Market-lagging performance, writes Mark Hulbert in a recent MarketWatch article, is not a good enough reason to fire your adviser.
It’s extremely difficult, Hulbert says, to beat the market by “picking individual securities, ETFs or mutual funds—even among those with stellar track records for past performance.” He argues that, even those advisers and investment approaches that outperform will suffer periods of lackluster returns over the long-term.
Hulbert cites the example of Warren Buffett and Berkshire Hathaway, noting that over the last eight years the legendary investor has “lagged the S&P 500 by 2.7 percentage points a year on an annualized basis.” Hulbert argues that an eight-year track record might seem like a long enough period for an adviser to show his prowess, but argues, “such a standard would have you fire Mr. Buffett.”
While Hulbert admits there is no foolproof way of determining whether to stick with an adviser, he says, “It’s easier to say what we shouldn’t do: React emotionally and impulsively, which is the universal temptation in the face of many years of market-lagging performance.” He says that if an investor can’t stick with an adviser for ten years of underperformance, they would be better off in an index fund.
“The relationship you are entering into when you pick an adviser,” Hulbert concludes, “is far closer to a marriage for life than it is to a one-night stand. You should behave accordingly.”