How to Evaluate Your Portfolio This Year

3. Unforeseen Liquidation

If many of your well-researched and favorite stocks were abruptly sold off by "the market" this year, then you might have been a casualty of leveraged liquidations. This was particularly true for those energy, commodity and agricultural stocks that were owned by hedge funds.

In "Hedge Fund Liquidations: Five Things You Need to Know," I discussed how hedge funds could impact you, the individual investor. And in 2008 many individuals and "pros" felt the damage of hedge funds that needed to meet redemptions and reduce leverage.

While this may not seem to be rational behavior, we have to accept that it did occur and the impact is probably being felt in our year-end investment evaluation. However, do not throw traditional valuation to the wind. Eventually, the hedge fund liquidations will cease and security prices will revert to more normal behavior.

4. Fixed Income Is Not Risk-Free

Before 2008 it was conventional wisdom that fixed income investments were more or less "safe." But like the Discovery Channel's Mythbusters, the markets in 2008 busted the safety tenant of the fixed income myth.

Unless you invested in U.S. Government debt or obligations of certain states and municipalities, then you learned the hard way that losses in fixed income could be severe and, in many cases, more dramatic than stock market losses.

Many investors tried to chase yield by investing in mortgage-backed or low rated debt instruments. This may have been the root cause of underperformance in many fixed income or "blended" portfolios.

Your Homework

Calculate your annual investment performance for 2008. Make sure you compare your performance to a specific (and relevant) benchmark.

Determine the cause of your over- or under-performance this year.

Ascertain if you subjected yourself to style drift and if so, realign your portfolio to get back on track for 2009.