Patience is a virtue, right?

I know this is not politically correct commentary. Investors and advisers don’t want to hear that their financial downfall is their own fault. If they buy a fund and it fails to make money for the investor, then surely it’s the fund manager’s fault. Right?

Not necessarily. Investors are chronically prone to pouring money into a hot fund, and then yanking it back out again at the slightest sign of underperformance.

Advisers are usually no better since their job is to keep clients happy, and clients want the latest hot fund. Investors earn, on average, a far lower return than the market average, even after adjusting for the fees of mutual fund managers.

Most investors and advisers need only look in the mirror to find the source of their underperformance.

Among the many pieces of research that back up this point is a recent study released by Litman/Gregory Asset Management of Orinda, Calif. Litman/Gregory manages money for clients using mutual funds, and it also manages a series of multi-manager mutual funds called the Masters Select funds.

The firm publishes the No-Load Fund Analyst newsletter that has garnered top performance awards for many years. I have been a follower of Litman/Gregory’s research for a number of years and among their hallmarks is a disciplined and rational approach to selecting and investing in funds.

Litman/Gregory took a look at the long-term performance of some of the best-performing fund managers. These are fund managers that, over a 10-year period, have beaten market benchmarks by at least one percent per year, annualized.

These are the stars of the mutual fund world. The question was: To what extent did these star managers experience extended periods of underperformance and by how much?

A manager that rings up a three-year period of underperformance will test the patience of any investor. If that investor leaves the fund, he misses the opportunity to profit from a later recovery.

It turns out that, among funds with a ten-year outperformance track record, more than 90 percent of them had at least one rolling three-year cycle where they underperformed by at least 2 percent per year. Two-thirds of them underperformed for a three-year period by at least 5 percent per year.

Now, be honest with me: Would you have stuck with those managers? I’ve got some funds in my model portfolios that are working on two-plus years of underperformance. Why do I stick with these managers?

I keep them for the same reason I bought them in the first place. I don’t buy funds based strictly on recent performance. I do not consult Morningstar ratings. Buying a mutual fund is more akin to hiring a vice president of finance than buying an investment.

You need to know something about that person, and what makes them tick. How do they pick stocks? Do they have a plausible edge over the market, and is that edge expected to sustain over time?

If you like the answers to these questions, then you decide to hire the manager. However, if the fund underperforms, you will need to revisit these questions.

Is the underperformance due to the market not favoring the manager’s approach, or did the manager lose discipline or alter his approach? If I am convinced that the manager has retained its discipline in the face of a fickle market, I stay with the fund because I am highly confident that I will be amply rewarded when the market tide turns.

To quote the study: “The results of our study tell us that on the road to long-term outperformance, not only should we expect underperformance, we should be prepared for it to last for years.”

The best managers will go through periods of underperformance. When that occurs, you need to ask the same questions you asked when you bought the fund. If you bought it solely because of recent results, you didn’t ask the right questions the first time.