There are a number of reasons why one should create a mock stock portfolio. Here are my top 3:
#1: Find out how good you really are
Of course we're all good at picking stocks - we're intelligent and have a unique perspective that leads to the way we picking stocks. But is there an objective, scientific way of knowing that you'll make more money investing in stocks yourself, rather than investing in mutual funds or ETF? People may point to research that shows that ETFs and mutual funds perform better than the average investor. But am I really just an average investor? What if Warren Buffet fell for that line without trying?
Mock stock portfolios are one of the better ways to find out. You don't risk any real money and can still find out how good you are. Create one and measure yourself against some of the alternatives like an index fund or a few mutual funds. Don't measure yourself against stock investment newsletters that report their own performance - you can never be sure how accurate their numbers are.
#2: Learn from your mistakes
Having a mock stock portfolio, lets you learn from your mistakes without actually losing any money. You'll learn if you buy too early or too late, sell winners before you should or hold onto losers for too long. You'll know if you tend to focus too much on a few sectors, making your portfolio volatile. If someone offers you a free no risk trial period with your portfolio, wouldn't you accept it? A mock portfolio is quite the same. Even though you're giving up potential real profit, it's worth the effort.
#3: Test different strategies
Maybe you have different theories on what will make the most money. Should you pick growth stocks or rely on dividends? Follow the Dogs of the Dow or the Alphabet Portfolio? Each strategy has different ways of being implemented. You could rebalance the Dogs of the Dow every year so that all positions are equal, or you could choose not to. You could choose stocks that have a good dividend yield either because they increase how much they pay or because their stock price fell. Using mock portfolios will help you see how you perform with each strategy.
There are a number of websites where you can create mock portfolios. Make sure to choose one where you can place orders just like you would at a real stock brokerage. This lets you try out market and limit orders and allows you to test your money management skills. Xearn.com is a great place to create to create a mock portfolio. In addition to 3 benefits above, you also get to showcase your abilities and maybe even make some more money.
