Fidelity Breaks Down 3 Reasons Your Portfolio Is Underperforming: Here Are the Solutions

It’s no secret that equities and bonds have taken a shellacking in 2022. The downdraft from the highest inflation in four decades, sharply rising interest rates and persistent supply chain disruptions combined to hammer the S&P 500 some 25% by midyear. And approaching yearend, the benchmark index has trimmed those losses to about 17%, which is still a painful correction. Nevertheless, not everyone’s losses can be laid exclusively at the feet of macroeconomic trends. Fidelity Investments says there are three sometimes-ignored factors that may have compromised your investments. We explain them below.

Consider working with a financial advisor to ensure your portfolio’s performance is not unnecessarily burdened.

Memo to Investors: You Always Have Agency 

Investors are not completely powerless in the face of economic and geopolitical challenges. It’s true that in a serious market downturn there is no perfect haven. But there are three things that make those downturns worse than they need to be.

“Cash, concentrated stock, and taxes can all act as a drag on overall portfolio performance, but it is possible to mitigate these headwinds and prepare your portfolio to help you feel confident that you’re getting the most out of your investments,” according to Fidelity.

Holding Too Much Cash

There’s no argument that holding some of your wealth in cash is wise. It makes sense for short-term goals and as a cushion for emergencies. But staying away from securities, whether stocks, bonds, commodities or alternative investments, can come at a heavy price. Fidelity provides a hypothetical example based on an inflation rate of a mere 2.5% and a cash balance of $100,000, which could lose about $12,000 over five years. “And by not being invested, you’re missing out on the potential for long-term, compounding growth that could provide a chance to keep up with or even potentially outpace inflation,” Fidelity says.

Solution: Put some of that cash to work in stocks or bonds or a combination of the two.

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Holding Too Much of a Single Stock

History provides ample evidence of the need to diversity your assets. Fidelity says that from 1980 to 2020, 40% of stocks within a diversified index lost 70% of their peak value, and in March 2020, 63% of individual stocks underperformed a diversified index. Marshall Baker, vice president and wealth management advisor at Fidelity, suggests a diagnostic question for investors who may be overly attached to a single stock: If you had a sudden windfall of cash, how much of it would you invest in this position? He tells clients “that while that single position may have helped them build wealth, diversification may help them retain it.”

Solution: Sell shares of that overweighted equity and buy diversified funds (mutual or exchange-traded), an array of individual stocks or gift some shares to heirs or favorite nonprofits.

Paying Too Much in Taxes

“Taxes are one of the biggest headwinds that investors need to overcome,” says Chris Johnson, vice president and wealth management advisor at Fidelity, “and one of the easiest to control, because it doesn’t require changes to their lifestyle. It’s entirely within the investor’s control to make decisions to help mitigate the impact of taxes.”

Solution: Pursue “tax-smart investing,” which boils down to the ability of an investor to outperform reasonable returns by implementing tax strategies that lead to savings. In other words, it’s not about what you earn; it’s about what you keep.

Bottom Line

Successful investing isn’t just about racking up big returns; it’s also about responding to a downturn in a way that minimizes losses. Securities that normally provide an anchor to windward have failed investors in the last several years. In a bear market be sure you’re not holding too much cash, are not overly invested in one stock and are taking full advantage of all the tax-smart moves you can to avoid paying unnecessary taxes.

Tips on Investing

• A financial advisor can help you spot any subtle ways that your portfolio is being unnecessarily burdened. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Check our free investment calculator to get a quick estimate of how your securities will do over the coming years.

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