Practice makes perfect.
This article forms part of our Duelling Fools feature on dummy portfolios. You can read the case against here and tell us what you think in our Duelling Fools poll.
Are you comfortable with being an investor? I mean: really, really, really comfortable?
Because if you're not, it's infinitely better to find this out while nurturing a paper portfolio. And not when you've got real money riding the sort of investing rollercoaster we've had over the past couple of years.
And the stakes have never been higher. Because these days, don't forget, it's possible for investors to directly manage not just the stocks and funds that they hold in savings vehicles such as ISAs, but also directly control their pension pots, via self-select SIPPS. Which can be scary.
I've written before about transferring my Equitable Life pension fund into a self-managed SIPP. It's great when markets soar and your SIPP is showing a healthy profit -- but distinctly uncomfortable when markets dip, or don't do what one expects.
Risk-free zone
That's when investor psychology comes into play. And the evidence suggests that many of us don't handle the pressure very well, and make basic investing mistakes, allowing ourselves to be panicked into errors of judgement. Do you want to be panicked into making the wrong call when it's your pension at stake? I certainly don't.
Fortunately, thanks to on-line portfolio tools, building and maintaining on-line 'paper portfolios' has never been easier -- providing investors with a free education in stock selection and portfolio management, without putting a penny of their capital at risk.
Learning the basics
A paper portfolio is a good way of learning how to handle what might be called the normal day-to-day 'noise' of stock market investments.
On paper, a company in which you've 'invested' declares a rights issue, for example. What do you do? Whatever you decide, you'll learn from the experience. But with a paper portfolio, the lesson comes free.
Or, to take another example, the share price of a company you 'own' suddenly falls, on the back of director selling and economic bad news. Do you sell -- perhaps crystallising a loss -- or sit it out? Again, with a paper portfolio, your wealth is sheltered from any mistakes you might make.
Dividend re-investment is yet another good example. With a reasonably diversified portfolio, dividends will flow in. You don't have to re-invest them -- but the monthly (or quarterly) discipline of accumulating those dividends and deciding what to do with them focuses the mind wonderfully.
The psychology factor
Where a paper portfolio is most useful, though, is as a way of practising how you'll react when faced with potentially profit-sapping situations.
It's like being a pilot, practising in a flight simulator. An engine fails, right after take-off. Do you panic? Or do you calmly review events knowing that you've a carefully thought-through set of planned responses?
So knowing how you'll react when -- for example -- there's a profit warning, is a useful protection from panicked selling. The right answer might be to sell. But you want to have reached that decision rationally, in full possession of the facts, rather than blindly following gut feel or market momentum.
Proficiency test
My opponent, David Holding, may have pointed out that 'free' paper portfolios have a cost: while you're out of the market, you're not earning money.
I like to regard the situation differently. The novice investor is unlikely to be earning vast profits -- and far more likely to be learning through losses. A paper portfolio may not earn you any profits -- but it's a winner when it comes to protecting you from losses.
But how long is enough? In other words, when should you discard paper and go for the real thing?
It depends on the individual investor. And I find the flight simulator analogy helpful here, too. When you can handle the controls reasonably proficiently, and aren't thrown off course by unexpected events, then it's a good time to play for real.
Until then, there's safety in simulation.
What do you think?
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