You're new to investing and want to pursue a small cap value strategy. You've read that value stocks and small caps tend to outperform over time and you, of course, would like to outperform.

Looking back at history, following such a strategy seems like an easy ride. An investment of $10,000 in 1979 would have grown to $829,578 in the Russell 2000 Value Index versus only $299,945 for the Russell 2000 Growth Index (annualized return: 12.9% vs. 9.8%).

In reality, though, sticking with small cap value was anything but easy. There were many periods in which value underperformed growth. In fact, in looking at rolling 3-year returns, value underperformed growth 33% of the time. That means value was deemed to be “not working” or “broken” in one third of all rolling 3-year periods.

This is where we are today. Value has underperformed growth by over 25% in the past three years. How many investors, given this backdrop, would choose value over growth? Not many.

And this is far from the worst period in history for value. At the end of February 2000, value had underperformed growth by 85% in the prior three years. Those selling value strategies at the time were literally laughed out of the room. We all know what happened next.

The moral of this story: all anomalies have cycles and periods of underperformance. It seems counterintuitive, but this is why they work in the first place. If there was a strategy that worked every month of every year, everyone would follow it and it would stop working.

In our 2014 paper on Beta Rotation, we illustrated a rotational strategy that outperformed the broad equity market in 80% of rolling three year periods. Notable outperformance, but this still meant the strategy was underperforming 20% of the time. And when you're in one of those periods, it can feel like an eternity.

How should investors think about periods of relative underperformance?