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Portfolio Performance

It happens all the time: Investors complete a periodic review of their financial interests, only to discover their returns are falling short of expectations. Perhaps they seem to lose when the market loses, but fail to make bullish gains when the charts are looking up. Few things can be more frustrating than feeling like your investments are creeping along at a snail’s pace instead of following the market’s upward trajectory.

If you feel that your personal portfolio is underperforming expectations, you may have difficulty pinpointing the source of your problem. After all, a well-diversified investment portfolio has many moving parts, all of which are constantly changing. Furthermore, chances are you have other things to do besides spend hours dissecting every component of your financials. In this article, we will explore reasons your investments may be underperforming and what you can do to alter the course of your financial future.

Average Investors Underperform

When Dalbar* studied average investor performance of the previous two decades, the results it uncovered were surprising. During the past 20 years, the average person who invested in market equities came up short of the S&P 500’s returns by a margin of nearly five percent. In terms of long-term capital gains, that is a significant difference in capital growth. Narrow the numbers down even further, and you will find that investors underperformed by a whopping 8% in 2014 alone.

So how does that happen when the average investor could simply invest in a broad S&P 500 fund that returns the market average? How does an investor take small gains or even losses when the overall market is growing by leaps and bounds? Could it be that every person is making poor individual investment choices, or is something else going on?

Looking for Answers

The truth is there could be a myriad of reasons an investment portfolio would fall short of what one would hope. However, some reasons are more common than others.

Portfolio Structure

The most obvious reason for underperformance is found in the structure of the portfolio itself. The equities market is a reflection of what is happening in the U.S. and world economy. Many factors influence stock performance, including news, legislation, corporate earnings, and more. It is a highly fluid economy that changes year to year, month to month, day to day, and even hour by hour. There are times when some sectors outperform with tremendous growth and others when certain sectors lag when the rest of the market is experiencing growth. If your portfolio holdings are not aligned so that you are exposed to a well-diversified representation of the whole market, you could get left behind and experience poor overall performance of your portfolio.

Investor Behavior

Another reason portfolios underperform is due to investor behavior. Humans have natural reactions to changes in the market – specifically market corrections. When things are not going well, it can incite worry or even panic. When everything is spinning out of control, a spooked investor may jump out of equities to preserve cash in an attempt to escape what feels like a sinking ship. They are willing to take the small loss if it means avoiding a big one.

While it may feel good to avoid a financial catastrophe, it is important to remember that a loss isn’t really a loss until it is realized. Sometimes, riding out the storm and continuing to invest despite it could generate the greatest returns once the market rebounds.

Capital Setup

Another reason portfolios fall short of average gains is due to poor financial planning. Investors should be financially prepared for market fluctuations, as well as personal financial changes when beginning to invest. That means having a well-funded short-term savings account that allows access to liquid capital for unexpected expenses. If all of an investor’s money is tied up in a tax-sheltered retirement fund, he or she may feel tempted to borrow or take early distributions for emergency expenses – an action that could result in penalties that eat into capital gains. Not to mention, doing so can significantly disrupt the return potential of the investor’s now diminished portfolio.


Media is a powerful influence when it comes to investor behavior. Negative information and biased opinions are constantly blasted on 24-hour news channels, as well as financial blogs and news websites. When media outlets run pessimistic headlines in an effort to attract readership, it takes the spotlight off of where the focus should be and shines it on a slew of downbeat information. It is only human nature to avoid unnecessary risk and try to avert potential losses. They often jump out of stocks at the sound of unflattering information instead of keeping the money invested for better returns.

What You Can Do to Improve Portfolio Returns

Ultimately, you cannot achieve success until you understand your investment goals. We recommend assigning purpose to your money and determining how long you have before you expect to take withdrawals. We also recommend assessing your personal risk tolerance to better understand which types of investments are right for you.

Next, you should connect with a financial advisor here at our office to learn how to build a portfolio that matches your preferences and needs. We’ll help you cut through all the hype and noise, allowing you to stay the course regardless of what is going on around you. We’ll also help you re-assess your investment behavior and financial goals as you reach special milestones or face unexpected events in your life.

For more information or to request a personal financial consultation, we invite you to contact our Honolulu financial advisement office today. We look forward to helping you achieve financial success for years to come.

Jan Axel Tribler
July 2, 2018
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