I always get queries as to why we rarely churn the portfolio. We could always keep changing portfolio based on recent performance and convince you how much we add value to your portfolio. That is an easy path. Why we have chosen the difficult path? Why we prefer inactivity? Why we discourage you from chasing performance?
Based on our experience, we tell you that all funds and fund managers go through periods of underperformance. What matters is the long term track record and not a specific period of underperformance.
I recently came across a study done by Davis Advisors. They have found that all good investors, funds and fund managers underperform around one third of the time. The funds which ends up in top quartile over a 10 year period spends not less than 3 years in bottom quartile. During one third of the time, all long term best performers become worst performers.
We’re committed to provide you long term superior performance and not to keep chasing performance and provide suboptimal returns. Vanguard studies have also shown that performance chasing hurts long term returns significantly where as buy and hold strategy offer good returns. I’ve shared this Vanguard study earlier.
I also shared with you a study came in ‘Mutual Fund Insight’. If you’ve invested in a large cap fund in 2007 and kept changing the same each year based on the previous year top performer, you would have got an annualised return of 3.93%. Whereas buying a fund in 2007 and holding it for 10 years would have delivered an annualised return of 12.84%
Not that we keep quiet during periods of underperformance. We speak to fund houses and regularly keep getting their inputs. Most of the time we feel the issues are temporary and were subsequently proven accordingly. In rare instances, where we believe the future may not pan out well, we recommend change.
So please look at overall portfolio performance and not each fund’s performance. Since you hold around five funds, it is most likely one of them would always be going through a period of underperformance.
Our idea of value creation is not through activities. It is easy for us to do some tinkering frequently and show you action. We’ll never do that. What matters to us is you should reach your financial goals, build wealth and attain financial independence. We would hand hold you through various business and market cycles and help you reach there. We’ll do only what is required. Many a times not tinkering with your portfolio and not allowing you to do so in itself is a big value addition.
Don’t equate activity with progress. Investing is one area where activities should be minimal. Neither you should chase performance nor ask us to do it.
Underperformance is inevitable. Keep this in mind when you look at your portfolio.