Top three reasons why your portfolio is performing poorly
Every investor wants a stellar performance from their share portfolio.
We all invest with the aim to see appreciation in our wealth - either through dividends or favourable moves in the markets.
However, the reality is that not all share portfolios are created equal. Here we look at the top three reasons why your portfolio may be performing poorly compared to others.
1. Lack of diversification
This is one of the key reasons why some portfolios are under-performing or not doing as well as others.
If we look at a typical personal investment portfolio a little deeper, particularly in Australia, the most obvious reason for the lack of diversification is often the limited range of industries and sectors represented in the stocks held in the portfolio.
While Australia has one of the most mature markets in the world, the domestic sharemarket is dominated by resources (mining) and financial companies which together account for more than 50% of local market capitalisation.
This means the inherent nature of the Australian sharemarket acts as a natural "limit" to an investor's diversification.
While Australia is rich in natural resources, we don't have a great range of companies in the growth sectors that are driving overseas markets like the US, China and much of the rest of Asia.
Some of the growth sectors - for example, electric vehicles, renewable energy, artificial intelligence, IT/technology are hardly represented in Australia. This means local investors are missing out on fast-moving and fast-growing stocks that are delivering healthy returns on investments.
If you are only investing in Australian shares, you could be limiting your portfolio's growth, even without realising it.
Lack of diversification can manifest in different ways. Here is a short checklist to find out if your portfolio lacks diversification:
- Are the stocks in your portfolio predominantly in one sector only - for example resources or finance?
- Do you only invest in Australian shares?
- Do you have shares in growth areas like Artificial Intelligence, IT/Technology, Software, Electric Vehicles, Renewable Energy?
2. Skewed allocation
Many investors allocate a big part of their investment to a few select stocks or assets. This means they face the risk of stagnant or even falling returns when those assets don't perform well.
It is generally regarded as much wiser to allocate your capital in such a way that your portfolio can withstand dips in one sector that can be balanced by the rise in another.
While it may be tempting to load up on just a couple of investments that you expect will do well, you would be wise to remember the old adage; "Don't put all your eggs in one basket".
3. Holding on and falling in love with your stocks
Another well-worn investment adage advises investors to "cut your losses short and let your winners run".
Instead, undisciplined investors tend to ignore losses and turn a blind eye to falling stock prices and returns, waiting and hoping for a rebound.
The better alternative is to cut your losses, get out of losing positions and then re-enter when, and if, they turn around.
Falling in love with a stock or being too emotionally attached to a company (and its shares) is one of the most common pitfalls for investors. They can't accept their mistake and sever their ties with a falling stock even as the emotional and financial pain increase.
Considering these factors that could be hindering the performance of your portfolio, it may be worth revisiting your shareholdings to see if you can implement some alternative strategies to boost your returns.
After all, if you want to grow your wealth you should take advantage of the benefits of diversification that are on offer from international markets with more opportunity and better growth potential?