This may sound like a stupid question. You hire someone to make you money, so if they underperform their peers, of course it’s bad! But the question is, over what period?
Every advisor and every fund, no matter how good, will not beat the market every year. I remember clearly in 1999 how people talked about how Warren Buffett was all washed up. He had missed the big move up in technology stocks. For 1999 as a whole Buffett’s company Berkshire Hathaway was down 17% versus the S&P 500 being up 20%. He underperformed by 37%!!! Therefore the right move was to fire Warren and hire someone else right?
Well over the next five years, Berkshire was up 56% versus a 20% decline for the S&P 500. Seems like Buffett wasn’t so stupid after all.
People ask me all the time, “How was the market last year?” or “How did fund X do over the last six months?”. These are the wrong questions. The question should be “What happened over the last five or ten years?”. But people rarely ask that question.
Here is the big problem. People will chase performance. They will look at a fund or a manager who had a good year and assume they are really good (i.e. someone who bought tech stocks in 1999). Then when that person has a bad year, they jump ship and pick someone else who had the hot hand for one year. And somehow they always lose out. They are driving looking in the rear view mirror and don’t understand why they never reach their destination.
It’s hard to stick with it when you’ve had a poor year. But if you’re in a good fund, or with a good manager, be a little patient. In the long run, you’ll have better performance, pay fewer fees, and sleep easier.