In finance, a laggard is a type of investment that underperforms its benchmark. The benchmark is usually a stock market index, such as the S&P 500, or an industry-specific index. Market laggards are typically stocks or mutual funds that fail to meet the average performance of the entire market or their respective industry.

Investors typically avoid laggards to reduce risk in their portfolio. On average, laggards can be expected to underperform the broader market, and holding laggards may lead to subpar returns. For example, many tech stocks are laggards in the larger stock market which means that holding only tech stocks may mean missing out on important gains from the broader market.

Laggards are not inherently bad investments, but they often lack the catalysts that propel winners. Winners may benefit from exceptional technology, consumer demand, or M&A activity. This can create momentum that carries a stock or mutual fund higher for a considerable amount of time. While laggards may experience price increases every now and then, they do not have the potential to ride out a strong trend or rewarding tailwind.

For this reason, many investors look to avoid laggards. However, it can be advantageous to build a portfolio of both laggards and winners. While it is difficult to accurately predict the performance of laggards, they can still provide a return if the right stocks or sector are chosen.

For example, laggards in the energy or financial sector may benefit from a rise in the values of crude oil or US Treasury bonds. Similarly, laggards in technology could benefit from a surge in demand for their products or services. Investors should consider these factors when evaluating laggards for their portfolio.

In conclusion, laggards are investments that tend to underperform their benchmarks. Investors often avoid these holdings, as they can be more risky and do not have the potential for a sustainable price increase. Still, laggards can provide an opportunity for some profits if the underlying factors are favorable. Therefore, laggards can play an important role in diversifying an investor’s portfolio, but it is important to do the necessary research beforehand to increase the chances of success.