As 2008 winds down, it is time once again to take that annual retrospective (and introspective) look at your investment portfolio.In " How to Measure Your Investment Performance," I presented my grading system for evaluating your investments. To refresh your memory, the following is my system. (Please note: Performance should be calculated after you subtract all fees and expenses.)
1. Style DriftMaintaining a consistent investment style, with a consistent benchmark, is one of the keys to laying a foundation for investment management and performance. However, there is a tendency to try to switch from a previously targeted benchmark to a different benchmark just because market conditions have changed. This usually occurs during periods with either very good or very poor market conditions. In the investment world we refer to this as style drift.
None of this is to say that you should not be flexible in your investment and risk management. But consistently evaluating how your investments stack up against your specific benchmark will require not falling prey to style drift. Bottom line: When the market goes wild, be careful how you play it because style drift may impair your judgment in the future, when a return to your core investment style would be optimal.
If your style is not to trade volatility or price ranges, then it is likely that your performance suffered this year. As I mentioned before, if you did not catch the twists and turns and volatility of 2008, don't worry. You were not alone.