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5 things you can do to weed-out underperforming ASX shares from your portfolio

Everyone wishes to avoid buying underperforming ASX shares – like the AMP Limited (ASX: AMP) share price and IOOF Holdings Limited (ASX: IFL) share price in 2018 – but few know what to do if they already have such underachievers in their portfolio.

Both stocks have halved in value over 2018 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down around 7%. It’s a very common predicament to feel lost on what to do and it’s never easy to know when to hold and when to fold.

Don’t be fooled into thinking you can avoid such situations by becoming a great stock picker either – so don’t beat yourself up if you find an ASX underachiever in your portfolio.

Every investor will almost certainly find themselves in such a hole although the more astute ones will be able to limit the number of times they step on a landmine and will know what to do when they do.

This article isn’t about teaching you to be a good stock picker but it will arm you with a checklist to help keep you out of trouble.

In essence, there are five things you need to watch for. These are:

  • Pride before Purge

No one likes to admit they are wrong and selling a dog will feel like an admission that you’ve screwed up. You’d be surprised how many investors fall into this trap and even the professionals struggle with this one.

But this is arguably the worst reason to hang on to a fallen angel and the most damaging to your portfolio returns. No one gets it right all the time and you need to accept that a certain number of your investment decisions will fail before you put in any trade as there is no “sure thing” when it comes to investing.

For some reason, hubris or pride seem to afflict men more than women. I won’t delve into the psychology of the sexes, but it’s something men need to be particularly conscious about and it probably explains why a number of research articles have shown women to be better traders than men.

  • Tax Haven-Hell

I can’t tell you how many times I’ve heard the excuse for not selling a stock was due to tax consequences.

Some investors continue to hold on to a losing stock because they want to qualify for the Capital Gains Tax (CGT) discount that kicks in only after 12-months or refuse to sell a winning stock even as it overshoots on the upside because they don’t want to pay tax.

I am not saying tax isn’t important or shouldn’t be a factor in your deliberations but I believe many people think this is a bigger driver of returns than it really is.

My personal rule is that if the fundamentals tell me to sell a stock, I’ll do it regardless of tax.

  • Lucky Country Syndrome

I often embrace the Australian mantra of “she’ll be right, mate” but not when it comes to investing.

I am sure almost all retail investors have told themselves this when watching one of their stocks crashing. Even worse, they look at the past performance of the stock during its “glory days” and think that it will be heading back to its past peak.

Many ASX dogs do, but many do not either and thinking that “she’ll be right” is gambling – not investing.

Don’t just rely on luck to get you out of a hole. You will need to take the time and effort to analyse an underperformer before you can judge its recovery prospects (just beware of bias that comes from deciding an outcome before you do the research).

  • Complacency Trap

The days of “fire and forget” investing where you buy a stock and keep it in your drawer for prosperity are over.

It may sound like a more attractive (and fuss-free) way of investing but the GFC proved that you need to regularly review your share portfolio as industry and macro-economic conditions are in a constant state of flux.

I have found that lightening or closing positions in stocks where headwinds are starting to build is overall a rewarding exercise even though some large-cap stocks do recover over the longer-run – particularly at a time the market is in a late-stage bull market and could turn quickly.

  • Grape-Vine Grime

If you have been guilty of buying a stock on the advice of your Uber driver, stranger or friend, you should stop that practice.

You wouldn’t buy a car based just on hearsay without test-driving it, so it’s really illogical for you to base your investment decisions on gossip that originated from unknown sources.

Even if the rumour is true, by the time your Uber driver has told you the news, it’s probably too late to profit from it.

You’d be surprised how quickly the market moves and any stock tip advantage (assuming it’s correct) is very quickly reflected in the price of the stock.

It’s a case of prevention being better than the cure. By not acting on rumours, it could save you the pain of buying a dog.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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