What Should I Do If My Portfolio Is Outperforming or Underperforming?

Establishing a benchmark helps answer the “what” of investing — what outcome your portfolio generated relative to a relevant measuring stick. But the real insight comes from understanding the “why” behind that result, which will also help you decide what to do next (if anything).

… If you’ve outperformed

If your portfolio has beaten its benchmark, it could mean a few things:

Outperformance over a short period — say six months or a year — often doesn’t mean much. Markets move. Trends come and go. But if you’ve outperformed over longer stretches, that might be more meaningful.

Emphasis on might. Even then, outperformance isn’t always statistically significant. A seemingly large performance gap over 3-5 years could easily fall within the range of expected noise — but ​ investors often fall into the trap of looking at 3-5 year performance windows and assuming that their winning strategy will continue to win. This behavioural bias leads to buying high (loading up on whatever’s been doing well recently) and selling low (abandoning valid strategies that have ​ ​ happened to underperform), which can significantly impact long-term returns. (In a bad way, we mean.) 

Try to unpack why that outperformance happened. Did it come from leaning heavily into a hot sector or stock? If so, it might not be a sustainable long-term strategy; no company or industry stays #1 forever. Good performance is more repeatable when you construct a portfolio with diversified allocations that carry a level of risk appropriate for your goals. 

… If you’ve underperformed 

This one hurts a bit more. But it’s also when good investing habits could start forming. Your portfolio might lag for a few different reasons:

Just as outperformance over even a 3-to-5 year period often isn’t statistically meaningful, underperformance over these timeframes might not be either. Before making dramatic changes, consider whether the underperformance could simply be normal variation around your expected return. Reacting too quickly is something investors should try to avoid. If your portfolio is built to match your risk tolerance, time horizon, and goals, and you're comparing it to the right benchmark, then what you might actually need … is just patience.

A common source of addressable underperformance can be paying high fees to active managers that ultimately don’t end up adding value once those costs are accounted for. Research continues to illustrate that the majority of actively managed funds underperform their passive benchmarks. In fact, some research has found that simply charging low fees tends to be a surprisingly reliable predictor of good returns.

But sometimes action is warranted - so we’ve come up with a list of questions to ask yourself to help determine appropriate next steps.

Questions to ask when assessing performance: