No baseball player has ever batted .1000, ever. Babe Ruth was considered one of the best hitters of all time and had a .342 batting average. Although nowhere near perfect, he is still considered one of the greatest hitters of all time. The same thing goes for world-class investors; there has yet to be one that is able to bat .1000, it just doesn’t happen. Even the best in the business have made huge mistakes, it’s part of the game.
Top money managers with the best long term track records have also had bad years. Some have even had consecutive years of underperformance and have still managed to do extremely well over a longer time period for the investors that weathered the periodic storms. The opposite also holds true. Managers, coming off record years have sometimes experienced underperformance in the years following.
You shouldn't base yourself solely on past returns when building a diversified portfolio. Oftentimes managers or asset classes that have outperformed in the past may fall out of favor shortly after as they were at the peak of their performance cycle. Jumping from manager to manager while trying to chase their past performance can be a destructive investment decision.
I like to compare this phenomenon to sitting in traffic.
How many of us have found ourselves in the far left lane in bumper to bumper traffic on the way to work? All of a sudden the middle lane starts moving, one.. two..three cars pass and you decide you’ve had enough. Being “smarter” than everyone else you decide to jump out of that left lane and into the middle lane. You feel really good about your decision because things seem to be moving, right? Wrong. The middle lane stops moving abruptly and you find yourself coming to a full stop trying to jump back into the far left lane where you started. You anxiously wait with your blinker flashing while you watch a dozen cars move right past you, including the red minivan that was right behind you originally. Finally, you manage to sneak back into the left lane and you find yourself coming to a dead stop, yet again. You watch, as dozens of cars that were behind you are now moving ahead. Frustrated, you realize that you would have saved time and energy by avoiding vehicular gymnastics and by staying in your original lane from the start.
Interestingly, this story also applies to investing. Patience is the key to successful long-term investing. Make sure to do your due diligence on your selection of money managers, asset classes and sectors while maintaining proper diversification. Once you’ve done that, stay in your lane and you’ll be fine, not only will you very likely be further ahead, you’ll also experience less frustration along the way.
Special thanks to the red minivan that inspired this blog post.
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