Investment records are better than memories

By David McEwen

Saturday 1st December 2001

Have you ever heard a good joke, made a mental note to remember it for future reference only to completely forget it?

How about that nice glass of wine you had at a barbecue recently that you would love to enjoy again, if only you could remember its name?

Sometimes your memory is only partial. You may recall the joke but it falls flat because you call the doctor a dentist. Or you get the name of the wine right but not the vintage.

We all have memory lapses and they can be frustrating. It's times like that most of us wish we had written the information down. This definitely applies when it comes to investment. The reasons why we buy or sell an investment often are quickly forgotten or hazy at best.

Was the best performing asset in your portfolio last year really caused by sheer brilliance on your part? Was the worst performer caused by simply a bit of rotten luck?

If you are the sort of person who struggles to recollect why they bought an investment, what they want it achieve and under what conditions they would sell, then it may be time to consider drawing up an investment template.

This can be as simple as a piece of paper with space for particular pieces of information. By filling in the template, you create a permanent record of what, when and why you bought an asset. Equally as important, you can record why and when you might sell.

This latter point is particularly significant because few people have a clear idea of when or why they should sell an investment. Ideally, you should decide your exit strategy before buying.

One major benefit of using a template is that it can improve your investment selections. Every time you have a major winner or loser in your portfolio, you can go back to your notes to find out what influenced your decision to buy. By learning from these, over time you should be able to increase the successful investments and reduce the failures.

You can tailor a template to suit you needs, but it should contain the following information:

Basic details of the investment's nature (date of analysis, asset name, type, price)
How this investment fits into the portfolio strategy (increasing diversification, growth, income)
Risk profile (high, medium, low)
Anticipated return
Percentage of portfolio to be allocated
Reasons for liking it
Things that could go wrong
Sell strategy (by a given date, if returns under perform the benchmark, price rises or falls by a given margin)
Action taken (number of units purchased, date, price)
It's amazing what a discipline this can bring to your investment selections. Filling in the blank for why you like an asset with "gut feel" or "hot tip from Uncle Brian" makes you stop and think - even more such purchases tend to be big losers.

The more specific you are, the better. Merely deciding to buy an asset because you think it will go up or sell when it goes down is unlikely to be.

Best of all, using a template means never again having to ask yourself, "Why ever did I make that investment?"

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

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