Another reminder to stay the course comes from the article at Yahoo! Finance. It mentions a study of mutual fund returns and flows performed at Baird:
Baird looked at top-performing funds, a group that had outdone the benchmarks during the past 10 years while recording less volatility. Of the top funds, 85% had at least one three-year period when they lagged the benchmark…
It’s always good to be reminded that even the top funds go through periods when they struggle, but what tends to compound the problem is investor behavior.
Baird concluded that to succeed over the long term, investors must patiently hold funds through good times and bad. But all too often shareholders follow a self-defeating pattern. The investors buy after a fund has recorded a hot streak. When the inevitable slump occurs, the shareholders lose patience and sell at the wrong time. Consider Yacktman, which returned 12.5% annually during the past 10 years, outdoing 99% of large value peers.
Portfolio manager Donald Yacktman buys undervalued stocks with strong balance sheets and rich cash flows. During the market downturn that began in 2000, Yacktman excelled. But with stocks rallying in 2004, he slipped into the bottom quarter of the standings and stayed there for three consecutive years. Figuring that the manager had lost his touch, angry shareholders dumped the fund. Assets in the portfolio dropped from $441 million in 2005 to $293 million in 2007.
Never wavering from his style, Yacktman roared back. The fund outdid 98% of competitors in 2008 and 99% in 2009. Since then, investors have been pouring into the fund, which now has $4.2 billion in assets.
This is a very typical issue. After a year or two of subpar performance, investors often assume that a manager’s process is broken. Usually it is not. I put the key takeaway in bold: you must be patient to get outstanding results, even with excellent managers. A recent presentation I made on Ten Ways to Radically Improve Your Investment Results at a Broker Institute in Richmond counted down factors that in my estimation had the most impact on investment results. #1 was patience.
Patience is easy when things are going well. Patience is difficult when results are temporarily poor. Here’s a radical suggestion that may end up being very profitable: when you are considering dumping a strategy, turn the tables and add money instead. You’ll probably be adding somewhere near the low–exactly when investor patience is frayed–and you may have a chance of capturing both the inherent returns in the strategy and the extra bounce from a rebound.
