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BULLS & BEARS: A resolution for new year: Give portfolio a checkup

January 15, 2007

The gyms are full, Slim-Fast is flying off the shelves, and the closets are scheduled for cleaning.

Human beings regularly view the turn of the calendar as an opportunity to take stock of their affairs, and to vow to change things that need adjustment. So, add to your agenda a review of your investment program.

This annual checkup will include an assessment of the performance of your portfolio for 2006. But it is wise to reserve your harshest judgments for an analysis of investment performance over a period of years-say three to five, at minimum.

Your investment performance can be calculated from your brokerage statements, or if you use investment professionals, they should provide these figures to you-just make sure the numbers are calculated correctly.

Recall the famous incident of the Beardstown Ladies, whose 23-percent annualized return from 1983-1994 was lauded in books and videos. They became celebrities, hitting the talk show circuit and offering up their track record as proof the average investor can thrive.

Upon further review, it was exposed that the Beardstown group actually had counted their monthly contributions as part of their overall investment return. Adjusted for contributions, their results sank to 9 percent annually, well below the 15 percent the S&P 500 index returned over the period.

Once you have your performance numbers in hand, there are several indexes, or benchmarks, you can use as a comparison to your returns. This check can assist you in your effort to see if you have at least achieved the average overall return an index fund can provide.

The most commonly cited index today is the Standard & Poor's 500 index, which is viewed as a close proxy for the aggregate stock market performance. However, depending on the structure of your portfolio, you might want to select a few other indexes that measure small stocks, foreign stocks and even bond performance.

The idea is to scrutinize the effectiveness of your investment program over a period of years. If your results habitually lag a comparable index long term, you most likely should change your investment strategy.

If you are using mutual funds, brokers or other outside money managers, you should hold their feet to the fire. These professionals are paid well for managing your investments-are they earning their keep?

Also, recognize that there isn't a precisely correct way to manage an investment portfolio, but that a dose of common sense goes a long way. Things to avoid include chasing hot stocks and excessive trading. Also avoid high-cost investment programs where the manager just assembles a portfolio similar to that of an index fund.

Whether you make your own investment decisions or have others do it for you, the proper temperament is necessary. You need patience to wait for good investment opportunities, invest for the long term, and keep preservation of capital at the forefront of your mind. And even then, the very best investors encounter periodic bouts of underperformance.

Your annual investment review can provide peace of mind that you are on the right track. And knowing so will reassure you during those inevitable market downturns that occur from time to time. If you feel the task is overwhelming, seek qualified professional help.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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