Annual review

2008 has drawn to a close. It's a year to forget in terms of my share portfolio, but luckily the appreciation of the dollar against sterling has resulted in an overall profit of just over 6%.

Over the course of the year my returns have come from 4 places:

• Interest on my dollars.


• Dollar / sterling exchange rate movement.


• Dividends


• Share price movements
  

The effect of these 4 on my total portfolio have been:

• Interest: +2%


• Exchange rate: +23%


• Dividends: +1%


• Share price movement: -20%

With hindsight, my best decision was made at the start of the year and was to avoid hedging the currency risk I faced. I've since decided that my decision was based on faulty reasoning, and that the "correct" thing to do was to fix the rate. So I think we can place that result firmly in the camp of luck.

My share purchases have substantially underperformed the market. I believe I've learnt from my mistakes and can apply greater discipline in the future.

Insufficient research

I made my first investment in RBS based on very little research. I didn't even look at the annual report. The P/E ratio was low, the dividend yield was high, and I listened to what management were saying without applying sufficient scepticism. I failed to assess the possible impact of a rights issue, and failed to think logically about the impact of the credit crunch.

I made a similar mistake with Taylor Wimpey, failing to correctly analyze the nature of their debt and the effect on their land portfolio that a sharp fall in house prices would have.

I've learnt two lessons here: that more research is required, and that I need to focus on companies that I can understand.

Emotional involvement

Having made faulty investments, and watched the share price punish me, I refused to accept that I might have made a mistake, and compounded my original error by averaging down. While spreading purchases over time is sensible, automatically purchasing more shares on a price drop is not.

I have ended up investing a very large amount of money in RBS, Zirax and TW, and these have been the worst performing shares in my portfolio.

In future I plan to be more cautious, leave much longer gaps between adding to an existing investment. I'd like to think that I will be more self-critical, but I doubt I will ever fully learn that lesson.

Excessive contrarianism

While I think being a contrarian is a good thing, much of the time the crowd is actually correct. I need to be much more selective about when I move against the crowd.

Portfolio

As of today, a week after New Year, my portfolio breakdown is:
GNK: 15.9%
IEEM: 14.2%
IAPD: 13.0%
IDVY: 12.7%
TSCO: 9.4%
RBS: 7.3%
NXT: 7.3%
BDI: 5.1%
MXM: 4.7%
QDG: 4.1%
ZRX: 4.1%
TW: 2.0%

The dismal performance over the year is as follows:

Actions

Looking at the portfolio breakdown, I think my next steps will be:

• Bring my investment in larger companies up to a similar level as GNK. That means adding more Tesco, Next and RBS.
• Take a decision on Taylor Wimpey. Either add to the investment or sell. I think I'll wait for the outcome of the debt refinancing.
• Add to my investments in IEEM, IAPD and IDVY. These currently constitute around 40% of my portfolio, and I want them to keep at least that ratio.
• Consider investing in US shares to increase my international exposure. Another dip in the Berkshire Hathaway share price would be perfect, since I don't want a large number of US shares.
• Avoid adding to my investments in smaller companies. My instinct is to double up on these, and I may do so at some point, but think I'll wait to see how they do this year.