Journaling your investments is a tip that pops up a lot because it’s common sense. Aside from being cathartic, writing gives you an idea of how well you understand an investment.
And once written, you have a handy reference — a reminder of why you’re doing what you’re doing — for whenever an investment deviates from your expectations. It becomes a short term aid to help avoid typical emotional mistakes.
Writing it down also works in tracking your emotions. How did you feel about the market correction or spike in volatility or other latest market event? What action did you want to take? Did you follow through? Why or why not?
Because large gaps can happen between these events, and investors tend to forget, you now have a reminder of how you felt the last time it happened. You might even notice patterns of stupidity (or brilliance?) — your unique cycle of emotions — to help stop any repeated mistakes.
Gerald Loeb covers writing about investment in his book The Battle for Investment Survival. He refers to stocks but it works for any investments, asset allocations, or strategies too. Here’s what he had to say:
Writing down your cogent reasons for making an investment — what you expect to make, what you expect to risk, the reasons why — should save you many a dollar.
Years ago, in the early Twenties, I was initiated into writing down my reasons pro and con before making a purchase or a sale. This was suggested to me by an investor who had amassed many millions.
During about 40 years of investing in stocks my major successes were invariably preceded by a type of written analysis. Sudden emotional decisions have generally been disappointments.
Writing things down before you do them can keep you out of trouble. It can bring you peace of mind after you have made your decision. It also gives you tangible material for reference to evaluate the whys and wherefores of your profit or losses.
I have seen many analyses, some involving many pages of information. In practice, quantity doesn’t make quality. When all is said and done, there is invariably one ruling reason why a particular security transaction can be expected to show profit.
Writing it down will help you find it. It will help you judge whether it is really as important as your first inclination suggests. Are you buying just because something “acts well”? Is it a technical reason — a coming increase in earnings or dividend not yet discounted in the market price, a change of management, a promising new product, an expected improvement in the market’s valuation of earnings? In any given case you will find that one factor will almost certainly be more important than all the rest put together.
Writing it down will help you estimate what you expect to make. It is important that this be worthwhile.
Of course, you will want to decide how much you can afford to lose. There will be a level at which you will decide that things have not worked out and where you will sell. Your risk is the difference between your cost and this sell point; it ought to be substantially less than your hopes for profit. You certainly want to feel that the odds as you see them are in your favor.
All this self-interrogation will help you immeasurably in the much more difficult decision: when to close a commitment.
When you open a commitment, whether it is a purchase or a short sale, you are, so to speak, on your home ground. Unless everything suits you, you don’t play. But when you are called upon to close a commitment, then you have to make decisions, whether you see the answer clearly or not. The latter situation is like being stuck on a railway crossing with the train approaching. You don’t know what to do — but you have to do something. Go backward, go forward — or jump out.
If you know clearly why you bought a stock it will help you to know when to sell it. The major factor which you recognized when you bought a security will either work out or not work out. Once you can say definitely that it has worked or not worked, the security should be sold.
One of the greatest causes of loss in security transactions is to open a commitment for a particular reason, and then fail to close it when the reason proves to be invalid.
Write it down — and you will be less likely to find yourself making irrelevant excuses for holding a security long after it should have been sold. Better still, a stock well bought is far more than half the battle.
