Understanding Laggards: How Underperforming Investments Impact Your Portfolio

Discover what laggards are in the stock market and how these underperforming investments can affect your portfolio. Learn strategies for identifying and managing laggard stocks to mitigate risk.

What Is a Laggard?

A laggard is a stock or security that underperforms relative to its benchmark or peers. Laggards exhibit lower-than-average returns when compared to the market. They stand in contrast to leaders, which outperform their benchmarks.

Key Takeaways

  • Laggards underperform in terms of investment returns when compared to their benchmarks.
  • Portfolios containing laggards may see these investments as the first candidates for selling.
  • Misidentifying a laggard as a bargain can lead to excess risk.

Clarifying the Concept of Laggards

Often referring to a stock, the term ’laggard’ can also describe companies or individuals consistently underperforming compared to peers. In investment jargon, investors avoid laggards as these stocks tend to achieve less-than-desired rates of return. For example, consider stock ABC which posts an annual return of only 2% while other industry stocks yield 5% on average. Clearly, stock ABC is a laggard.

If your portfolio has laggards, these should be at the top of your sell list. Holding a stock that returns only 2%, while another in the same category returns 5%, basically costs you 3% each year. Unless there is a robust reason pointing to a potential turnaround, holding onto a laggard equates to financial drain. Usually, company-specific issues like lost contracts, management turmoil, or earnings erosion in a competitive landscape can drag stock performance into the ’laggard’ territory.

The Risks of Investing in Laggard Stocks

Why does a stock become a laggard? Repeated failures in meeting earnings or sales estimates, weak fundamentals, or thin trading liquidity can mark a stock as a laggard. While a lower-priced stock might seem like a bargain, it could turn out to be a costly risk if it continues to underperform.

Everyone prefers bargains, but cheap stocks may not correspond to lucrative investments. A $2, $5, or $10 stock might appear to have high growth potential. However, stocks under $10 often have inherent deficits, either historical or current.

A prudent strategy could be investing in fewer shares of a robust stock rather than thousands in a cheap one. Top mutual funds and major investors are generally drawn to companies with strong earnings, have traded at least $15 on the Nasdaq or $20 on the NYSE, and sustain daily trading volumes of at least 400,000 shares. This ensures smoother trading with minimal impact on share prices.

By focusing on institutional-quality stocks, you can strike a balance between investing in growth and managing risks effectively.

Related Terms: stock performance, investment risk, portfolio strategy, stock trading.


Get ready to put your knowledge to the test with this intriguing quiz!

--- primaryColor: 'rgb(121, 82, 179)' secondaryColor: '#DDDDDD' textColor: black shuffle_questions: true --- ## What is a "laggard" in financial terminology? - [ ] A leading company in its industry - [x] A company that is underperforming compared to its peers - [ ] A company with the highest market share - [ ] A new entrant in the market ## Which of the following best describes a laggard in the investment context? - [ ] A stock with high growth potential - [ ] A stock with consistent performance - [x] A stock that lags behind others in terms of returns - [ ] A stock that is the industry leader ## In which market would you most likely find a laggard? - [ ] Real estate - [ ] Foreign exchange - [x] Stock market - [ ] Personal loans market ## Laggards are typically characterized by what feature? - [x] Underperformance compared to industry averages - [ ] Higher than average industry returns - [ ] Strong market leadership - [ ] Innovative product offerings ## Which type of investor might be interested in laggards? - [ ] Growth investors - [x] Value investors - [ ] Angel investors - [ ] Venture capitalists ## Which of the following can be a reason a company is considered a laggard? - [ ] Strategic acquisitions - [x] Outdated technology - [ ] Innovation leadership - [ ] Strong financial health ## How can a laggard affect an investment portfolio? - [x] By dragging down the overall returns - [ ] By ensuring steady returns - [ ] By enhancing growth prospects - [ ] By diversifying it effectively ## Compared to leaders, how do laggards typically perform in terms of stock price? - [ ] Laggards have higher stock prices - [ ] Laggards have the same stock prices - [x] Laggards have lower stock prices - [ ] Laggards have highly volatile stock prices ## What kind of market might reduce the number of laggards? - [ ] Bear market - [x] Bull market - [ ] Stagnant market - [ ] Volatile market ## What is typically the strategy of investors dealing in laggard stocks? - [ ] Short selling to capitalize on declining prices - [x] Buying undervalued laggards with potential for turnaround - [ ] Day trading for quick profits - [ ] Steady dividends collection