Wise investors would resist the impulse to flee. A portfolio of hand-selected stocks or managers is supposed to deliver something the benchmark index does not. When the benchmark does well, the portfolio might trail it. When the benchmark does poorly, the portfolio might outperform. Reaching for returns that beat the benchmark requires the emotional discipline to stick with an investment manager through thick and thin, knowing that no strategy can beat the market all the time.
Even Warren Buffett, the billionaire head of Berkshire Hathaway who is followed by millions of investor devotees, has bad years. Newfound Research analyzed Buffett's track record and found he underperforms the broad index about once every three years and he's had 10 periods when he missed the benchmark by 10 percent or more over a significant period of time.
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But those who stuck with Buffett through the years have benefited from being patient. From March 1980 to October 2016, Berkshire Hathaway's A shares delivered annual return of 20.2 percent, nearly 10 percent more annually than the S&P 500, according to Newfound Research. On Tuesday morning, A shares of Berkshire Hathaway briefly passed $250,000, a landmark eclipsed 54 years and a day after Buffett bought his first shares of then-textiles company Berkshire in 1962.
This dispels the notion that short-term underperformance is bad. After all, would you fire Buffett from managing your portfolio just because one of his current investments has taken a hit lately? Buffett famously says investors should take advantage of downturns to buy what others are selling.