the decisions of senior leaders causing problems in the company that you invested in? Perhaps they are deviating from business goals you agreed on when you first provided your angel investment. Or, maybe they have not cultivated a healthy workplace culture, leading to team dissatisfaction and underperformance.
- Overvaluation. How much did you pay when you originally invested? If you entered at a high price point, the current decline could take a long time to reverse (if it does at all).
- Structural issues. Has there been a change in industry regulations that may be pushing down on the company (e.g. due to more compliance)? Has technology – e.g. artificial intelligence (AI) – disrupted the underlying business model? Sometimes, structural shifts can permanently alter consumer preferences and make a once-thriving firm obsolete.
Re-assess your portfolio balance
Underperformance in one area might indicate your portfolio has drifted away from its intended allocation. This could be a good time to discuss “asset allocation” with an adviser.
Sometimes, this leads to a rebalancing – i.e. realigning your asset mix to maintain your original risk profile. For example, if the tech stocks in your equity portfolio have plummeted in value, your portfolio may now be overweight in conservative assets, such as bonds.
In this scenario, your long-term growth potential could now be lower. Conversely, if high-risk assets have lost value, your portfolio may be riskier than originally planned.
Be careful with rebalancing. It may be tempting to simply sell all of your “losers”. However, this can exacerbate an imbalance. A better approach will likely be to trim certain positions and/or re-invest new funds in underweighted areas.
It also helps to re-examine your investment thesis at certain points in your investor journey. When you bought an investment, you likely had a reason. These could have included strong growth prospects, solid fundamentals, diversification or income generation.
Do these reasons still hold? Was your original thesis reasonable and realistic? Has anything fundamentally changed, and is your reasoning still valid today?
Keep emotions in check
When you experience investment losses (even if these are not yet crystallised), it is natural to feel powerful emotions in response – e.g. fear, anger, regret and impatience.
If you are not careful, these feelings can get the better of you, often leading to poor decisions, such as selling at the bottom. Or perhaps you double down on a losing bet without justification.
One of the worst investment ideas is abandoning a long-term plan due to short-term pain. If you suddenly face strong emotions due to an investment’s underperformance, take a step back and assess the situation logically.
If needed, speak with an adviser or a trusted financial professional to gain perspective. It can often help to get a wise second opinion before making any big decisions.
Take another look at tax
One of the potential upsides of an investment’s underperformance is the potential to realise a capital loss for tax purposes (“tax-loss harvesting”).
In the UK, capital losses can often be offset against capital gains. For instance, capital gains losses can be set against income arising in the tax year in certain cases (e.g. where they arise from unlisted shares and securities).
The result could be a reduction in your overall tax liability. However, timing and strategy are key. You must also be mindful of rules restricting such activity. An example is “bed and breakfasting“, which can disallow a loss if you repurchase the same (or a substantially identical investment) within a certain period.
Consider talking to a tax adviser to explore the best ways to maximise this strategy and avoid unintended consequences.
Final thoughts & invitation
Underperformance can be a wake-up call, prompting you to reassess how much risk you’re really comfortable with. It is an inevitable part of the investing journey, but underperformance does not need to derail your portfolio strategy.
Moreover, every investing setback holds valuable lessons. Documenting what went wrong – and what you’ll do differently next time – can help you become a better investor over time.
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