This behavior could be the result of collective thinking that active fund managers are expert stock pickers possessing "special" skills that common investors don't have. Also, many people believe that active managers have access to "special knowledge" that is not available to common investors.
And, because even a small amount of out-performance can have a meaningful impact on the value of their portfolios over time, everybody wants to get that extra slice of the pie. Lastly, nobody wants to be an average investor because performance is in-grained in all our activities from the very beginning.
These alpha-seeking investors may spend significant time and effort trying to identify potential winning managers and their funds. But, of course, there is a flip-side to the coin that many investors overlook. People get so mired in the short-term performance chasing mentality that they lose perspective on the long-term success of their portfolio.
According to the Vanguard's case study titled The Bumpy Road to Out-performance, funds that out-perform their benchmarks are often inconsistent for the excess returns. This is a particularly pertinent issue for any investors who use historical returns as a primary basis for hiring and firing managers.
Vanguard looked at the 15-year records of all the actively managed U.S. domestic equity funds that existed at the start of 1998. Vanguard found that not only are long-term out-performers rare (only accounting for only 18% of the funds), but they also experience numerous and often extended periods of under-performance leading to the bumpy ride. Nearly every one of the successful funds under-performed in at least 5 of the 15 years through December 2012. Furthermore, two-thirds of them experienced at least 3 consecutive years of under-performance during that span.
Link to this study is here.
[…] BUT, research has shown that higher performance equates to bumpy performance. […]
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