2007 in review

2007 was a bad year.

It was mainly bad for a number of personal reasons but it was also bad for my portfolios. 2007 was a bad time for me to go overweight banks and dabble in real estate for the first time.

The FTSE100 only managed a 4% gain but none of my portfolios managed to beat it.

The best performer was my nest egg portfolio which managed a 2% gain. The star stock was Gilead Sciences which gained 25% in less that one year. My worst decision was to sell my Google shares in August, missing a 20% rise! I used some of the proceeds to buy into British Airways which is now down almost 20%. Ooops!

My mortgage portfolio did OK, only losing 3% despite containing banks and a REIT. The star performer was Genzyme which gained 20%. My best decision was to double down on Genzyme - a decision that was richly rewarded in the second half of the year when Genzyme went up while the market was going down. My worst decision was to buy into a second bank and a REIT in the first half of the year before the credit crunch set in. If I had invested the money in commodities stocks instead the result would have been so different.

My college fund portfolio spent most of the year just containing two banking stocks and consequently performed appallingly. The performance was broadly inline with the UK banking index - down about 30%! Thankfully I will not be needing these funds for a long time and it is just a paper loss. My worst decision was to sell Vodafone and buy RBS. The Vodafone share price then had a great year and the RBS share price had a terrible one. My best decision was not to buy into Northern Rock!

So what are the lessons from 2007?

1) Do not sell a stock that is performing well to catch a falling knife. This refers to my decision to sell Google to buy into British Airways and CSR. Both these stocks had further to fall while Google went on to have the rally that I had been anticipating but had lost patience waiting for. Selling a great stock just to raise funds to buy into a falling stock is a risky business.

2) Diversity wins. My nest egg and mortgage portfolios were held up by my technology and biotech stocks, despite having significant exposure to banks. My college fund which only had banks got hammered. Having said that I think my college fund will be OK in the long term as the two banks it holds are top quality ones that are still profitable and the share prices will recover sharply when the credit crunch starts to ease.

3) Consider investing in an index fund. In the last two years only one of my portfolios outperformed the index over 12 months and none over two years. While it would be boring to give up stock picking if I consistently under perform then I will have to put at least some of my portfolios into an index tracking ETF.

2007 has been bad. If bank stocks recover somewhat this year then 2008 will be a lot better.