Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Knowing why you’re investing matters to how things turn out.

GameStop mania, for all its colorful “diamond hands” lingo and “Roaring Kitty” characters, has highlighted the plainest but most important rule of investing:

Have a well-defined reason for making an investment in the first place.

With any fund, ETF, or option purchase or broader asset allocation strategy – you should be clear why you are committing your capital. Without that clarity, it’s too easy to get swept up in the emotional currents of the market and suffer significant losses.

The extreme movements and fast-shifting developments at GameStop and other Reddit meme stocks highlight why it is so important to know why you got in so you have some assurance of profitably getting out.

The 3 x 5 index card test

You should be able to write down, on a 3x5 index card or similarly sized digital equivalent, the justification for putting money into a stock or allocation strategy. The test of putting it on a 3x5 card forces you to distill your thinking to a concise, articulate reason.

You can and should spend time doing in-depth research. However, limiting your justification to the space of a 3x5 card insures you are focused on the most important issues. It also provides a permanent record and benchmark to measure your success.

Include such details as:

  • company name, stock symbol, date, and price;
  • the thesis or catalyst behind the idea;
  • some metric of success (target price/expected gain/growth measure/etc.); and
  • source of the idea, if identifiable (web story/broker research/product experience/observed trend/random inspiration).