Don't Kid Yourself
July 6, 2015
The mistake to which I refer is that of failing to keep track of their progress from month to month. It is not sufficient to check your gains or losses at tax time. You need to catch any mistakes you are making in your trading long before that so that you can make corrections.
Nor is it sufficient to go by "feel." Many times I talk to friends who tell me they're doing "pretty good" with their investing. When I challenge them to use the system I will describe below, they discover that they are losing money. Why the discrepancy? Because investors and traders tend to be like fishermen. They remember the big ones they caught and forget about the ones that got away. Selective memory...
There is a way to keep accurate track of how you are doing after costs and commissions that is so simple that I am amazed everyone doesn't use it. But in fact my informal survey shows that only about twenty percent regularly check their progress. The rest are either kidding themselves or they don't care.
If you have not added any cash or taken any cash from your account (or accounts) during the last month, it is very simple to get a quick, accurate read on your success (or lack of success). Account statements vary, but they all must have your opening and closing balance for the month. Subtract your opening balance (the account value at the end of last month) from your closing balance (the account value at the end of this month). Then divide the result by the opening balance.
If the result you got when you subtracted the opening balance from the closing balance was a positive number, you had a gain for the month. The number you get when you divide that result by the opening balance gives you your percentage gain for the month. If you got a negative number got when you subtracted the opening balance from the closing balance, dividing that number by the opening balance will show you your percentage loss for the month.
If you added or removed funds from your account during the month you should add or subtract that amount from your opening balance. Then proceed as described above, using this number as your opening balance in place of the opening balance shown on your statement. If the funds were added or removed in the middle of the month you will not get an accurate number if you try to annualize your monthly gain or loss. But you will get the most important information you need - whether your account is overall up or down for the month.
"But part of my account is invested and part is in cash. Won't that throw off the calculation?" Not at all. Most accounts contain both securities and cash. We are interested in determining the overall performance of your account. Cash is a position, too. If you made a decision to keep part or all of your account in cash, that decision has consequences just the same as if you had invested in equities. The calculation I have described will tell you whether your overall strategy is helping or hurting your financial future.
Some of us don't want to know the truth. "What if I do the calculation and find that I had a losing month?" If your loser followed three or four winners, you shouldn't worry about it too much. Almost everyone has a losing month occasionally. However, if you have three or four losing months in a row, you need to:
1) Change strategies 2) Get some investment training 3) Ask your spouse to handle the family investments
Some people don't care about the truth. Seriously. I have met people who have lots of money and refuse to check their progress because they're not in the market to make money. Some just like the excitement. Others like to brag to their buddies at the country club, "I bought 5,000 shares of IBM today."
Most of my readers are not in this category. Most of us do want to know the truth about our progress. I believe many people don't track their progress because they think it is complicated to do so. I hope this article has shown you that it is both simple and essential to check how your account is doing every month.
Remember, if a negative trend is developing in your trading or investing, the time to catch it is now. Every business owner worth his salt gets a financial statement from his accountant every month to see how the business is doing. Waiting until the end of the year is not an option. Trading is your business, whether you do it part-time or full-time. Should you do less?
Dr. Tom is a pastor, teacher, author, conference speaker and marketplace minister. He has been ordained for over 40 years, and has pastored in seven churches since then. Today he pastors pastors as he oversees ordained and licensed ministers in Southeast Florida for his ministerial fellowship. He speaks internationally concerning Biblical finance in churches, conferences, colleges and financial events. His passion is teaching, as you can see from this website, his business site (www.GoldenArtTreasures.com) and his patriotic site (www.ConservativeTruth.org).
Visit Dr. Tom Barrett's website at www.DrTom.TV
See more from Dr. Tom Barrett at www.ConservativeTruth.org