What are the best tools to use if you want to grow your money? A journal is probably not the first thing that comes to mind. But there are four reasons that a little time spent journaling will be a great investment.
1. Clarify your purpose
A lot of smart financial habits are hard to stick to—spending less than you make, investing consistently, ignoring your coworker's hot stock tip. You won't keep these resolutions if you aren't clear about why you're trying to keep them.
Our suggestion: fill up the first pages of a journal with the reasons why you save and invest. You could be using that money to buy a deluxe espresso machine or a fancy exercise bike, but you're not—why?
You may have a goal that you're trying to reach—a home, retirement, a fancy exercise bike. Write down why that goal is important to you. What will it feel like when you reach it?
You might think that these are unimportant details, but they're not. You're trying to realize in the present, the excitement that you'll feel in the future. Detail is important. Even if your goal is more general—for instance, growing your money—write down why you're excited for the financial freedom that this money will bring. What possibilities will open up to you because you were saving and investing?
Why it helps: Every day we feel the pressure to spend money—we respond to a fridge that needs refilling, the latest Apple release, the miracle of 1-click ordering. But we are rarely reminded to save and invest. If you've written down why saving and investing are important to you, you've given yourself a fair shot at inspiring yourself to achieve your desired financial future.
This is one way to avoid “present bias,” our habit of taking smaller immediate rewards (the joy of clicking that “Buy now with 1-Click” button), over larger later rewards (having enough for that down payment). Later rewards seem undefined and distant. Your investing journal reminds you of the gain that awaits you for your pain.
2. Strengthen your plan
If you started investing with an investment manager such as RBC InvestEase, you were asked a series of questions about what you were saving for and how long you planned to keep your money invested. In your journal, write down the answers to these same questions once you have identified your goals. The answers will provide you with your investment plan.
You may be making regular contributions to your investments based on the belief that you'll stay on the same career path, make a stable or increased income, and that your expenses will remain steady. But, if you've been smart and decided to invest for the long-term, those conditions will be variable. Write in your journal about what you will do if you lose your job, if your car breaks down, or if a meteor hits your patio and destroys all your furniture (okay, maybe that's overkill).
What could happen that would prevent you from staying invested for the length of time you planned on? How could you cushion or even avoid the blow of those events?
A journal can also be the place in which you reflect on how much risk you've taken in your investments. When the economy is good and markets have been trending up, it's easy to say we'd be okay with temporary, large losses in our portfolio. It's decidedly less easy to actually experience those losses. Write down what you plan to do when an inevitable market downturn hits, and why your plan is a smart course of action.
Why it helps: This journaling exercise works to expose potential leaks in your boat. With any luck, your journal will prompt you to take advantage of one of the best ways to insure yourself against the unexpected: an emergency fund, which should consist of three to six months of funds that you set aside in case an unexpected event tries to derail your plan.
And when you see the value of your portfolio declining, you can go back to your investing journal and read a note about what you committed to doing in this scenario. One of the best ways to stop your emotions from getting in the way of good decision-making is to get clear ahead of time about what you will do in stressful scenarios. It will be a lot easier to be told what to do by someone if that someone is a calm and clear-headed you.
3. Clarify your thinking
Before making major financial decisions—especially those that don't jive with your long-term plans—think about what advice you'd give to a friend. When we take the perspective of a trusted advisor, we make wiser decisions because we take an objective view that sidesteps our emotional biases.
Giving advice to a friend also means that you must explain your decisions. What evidence convinces you that this is the right course of action? What do you expect to happen if your friend takes your advice over the next six days, six months, six years? What might be a few arguments against taking your advice?
Why it helps: When we take the time to write down the reasons for our decisions, we may realize that a decision doesn't make as much sense as we thought it did. At the same time, listing counterpoints can help offset “confirmation bias,” or our tendency to focus only on the information that supports our views.
4. Create a reliable record
Even if you've clarified your plan, your purpose and your thinking, you'll still make mistakes. And that's okay. And it's even better if you are able to learn from those mistakes. That way, it's like you're paying tuition instead of a fine on your way to becoming a smart investor.
Review your investing journal from time to time to see what the actual outcome of these decisions were. Were you led astray by fear, greed or overconfidence? Or did you make the best decision you could based on the situation? The point isn't to make yourself feel badly, but to understand where and why you made mistakes so that you can learn to avoid them.
Why it helps: This process helps to tame something called hindsight bias, our tendency to think that it was obvious at the time that things would turn out the way they did. We're prone to hindsight bias because memories aren't retrieved, but remade. Our memories are based on both past and present experiences along with our desire to cast ourselves in a positive light. We're only able to learn from past experiences if we can remember them accurately. An investing journal helps us to do that.
And, since you have many years of investing ahead of you, it's worth it to create a personal history of your investment ups and downs. Looking back on these times can help put events into perspective. Just like looking back in our diaries to when we were younger, a lot of stuff that seemed to matter a ton when it was happening, ends up not mattering at all.