Sometimes it can be helpful to practice before you do something for real. Pilots in training, for example, often use simulators to learn how to deal with difficult weather. Even budding bicyclists generally start out with training wheels. In investing, too, some practice can be useful -- especially via mock portfolios.
I've written about mock portfolios before, but I recently ran across an eloquent post about them on our Retirement Investing board. Permit me to share it with you. RetiredVermonter said:
Years ago, when I first started dabbling with investing (in my IRA and outside of it), someone wisely suggested I set up "make believe" portfolios first. It was a big help.
Sound stupid? Not at all. You can do this easily on line -- within Yahoo! (NASDAQ:YHOO), for example. Start looking at stocks, researching them, doing your "due diligence," as we say, and maybe you'll get the idea you might like to try your hand at investing in some of them -- long or short term. However, before putting real money into anything, why not see if you're going about this correctly?
Say you see one stock (call it XXXX) that sells now for $5 per share and you think it may go higher, for whatever reason. Do you rush in and put real money into XXXX? Sure, you might, but, if you're new at this, why not first set up a "make believe" portfolio on Yahoo (or wherever) and pretend to "buy" 500 shares and then see how it does? It will cost you nothing and will give you a chance to see how good all your prognostications are!
Track it by setting up parameters that let you see what you paid and when, and watch the stock(s) go up or down, over whatever period of time you choose. Then study and look at some more stocks. Check news about "hot" stocks, if you like, and then do some digging to see if those "hot" stocks have any real reason (in your opinion) to continue to grow. If so, "buy" (pretend) some of those in your make believe portfolio, too!
Keep studying and learning, and watch how your picks do. After a few months, you may get a handle on what you've done right or wrong, and then maybe you can stick your toe in the water and buy some real stocks, or you may decide that you just don't have the time or interest, so you'd be better off just parking your money in some good mutual funds, CDs or wherever.
To that, I say "Amen."
So did some other board denizens. Adenovir, for example, added some excellent points:
I agree that make believe portfolios are a great way to get started. I often use these to test out new ideas. I also think that the next step is a real portfolio with very small amounts of money (whatever counts as 'small' to you). There is something about having real money on the line that changes the whole psychology of the thing and really motivates you to learn. Think of any money lost here as 'tuition' at the school of investing.
Dougdoogle then noted: "And don't forget to include commissions, just to keep it accurate." That's another excellent point. We advise trying to keep your commission costs around 2% or less of your trade. So if you're paying a $10 trading commission, try to buy or sell at least $500 worth of securities at a time. With $25 commissions, aim for $1,250 or more.
TMFCramerica then jumped into the discussion, noting that he started investing via mock portfolios himself, and then introducing a brand-new Motley Fool offering, one we're very excited about. It's Motley Fool CAPS, where investors help each other to beat the market.
At first blush, CAPS may look like a game; participants pick the stocks they think will go up or down, then get rated and ranked for their efforts. But CAPS is much more than that. It's a valuable research tool you won't find anywhere else, aggregating the opinions of (eventually) hundreds or thousands of investors about lots of different stocks. It can help you quickly see which stocks have the most fans, and which ones don't.
If you're interested in, say, China Mobile (NYSE:CHL) because of how many cell phones the Chinese population will eventually buy, you can check it out at CAPS. When I did so, I saw that it had 31 players thinking it will outperform the market, and none with the opposite viewpoint. Several players had added "pitches" explaining why they like the company. When I checked on Apple Computer (NASDAQ:AAPL), 355 players expected it to outperform, with 79 expecting underperformance. Google (NASDAQ:GOOG), meanwhile, had more bears (166) than bulls (148).
TMFCramerica noted:
CAPS provides users with a great way to track all potential investments. Your pick list can function as a temporary watch list of stocks. And you can even see how your pick list will rate against all other users. So consider it a super-charged watch list.
Best of all, you can track the picks of those with the best track records. Learn more in this interview with Fool co-founder David Gardner.
Happy investing, Fools!
Yahoo! is a Motley Fool Stock Advisor recommendation. See Tom and David Gardner's full list of Wall Street's top investing opportunities with a free 30-day trial.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool has a full disclosure policy.
