by Michael Tarsala
It’s true, stocks were down every day last week. And with volatility still not very high in the big picture, there is no sense yet of a capitulation that would set up the next big rally.
Some investors may be wondering if they should sell at this point, noting a long list of potential shocks that may be yet to come.
That might be the worst thing you could do.
Read this for background. The one mistake the average investor continues to make is dumping stocks after a selloff, then jumping back in after a rally. They buy high, sell low. And it’s hurting their performance.
I tend to think that many make a very similar mistake with money managers. They’ll dump a manager who is not keeping up with the market, and be attracted to the model that is rocketing past the S&P 500’s returns in one given year.
It’s true, performance matters. But you cannot judge a manager in the short term.
To the contrary, the short-term underperforming manager may be the one to buy; his or her performance may be more likely to revert to the mean. And the manager who is up huge in a given year may also revert to the mean, and be less likely to repeat their amazing results.
So how DO you find a money manager?
Ideally, you were set up before the current decline with a manger that tends to have low max drawdowns. That is, their strategy has done less bad than the overall market in past big declines.
The reason is simple: It’s hard to make up the big losses. The manager with a strategy to avoid the big loss is the one who is more likely to outperform in the long haul — and possibly do so while giving you fewer heart palpitations.
After all, investing is about managing risks, not managing returns, according to the father of value investing and author of “The Intelligent Investor”, Benjamin Graham.
So don’t just ditch your manager when he or she stops outperforming the market in good times, or over the short term.
You might want to think about it, though, if that manager has a consistently poor track record when the chips are down.
