- Few strategies outperform all the time, and you should thoroughly understand why and when underperformance is most likely to occur.
- Value-oriented strategies tend to perform poorly during economic recessions.
- The first step when a strategy fails is to compare the economic environments in which the strategy failed in the past, and to determine if the current environment is similar.
- When historical economic precedent can indeed explain the performance of a strategy, then the investor should probably continue using the strategy despite poor short-term performance because attempting to time different strategies can be a very difficult task. Short-term performance is typically very misleading, so the probability is reasonably high that you might give up on a strategy just before it begins to work again.
- If the economic environment is not one in which the strategy has historically fared poorly, then the next step is to be somewhat introspective. Is it I, the investor, or the strategy that is failing? Simply monitor the performance of the strategy’s entire portfolio versus that of the stocks selected by the investor. If the performance of the stocks is inferior to that of the entire portfolio, then the investor detracted from the strategy’s basic performance.
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