One-year performance rankings are a poor guide when picking an adviser Past performance is about to lead you astray — in a huge way. That's because — if you’re like most investors — you will pore over the annual performance score boards in search of advisers who performed the best in 2014. And, on average, the advisers you end up following will go on to lag the broader market and lose a lot of money. Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by the Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than 17%. How could the winners have subsequently performed so awfully? The culprit is risk: The annual performance sweepstakes are almost always dominated by high-risk strategies that try to hit home runs every time at bat. Though, occasionally, those advisers hit a ball out of the park, more often than not they strike out, leading to huge losses for their clients. This crucial role that risk plays in one-year rankings is also evident in the dismal performance of another strategy that follows the previous year’s worst performer. That strategy has done even worse than the follow-the-winners strategy, producing an annualized loss of 52%. Given this fatal role played by high risk in this strategy, some have wondered about a modified version that is confined to low-risk approaches. It turns out that, while this has performed better than the unmodified strategy, it also leaves much to be desired. Consider a strategy introduced at the beginning of 1992 in No-Load Fund Investor, then edited by Sheldon Jacobs and currently edited by Mark Salzinger. Each year it followed the previous calendar year’s best-performing no-load diversified U.S. stock mutual fund. Over the next 19 years, the strategy only marginally outperformed the S&P 500, and it lagged the market over the last three years of that period — 2007, 2008 and 2009. The newsletter stopped recommending the strategy in 2010. You might think it odd that, since my Hulbert Financial Digest is in the performance-monitoring business, I would be emphasizing the folly of following advisers with the best track records. But note carefully that I am not saying you should ignore past performance; it’s just short-term performance that is so unreliable. How much past performance should you take into account when picking an adviser? There is no one set answer. Instead, as I tell my clients, they should focus on performance over a long enough period to encompass all the possible market environments they think are possible in the future. That’s because, when you focus on performance over a particular period, you are implicitly assuming that the future will be similar to the investment environment of that past period. These days, focusing on a one-year track record, for example, is an implicit assumption that the bull market will continue. When pressed, I typically mention a 15-year performance-monitoring period. That encompasses two powerful bull markets as well as the bursting of the Internet bubble and the Great Recession of 2008-2009. Among Hulbert Financial Digest-monitored advisers, the ones with the best records over that period are the Turnaround Letter (edited by George Putnam); the Investment Reporter (Marc Johnson); the Prudent Speculator (John Buckingham); Sound Advice (Gray Cardiff); Investor Advisory Service (Douglas Gerlach); and Investment Quality Trends (Kelley Wright). To give you an idea of the approaches favored by those long-term market-beaters, below are the stocks that currently are most popular among all HFD-monitored advisers who have beaten the stock market over the past 15 years. They are listed in descending order of popularity: Pfizer PFE, -0.03%Apple AAPL, -1.22%Chevron CVX, -0.19% Schlumberger SLB, -1.04% Union Pacific UNP, -0.37% You will notice that two of those five stocks are in oil-related industries. That’s not a surprise, since the long-term top performers tend to be contrarians; they therefore refuse to chase the stocks that recently have performed the best. We should do the same, not only when buying stocks but also when picking an adviser. Mark Hulbert