Well, no matter what you do in your professional life, you are the owner/manager of your personal investment business. And that being the case, your start to 2009 means reflecting on a lousy 2008, which should lead you to one simple question:

Should I fire my mutual-fund manager?

Under most market conditions, a 40% annual decline would be horrible performance that is immediate cause for dismissal. In 2008, that kind of loss was average for equity funds. And while an equity manager who lost 30% or 35% clearly was “above average,” it’s hard to feel really good about those results.

When investments go down 40% to 50% and the market delivers a harsh reminder that diversification doesn’t work well in cyclical bear markets, human nature wants to blame someone for what went wrong. That puts every fund manager who delivered poor results — relative or absolute — on the chopping block.

And yet investors are clearly in deer-in-headlights mode, unable to escape this problem or solve it. The market is providing no real safe havens, and even past heroes and old standbys were taken for fools by this crisis. Top long-term managers like Dodge & Cox, American Funds, Fidelity Investments and many others got gassed in 2008; they were every bit as horrible and miserable as the rest of the crowd.

There weren’t any new heroes, either. Plenty of middle-aged investors can recall 1987 and remind you that Elaine Garzarelli — working for what was then Shearson Lehman — called the valuation bubble that mushroomed into Black Monday. Never mind that Garzarelli never proved to be more than a mediocre fund manager when she tried her hand at it — she was a bright light in a dark time, and investors found solace and profits in her advice before, during and after the crisis.

Today, it looks to the casual observer like Wall Street’s emperors are naked; you’ll have a hard time finding a Garzarelli-like figure, someone who earned stardom by getting 2008 right. Some perma-bears and newsletter editors helped a small-scale audience, but most Wall Street luminaries got 2008 wrong, which makes it hard to believe in them now.

Which brings us back to the question of whether you should fire your fund manager?

Traditionally, the most crucial question for evaluating a fund has been “Would you buy it again today?” Alas, market conditions actually pollute that query, since it is pretty hard to honestly answer that you’d repurchase a fund that just lost one-quarter of your money, even if that result was above average.

It is almost a given they are always wrong.

During raging bull markets they don’t look so bad, but in sideways and bear markets they should have stayed in bed. This year’s bear had them hiding under their desks.

Fortune in the December 2007 issue had 100 no-load, low-expense ratio mutual funds. Of the 100 their pick for the best 6 were Artisan International (ARTIX), BlackRock Enhanced Income (BRISX), CGM Focus (CGMFX), FBR Small Cap (FBRVX), (Manning and Napier World Opportunities (EXWAX) and Oakmark Select (OAKLX).

These were the crème de la crème yet only the bond fund, BRISX (-14%) outperformed the Standard and Poor’s 500 Index that declined 36%. The experts picked those that were down from 40% to 51%.

Do not allow your broker or financial planner to come up with the sick story that your account beat the S&P; by a few points. He might think that is good, but you lost money. He had no plan to protect your savings.

Many people were down 50%. Don’t they realize the account must make 100% just to get back to even? If any broker allows a customer to lose this amount do you think he is smart enough to make 100% to get back to “even”? Las Vegas will take that bet any time.

Brokers and money managers are not taught money management. As a former brokerage company owner I can attest to knowing few brokers who know how to sell. This is especially true for mutual fund managers. Unfortunately many mutual fund charters require 90% of customers money to be invested at all times. There are many times when the market is going down there not only should be no buying, but the fund manager should be in cash. The customer will not be making money, but more importantly he will not be losing money.

The secret of stock market success is not buying – it is selling. Wall Street does not teach brokers to sell. Any investor who had a mutual fund this past year will corroborate that statement.

Any fool can be a smart (?) broker during a bull market. Few brokers know how to handle customer money during a bear market. It seems the worst of the bear is over, at least temporarily. Those who held their positions this long should probably stay in during this next run up. A broker with a strong technical background should be able to see the next top and have his clients run for cash.

For some of these managers, stashing cash has proved a valuable defense against the economic downturn. For others, boosting cash was a prudent decision at a time when stock valuations were too rich for their liking.

Whatever the reason, such moves in many cases mitigated the steep losses that other funds suffered in 2008. Of the 50 best-performing U.S. stock funds that reported cash holdings last year, the average portion in cash was 22.9%, while the median amount was 15.4%, according to data from investment researcher Morningstar Inc.

“[Cash] is part of my bag of tools to help manage people’s money prudently and safely,” said Ralph Shive, manager of Wasatch First Source Income Equity Fund, which has about 15% of assets in cash.

“Holding cash is part of my style, based on the business cycle,” said Shive, who typically holds between zero and 5% in cash. “I’m looking forward to a time when I can put it back in. I think about it every week, but I’m not there yet. We’ve got some serious structural problems.”

The manager of one of the country’s better-performing funds decided in August 2007 to build cash positions.

Since then, said Monem Salam, deputy portfolio manager at Saturna Capital, which manages the Amana funds, not much new investor money has been put into stocks. As a result, cash holdings of the Amana Income and Amana Growth funds have swelled from single digits to about 30%.

“We’re not selling to go into cash, but we’re seeing money coming in and staying in cash,” the fund manager said, adding that the few buys he’s made have been in stocks he considers defensive.

There are still some warning signs for the markets and the economy, Salam said, including whether financial institutions have finished writing down assets, how large the U.S. deficit will be and the scale of job losses.
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“Some managers do it right,” said Ryan Leggio, a Morningstar fund analyst, of those who have high cash positions. Leggio said Morningstar is “agnostic” about the strategy. He added that there are some “great managers we’ve long admired” who use cash heavily in their portfolios.

One of those managers is Rikard Ekstrand, co-manager with Bob Rodriguez of FPA Capital, a value fund that has just under $1 billion in assets. While the fund typically has cash holdings in the single digits or low teens as a percentage of assets, starting 2004 it began building cash, which peaked at 43.6% of assets in November 2007.

Ekstrand said that, as a value fund, FPA Capital has strict criteria about the stocks it chooses. “We just weren’t finding values good enough to deploy our cash,” he said. Still, the fund lost 34.8% in 2008 largely due to concentrated investments in energy stocks.

Investors do raise questions about when the cash levels jump, Ekstrand said, but the fund’s managers respond by explaining they can’t find the right opportunities.

“We hate cash, but we hate stocks that don’t fit our criteria even more,” he said. He added that the fund has been spending its cash “in earnest” since October, buying mostly energy stocks. Cash holdings have dropped to 32% of assets from 38% on Sept. 30.
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Yet the fact that some managers hold large amounts of cash and still collect a management fee for stock-picking may surprise some investors.

“When an investor initially invests in a fund, they probably do expect it to be fully invested,” said Morningstar’s Leggio.

But some stock-fund managers say holding cash is not their responsibility. They’re hired to be fully invested in stocks, and if investors want a place to park cash they can go to a bank.

“Our institutional managers don’t pay us to manage cash,” said Jason Farago, spokesman at Lord Abbett & Co. “Cash looks great in hindsight, but you then run the risk of missing the rally when the market recovers.”

“We believe that over a period of time, our [stock selection] formulas work,” added Frank Ingarra, co-manager at Hennessy Funds. “It’s all about time in the market rather than market timing.”

I believe that in time, historians will define the last twenty years in America as the “Age of Aspiration” where, thanks to unprecedented levels of credit, Americans could become anything they wanted. Where, thanks to 0% down debt and a seemingly robust economy, we could own bigger homes, fancier cars, and more lavish vacations – where our bounty was limited only by the boldness of our wants.

Well, I, for one, believe that our Age of Aspiration is ending. And, with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.

But I would suggest that few of us are prepared for this challenge. Why? Because abundance relieves each of us from having to prioritize what is important. When anything is possible, everything is possible. Few of us have really had to choose.

As I look ahead to 2008, though, I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained. And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past 20 years: “I can’t afford that.”

Among non-leveraged U.S. stock funds with at least $100 million in assets, none did worse than Bill Miller’s Legg Mason Opportunity Trust , which as of Dec. 30 was down 66% this year.

The second worst performer, according to Morningstar Inc., was Winslow Green Growth, which is down 62% this year. The third-biggest loser was another fund from Legg Mason Inc. (LMGTX), which is down 61%.

The losses of these funds represent a lag of roughly 20 percentage points behind their broader category — domestic stock funds were down an average of 40% in 2008.

Opportunity Trust, which Greg Carlson, fund analyst at Morningstar, said was Miller’s go-anywhere fund, enjoyed market-beating returns from its inception in 1999 until its streak ended in 2006. But this year’s losses are so heavy that the fund’s three- and five-year annualized returns are now deeply in the red, down 27.9% and 14.5%, respectively.

The second Legg Mason fund, Growth Trust, a large-cap growth fund, is managed by Robert Hagstrom, a member of the Legg Mason Capital Management team.

Both funds suffered because of heavy bets in financial stocks that collapsed in value. Opportunity Trust held shares of Countrywide Financial, which was taken over by Bank of America Corp., and IndyMac Bancorp, which was seized by federal agencies after being declared insolvent. What also hurt Miller was his misreading of the broader economic environment.

“He continued to try to position the fund for a recovery,” said Carlson. “[As well as financials] he was also buying and adding to his holdings in home-building stocks and Internet companies including Amazon.com Inc., Expedia Inc. and Yahoo Inc.” This year, Amazon stock is down 44.9%, Expedia has fallen 73.3% and Yahoo is down 47.3%.

Growth Trust dived into companies including Freddie Mac and American International Group Inc. But despite its poor 2008 showing, Morningstar is bullish about the fund’s prospects.

“Legg Mason Growth will soar again,” said Bridget Hughes, senior fund analyst at Morningstar, in a Dec. 17 report. “We’re confident that the fund will perform well in an upswing. In fact, since mid-November, it has gained more than 7.5%, putting it near the category’s top (and ahead of its Legg Mason siblings).”