My investments are underperforming the S&P 500. Should I sell?
Quick Summary
Before you can decide whether to sell, you need to know why you bought. Without that, you're just reacting to a number.
Growth, lower volatility, income, diversification are different assignments an investment could have.
An investment trailing the index might be doing precisely what you bought it to do.
Selling what's lagged to buy what's doing well means selling low and buying high. This is the habit at the root of why the average investor earn less than the very investments they've owned.
Good reasons to sell are your goal changed, your capacity or tolerance for risk changed, or something material changed about the investment.
Keeping your investment strategy simple might be part of the recipe.
So, you've got an investment that's underperforming the S&P 500, and you want to know whether you should sell it.
Maybe you got advice about investments from a friend, or even another advisor.
Maybe you geek out on the market and have attempted to pick the winners.
Maybe your neighbor was boasting about how much their account has been growing.
But you look at your investment statements and wonder why you’re not doing better.
Maybe you even know which one is the laggard but you’re not sure what to do about it.
My name is Michael Hollis, and I help people in Aurora, IL, Chicagoland, and virtually across the US think about what job their investments are meant to accomplish.
What follows is general in nature and not specific investment advice.
Start here: why do you own it?
Before we can talk about selling, you ought to know why you bought it in the first place. That might sound obvious, but without that in mind, how can you answer the big question?
If you can't say why you own something, you have no way to judge whether the lag matters. You don't know what job that investment was hired to do, so you can't tell whether it's failing at that job or doing exactly what it is supposed to be doing.
So, start with the job: growth, lower volatility, income, diversification, etc.
Those are different assignments and they shouldn’t necessarily be measured against “The S&P 500.”
What if there wasn't a reason?
Sometimes the honest answer is that there wasn't one. You got a tip from somebody at work, or you had a hunch, or you heard it on a podcast, or the thing was hot at the time and you didn't want to miss the opportunity.
Buying without a sound reason tends to lead to selling on impulse and creates a loop you don’t want to be in.
You end up continually chasing, buying high and selling low over and over, which is exactly the opposite of what you want to be doing.
The selling trap
Here's how it usually goes. You sell the laggard and buy whatever has been winning. You might even feel a little relief because you got rid of the thing that wasn't working and replaced it with something that had been doing better.
Except you just sold something after it went down and bought something after it went up. It's this habit that causes many investors to earn less than the very funds they own.
See, mean reversion in investment returns runs in both directions. The investment that trailed for three years might not keep trailing, and the one that led might not keep leading.
There's research on what this costs you. Morningstar tracks the gap between what a fund returns and what investors in that fund actually earn, which is a measure of when people buy and sell rather than of the fund itself. Their 2026 study put the average gap at about 1.2 percentage points a year. Estimates vary and the methodology gets debated, but the direction has been consistent for a long time.
Morningstar also found the gap varies quite a bit by category. It's narrowest in plain, diversified funds that people tend to buy and leave alone, and widest in the volatile, exciting stuff where investors pile in after a run and bail out after a drop.
The comparison might be misleading
There is almost always something outperforming whatever you own. Pick any window you like and you'll find a stock, fund, sector, or an index that beats something you own.
The bigger problem is comparing two investments that were selected because they don't tend to move together, meaning they have a lower correlation of returns. You might do this to tamp down the volatility of your portfolio. If you own something specifically because it doesn't track the stock market, then in a year when stocks run up big, that holding could fall behind, dampening your overall returns. It's also there to make the rollercoaster less violent when stocks have a major drop. That’s the price you pay for asset class diversification.
Trailing the S&P 500 because you selected these uncorrelated investments might mean your portfolio is doing precisely what it was designed for.
What if you do have a reason?
But let’s say for a moment that you DO know why you own a particular investment. Ask yourself if that reason still holds.
How long it's lagged isn't the trigger. Three disappointing years doesn't mean sell and three good ones don't mean buy more. What does answer the question is whether the reason you bought it is still true.
If your thesis is intact, the question stops being about this one fund and becomes a question about your overall asset mix and whether things have drifted far enough to rebalance.
That's a better conversation anyway.
When selling your underperforming investment is the right move
There are real reasons to sell, but recent underperformance isn’t one of them. Here are a few:
Your goal changed, so what you need the money to do changed
Your need to take risks to hit a particular goal changed
Your ability to take risks changed (Your risk capacity)
Your willingness to stay on the rollercoaster to the end of the ride changed (Your risk tolerance)
Something material changed about the investment itself, like a shift in strategy or a change in who's managing it
The same mentality that says don't dump a laggard out of frustration also says don't anchor onto an investment when the reason for owning it is gone.
A case for keeping it simple
One more question to ask yourself.
When you feel the pull to chase performance, is it happening with one investment or across several of them?
If it's several, the number of holdings may be part of the problem. The more investments you own, the more opportunities you have to look at one, compare it against something that did better, and talk yourself into a change.
Fewer funds mean fewer decisions, and fewer decisions mean you’re more likely to stay the course.
How do we decide when to sell?
At TapestryFP, I don’t start with investments.
I spend time understanding your unique financial and personal situation: what your WEALTH is really for. Then we come up with a financial plan that matches who you are and the goals you have. That naturally leads us to answer the question about which investments to sell and which ones to own.
That’s supposed to lead you to a portfolio which you have enduring conviction in and can stick with when your emotions try to push you around.
That’s one of the primary jobs of a financial advisor: helping you stay the course when you might not otherwise.
We revisit your whole financial picture during our twice-a-year financial planning meetings. And I'm available whenever a headline has you wondering whether you're still going to be OK.
I can show you all sorts of charts. How often the market has finished a year higher than it started. How routinely a major drop in any given year recovers before the same year is over. How many times over the last 100 years the stock market has had positive returns vs. negative.
But it's not always about the numbers, is it?
Two questions
Whether you sell comes down to this. Why did you buy it? Why do you still hold it?
If you had the same amount of cash right now, would you still choose to own it?
If you can answer these questions, you have the makings of a strategy. If you can't answer with clarity, that's the thing to work on, and it was never really about this investment at all.
Schedule an Intro Call and we'll look at it together.
