This post is was originally published on The College Investor

Do you feel like you’ve done everything right but your portfolio just doesn’t seem to perform?

How hard can it be? By low sell high…right?

If you’re managing your own portfolio, you aren’t alone. Wealthfront found that 25% of U.S. individuals manage their portfolio.

Managing your portfolio isn’t a sign that you’ll have an underperforming portfolio.

There can be only a factors that play into underperformance or many.

But what leads to an underperforming portfolio when the market is constantly rising? In this article, we’ll explore several reasons why a portfolio might underperform.

Underperformed Relative To?

When a portfolio underperforms, it does so in comparison to some benchmark. Often, this is the S&P 500 Index.

For the last three years, the annual performance for the S&P 500 Index has been:

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    2015: 1.38%

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    2016: 11.96%

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    2017: 20.49%

I’ve you’ve come in below those numbers for each of the above years, your portfolio has underperformed relative to the S&P 500. Compared to bond funds, you outperformed in 2016 and 2017.

We’ll look specifically at reasons a portfolio may have underperformed the S&P 500.

Underinvested

For investors who went through the financial crisis of 2007/2008, you can’t blame them for being cautious. Since the crisis, the S&P 500 has returned 7.8%, according to FactSet.

Sitting on the sidelines will have a negative impact on your portfolio’s performance during periods of overall positive market returns. Let’s say you were 90% in a money market fund and 10% in a bond fund during 2016 and 2017. 

You were basically 90% in cash, which won’t beat a market with positive returns. Bonds returned less than 4% from 2015 to 2017.

Underinvested can also mean being in low return investments. Usually, this is another way of stating that a portfolio is conservative.

For example, if you had invested 100% in bonds, we’ll use the Vanguard Total Bond Market Index Fund Investor Shares (VBMFX), your returns would have looked like this:

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    2015: 0.30

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    2016: 2.50

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    2017: 3.46

According to Morningstar. In that case, you would have underperformed relative to the S&P 500 Index.

Portfolio Managers, Managed Funds And High Fees

Even if someone else is managing your portfolio or you are picking managed funds, there’s no guarantee these managers will beat the market. 

While an S&P 500 Index fund will track the S&P Index, a managed fund makes its trades trying to at least equal the S&P 500. Sometimes that doesn’t happen and the fund returns less than its benchmark.

The same is true of a portfolio manager. Meaning, some one who manages your portfolio and trades on your behalf. Often, this is a financial advisor. They can and do under perform a benchmark as well.

High fees are another reason a portfolio will underperform. Even if your portfolio manages to return the same amount as the benchmark (i.e., S&P 500), high fees will erode your returns, pushing overall performance below the benchmark.

Market Timing

After sitting on the sidelines for a while and watching the market constantly rise, you decide to finally jump in, only to see the market immediately nose dive.

After a while of consistent down days, you decide to sell, only to watch the market resume its ascent. Certainly, this is unlucky timing.

While 2016 and 2017 were mostly up through out the year with only minor pullbacks, jumping in at the end of 2015, when the S&P 500 was at 2016, you would have watched it fall for a couple of months down to 1852. Bailing out there would have definitely had an impact on your returns for 2016.

Trying to chase too much performance can also be problematic. Ken Heise, a financial advisor with Heise Advisory Group in St. Louis, says, “You should have a purpose when you invest. There’s no reason to take a downside risk that’s higher than you’re comfortable with if you don’t need that high of a return.”

Higher returns can often mean higher risk. If you end up with too much of the risk side of those returns, you can realize not only underperformance but negative returns (i.e., below 0% returns).

Poor Performing Sectors and Countries

Being too heavily invested in an underperforming sector or country will reflect in the underperformance of your portfolio.

In 2017, the two worst sectors, according to Fidelity were:

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    Telecommunications service: -5.75%

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    Energy: -2.09%

For 2017, Morningstar found that the following countries were poor performers:

Do You Know Why Your Portfolio Underperformed?

Is There A Solution?

Don’t beat yourself up if returns weren’t what you expected. The average investor made just over 5% in 2016, according to Openfolio.

Diversifying your portfolio into various sections and not overweighting in anyone can help reduce risk. Because you’re in different sectors, it will also help returns.

Has your portfolio ever underperformed? Did you find out why?

The post Do You Know Why Your Portfolio Underperformed? appeared first on The College Investor.

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