Gaffer's Portfolio 

December 31, 2009

When you screw up, you can do one of two things: lie awake worrying about it and hope no one finds out or simply admit your error, however embarrassing. I choose to do the latter.

I said at the start of the year I chose the portfolio like a rank amateur. (Now I'm going to prove it - and perhaps that I'm not very smart either!) I selected 20 stocks and then realized one did not offer investors the ability to invest directly without going through a broker. I added a different company to the portfolio and forgot to remove one.

The result? We have been operating with 21 stocks, not 20. This means the initial investment should have been $21,000, not $20,000. And the monthly investment should have been $210, not $200.

Of course, this error affects the rate of return I have been reporting, making it higher than it should have been. Other than reporting of the initial capital - which has always been reflected correctly in the totals - it did not affect the cash value, just the percentages of gains or losses reported. This has now been corrected effective from December onward.

One option was to remove one of the stocks, but that would provide unfair human intervention in that I would get to choose which stock to drop after seeing the results for a full year. It would remove an element of fairness from the test.

I have chosen to keep all 21 stocks and have adjusted the figures this month to reflect the additional capital and the extra $10 a month investment in the annualized rate of return. The fact that the portfolio is now operating with a company that would otherwise be disqualified does not, I believe, invalidate the test.

The test is to prove beyond any shadow of doubt that The Gaffer Wealth System works. And it still does even after being corrected. It is still comfortably ahead of the S&P 500's excellent performance.

In the next several hours, the portfolio will get its first annual rebalancing. Watch for that here in a day or two, setting us up for a year that is likely to be less rewarding. The gains we have been enjoying must stop sometime; expect a market correction some time soon.

Then my guess is that we will go on to record highs in the next couple of years due to U.S dollar deflation and increased productivity with a smaller workforce. But don't act on guesses; stay within the system and it really does not matter much what the market does.