The mythology of the all-knowing fund manager lost some of its power after 2008, when about 80 percent of actively managed funds posted greater losses than their benchmarks. Since that rocky year, many mutual fund investors have headed for the exits. Data from the Investment Company Institute shows that domestic equity mutual funds have experienced net outflows of $51 billion over the past decade, the bulk of which has occurred since 2008.

Many investors believe that professional money managers should always beat their benchmarks to justify their fees. But is this a realistic expectation? Two high-profile fund managers have recently made headlines because their funds have struggled, and their stories shed light on this question.

Bruce Berkowitz, manager of the high-flying Fairholme (FAIRX), has come under fire, as the fund has lost 9.4 percent this year. To call this “underperformance” is charitable; the S&P 500 has gained more than 6 percent year to date. To add insult to injury, last year Morningstar named Berkowitz fund manager of the decade.

Bill Miller, the legendary manager of Legg Mason Capital Management Value (LGVAX), has been raked over the coals for his fund’s poor performance in 2010 and 2011. The fund’s struggles fly in the face of the accolades Miller has accumulated during more than three decades in the business; Miller famously beat the S&P 500 for 15 consecutive years.

Miller’s checkered performance has ranked his fund near the bottom of its category for most trailing periods. The situation isn’t quite as dire for Berkowitz. Despite the fund’s recent stumbles, Fairholme ranks at the top 1 percent of its category on a three-, five-, and 10-year basis.

Miller and Berkowitz run concentrated portfolios comprising about 50 positions. They’re also well known for making heavy bets in out-of-favor sectors and unknown companies. And both men have faltered before. Berkowitz’s fund badly lagged the S&P 500 in 2003, when most funds thrived; Miller has run into trouble on a fairly predicable schedule.

These are just two examples of fund managers whose charges have hit tough times. But the market also abounds with funds that have picked themselves back up after periods of underperformance.

Yacktman Focused (YAFFX) is arguably one of the best mutual funds available today. The fund is ranked at the top of the large-cap value category on a three-, five- and 10-year basis and it consistently appears in The Rukeyser 100. But this fund hasn’t always been a perennial winner.

Yackman Focused ranked in the top 1 percent of its category in 2002. But over the following five years, the fund plummeted to the bottom of its category before finally rebounding in 2008. That half decade of underperformance largely stemmed from Donald and Stephen Yacktman’s decision to steer clear of bets in the volatile energy sector—a group that outperformed the market during the period. Additionally, management’s strict value philosophy means they won’t buy stocks unless they come at a bargain, a strategy that led Yacktman Focused to sit out rallies in the early and mid-2000s.

Heartland Value Plus (HRVIX) is another well-regarded fund with a troubled past. The small-cap fund ranks at the top of its category on a five-, 10- and 15-year basis, but its performance lagged badly from 2004 to 2006. At the time, Heartland Value plus held positions in technology names that were still reeling from the dot-com bust. The fund also made heavy bets on the health care sector, and though the investment thesis eventually proved correct, management mistimed these investments and performance suffered.

The track record for these funds demonstrates a heard reality. Investors eventually must recognize that every top-performing mutual fund, and even legendary fund managers such as Bill Miller, will experience periods of weak performance.

Method for Success

Mutual fund investors must adopt a long-term approach to investment. The catalysts may change, but markets have always run on boom and bust cycles; any fund that’s fallen out of favor today could be sitting pretty tomorrow. The easiest way to realize the full benefit of a mutual fund’s strategy is to hold the fund for an entire market cycle.

Many investors believe they can maximize profits by entering and exiting funds as market cycles shift. But timing the market is easier said than done. On top of that, the fees incurred by regularly buying and selling funds means that investors would likely be better off simply maintaining a well-diversified portfolio. Only minor adjustments that reflect an investor’s changing tolerance for risk are needed.

Investors must also remain coolheaded and recognize that investment strategies fall in and out of favor depending on the market’s cycles. Consistency is king and the best funds adhere to their investment strategy in up and down markets. All things being equal, a well-run fund that’s executed consistently will return to its winning ways once the market cycle shifts in its favor.

Finally, keep in mind that any fund that ranks in the top 1 percent of its category can’t maintain that performance forever. In fact, these top-ranked funds have nowhere to go but down.

Stock investors tend to buy a company’s shares when prices are high and sell when values are low, and mutual fund investors are no different. All investors tend to chase performance, which is ultimately a self-defeating strategy. If an investor is able to recognize these patterns, they stand a good chance of avoiding these pitfalls.