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By Shehryar Khan, CFA |

My fund underperformed this year, now what?

Evaluate your investments over longer time horizons, and remember why you chose them before making any changes.

Shehryar Khan: As the end of another year approaches, it is common for most people to spend the time during the holiday season reflecting on the year gone by. A common question we get is, "my fund underperformed this year, now what?"

Here at Morningstar, we are always reminding investors to only look at results over the long term. As my colleagues have pointed out previously, investors are often their own worst enemy. But that still leaves us with the question: over what time period should you evaluate the performance of an investment manager?

The first thing we suggest doing before comparing your fund's performance to its benchmark is to remind yourself why you purchased a particular strategy. Was it meant to be a conservative backbone of your portfolio? That will always help put the performance in context. A more conservative fund, for example, should prove its worth when markets are in a downturn, but will likely lag its peers and benchmark in stronger markets when more cyclical names might outperform. In this context, underperformance should be expected, and not a disappointment.

Remember, truly active funds that look different from their benchmarks, should have differentiated results in any given year: That is how they have a chance at outperforming over the long-term. Evaluate your investments over four- to five-year time horizons, and keep their approach and fit in your portfolio in mind before making any changes.

For Morningstar Investment Management, I'm Shehryar Khan.