There are so many benefits to investing.
It’s one of the ways we can achieve financial freedom and set ourselves up for the future.
However, many people think about it but are then afraid to start.
Some people feel they lack the skills and will make mistakes and lose money.
Others think it’s dangerous and don’t like feeling they’re not in tight control of their hard-earned funds.
Whatever the reason for your doubts, there is a way you can learn to invest that’s risk-free. You can find out what it’s really like and discover the potential benefits of investing without losing money.
It’s by using a virtual portfolio.
Today’s post is going to teach you everything you need to know about using a virtual portfolio to build your knowledge and your confidence.
I used a virtual portfolio when I first started to learn what factors I needed to consider when making a purchase of a stock or when selling a share. I still use them now to test different ideas. I’ve put some of mine at the bottom of this post to use as investment examples. (The related financial ratios I used as a stock screener are listed on a cheat sheet in my free resource library.)
They’re so useful and they’re fun!
What is a virtual portfolio?
A virtual portfolio, or a dummy portfolio, is a simulated collection of financial investments, such as stocks, bonds, commodities, cash and exchange-traded funds (ETFs). The idea is that you buy, sell, and watch them over time without committing any of your real money to them.
Why use one?
Quite simply it’s a great way to build a real life portfolio or a watch list of ideas to build your investing confidence without losing any money.
It’s a risk-free way of practising investing and finding out which strategies work for you. You can set up several different portfolios simultaneously and compare their performance over time.
I have a few that I use to test different financial ratios as filters for choosing my investments. You can see the results of a couple of them below.
The pros and cons of a dummy portfolio
Although making a virtual investment is not risky, in reality, this can be a disadvantage to your investing strategy!
I know it sounds crazy but sometimes it’s too easy to become complacent and not take your investing seriously. It’s way too easy to make investments virtually that you may not in real life.
This can affect the returns you get back and it’s possible that your virtual portfolio shows higher returns than you may really make.
Other disadvantages to a mock portfolio
- Fees. Sometimes a virtual portfolio may not account for any fees you’ll pay for when investing for real. Such fees include brokerage or trading fees. This means your virtual profits may be higher than in reality. However, it does depend on your simulation platform – some may allow for fees.
- Market conditions. Not all simulation platforms are the same. Some will be better than others at realistic simulation. In the real world, there are numerous factors that affect financial markets and some may be difficult to replicate virtually. In addition, a good platform will take account of the effects of global market conditions on your chosen index.
- No money at risk. This must be the single biggest advantage to a virtual portfolio. You can choose your markets and indices and play around without the fear of losing your money. Great for newbies but also useful for experienced investors. Phew!
- Builds confidence. Virtual portfolios are a great way of getting used to the investing environment and finding out what much of the financial jargon means. You quickly learn the common characteristics of companies you think are worth investing in, and those you want to avoid. The more you learn, the more confident you’ll get.
- Test your ideas. It’s a great way to test your strategies and ideas. I use mine to test different ratios for initially screening stocks. You can see the results below.
- Real time analysis. You can get first hand experience of trading in financial markets and analyse how your virtual investments are affected by real-time events such as central bank rate changes, environmental issues and politics. (I always find this really exciting…but I am a geek.)
All in all, I think a virtual portfolio is a great way to start investing if you’re a beginner. Just bear in mind the disadvantages.
What is virtual investment?
Before I go ahead and explain how to create a virtual portfolio, I want to highlight the difference between virtual investing and virtual trading.
What is virtual trading?
Also known as paper trading, the mechanism of virtual trading is very similar to virtual investing. In other words, you practice trading stocks, or other securities, without committing any money.
However, as in real life, the difference between trading and investing is in the intent of the buyer/seller.
Trading is a get-rich-quick scheme where you buy and sell securities fairly quickly and hope that you make a profit from the difference in the short-term price.
But investing is about making an income from your money and not risking your initial capital.
Short-term trades are purely speculative. Longer-term investing is based on a thorough analysis of the financial fundamentals of companies with a view to making future income.
The portfolios I’m referring to in this post are for investors, not speculators.
How do I make a virtual portfolio?
Creating a mock portfolio is fairly straightforward.
The best bit is many of them are free.
In the examples at the bottom of this post, I use the free portfolio tool on the Financial Times website but many others exist and work in a similar way.
The FT portfolio tool allows you to create choose virtual portfolio stocks, track their performance, view relevant news stories and see the main financial fundamentals. You can also compare the performance of your virtual portfolio shares with an index of your choice, such as the FTSE 100 or the S&P 500.
To begin, create a free account with ft.com. Select ‘Portfolio’ from the top right-hand corner. This takes you to the Portfolio Dashboard page.
Click on ‘new portfolio’. Give it a name and save it. There – done!
You’ve become a virtual portfolio manager!
Now to add some investments.
How do I add investments to my virtual portfolio?
The FT site is again straightforward and I’ve written these instructions for it. However, any virtual portfolio will follow a similar process, so even if you didn’t use the FT site for your portfolio, the terminology in this blog post is useful to get used to if you’re just starting out.
Click on the portfolio to which you want to add an investment. Click on ‘add transaction’
Choose ‘security’ from the Asset Type menu. Then begin typing in the name of your chosen company. You should see a list of relevant company securities.
You will likely see one type of security for each company. This is completely normal as firms often have more than one type of offering listed.
Sometimes, a virtual platform will use the same symbol as an exchange for your chosen firm. Others will use their own proprietary symbols.
In addition, companies list their stocks on more than one exchange, in much the same way a clothing retailer sells its clothes in more than one shop.
For example, the mining company Glencore lists its offerings globally. On the FT portfolio site, Glencore PLC listed on the London Stock Exchange (LSE) has the symbol GLEN:LSE, whereas Glencore listed on the Frankfurt Stock Exchange (FRA) has the symbol GLEN:FRA
Don’t worry too much about this at this point. The idea is that you choose a good company to ‘buy’ – the index is less of an issue.
Make sure you have today’s date in the date field and ‘buy long’ in the transaction field. Buy long means you’re buying a share to hold on to it for a relatively long period of time.
Then, type in the number of shares you want to purchase and the respective price per share. I always use the ‘use last’ option above the price field.
Add any fees you wish to account for, then you’re all set. Click on ‘Add Transaction’.
Boom! You’ve started your first virtual investment portfolio!
But, how on earth do you choose what to purchase from all those shares out there?!
How to choose investments
In most of my virtual portfolios below, I’ve chosen an index and then used my favourite ratios as an initial filter for stocks. (I’ve listed these ratios on a cheat sheet in my free resource library. Get the password for the library by filling in the form at the bottom of this post.)
From there, I investigated each company further by reading related news articles and company annual reports. These are often found under the investor relations section of a firm’s website.
If the firm then fitted in with the aim of my portfolio, I ‘bought’ some shares.
I created my virtual portfolios to test how my ratios work as an initial filter for long-term stock investments.
When creating your own portfolio, you may wish to consider these three main factors for each one:
1. Objective/time horizon
Think about why you want to make money from your investments.
Since interest grows exponentially (see my guide to compound interest), a longer investment horizon can result in higher returns than a shorter investment.
Longer-term investments also mean that you may be in a position to buy riskier assets since you will have the time to make back any losses that occur due to short-term stock market fluctuations.
2. Risk management/sectors
Portfolio risk is the chance that your investments won’t perform as you want them to.
I don’t mean that you’ve failed to become a millionaire, though!
I’m referring to failing to achieve your goal, whether it be not saving up enough to put a child through college, or anything else.
This is a huge topic even for professionals. But for now, it’s is enough to consider the various sectors that your stocks are coming from.
For example, energy companies tend to have stocks that are very volatile – the share prices experience large swings. On the other hand, stocks associated with food businesses tend to be fairly stable because we all need to eat.
So, if you stuff your portfolio with energy stocks, you may be in for an emotional rollercoaster. Virtually speaking, of course!
When applied to a virtual share portfolio, diversity is about not putting all your eggs into one basket.
Consider stock markets in different countries, different indices, and across varying sectors.
The idea behind diversification is to get a better return for lower risk. If one sector, index or country is having a bad day, another may be having a good one. This reduces your risk of losing money and it seems to work pretty well.
It’s a good idea to get into the habit of diversifying your investments before investing for real.
A well-diversified portfolio over a longer investment horizon is often advised.
Virtual portfolio examples
Here are screenshots of three of my virtual portfolios. All screenshots were taken on 1 July this year and show the overall portfolio status.
As you’ll see, diversification, investing for the longer term and reinvesting your dividends works pretty well. I’m really pleased with the results of these two portfolios so far. In contrast, you’ll note that the portfolio with a tiny selection of companies in the aerospace industry doesn’t do so well over this period.
I used the FTSE 100 as the basis for all the portfolios in this article as it contains the biggest and most well-known UK-listed companies.
I then used my usual financial ratios to filter the stock universe before researching further the companies themselves.
It seems to be paying off so far – notionally anyway!
Virtual Portfolio 1: 10 Jan 2014
This portfolio is a small selection of diverse companies listed on the FTSE 100. I chose them back in January 2014, hence the name of the portfolio. Not too shabby, eh? However, I’ve not touched it since 2014 so I need to update my research on these firms.
Virtual Portfolio 2: Actual
Another example portfolio of a small selection of firms listed on the FTSE 100. Notably, as the world receivers from the response to the COVID-19, the ‘wheels’ began turning again this year, driving the demand for commodities – hence the increase in the share prices of both BP and Glencore. The recent announcement of a buy out of Morrisons Supermarkets didn’t hurt either.
Whatever the reasons for its rise, I’m not upset about a return of 41%!
Portfolio 3: Aerospace & Defence
This is a deliberately even more limited portfolio because I wanted to see the results on the non-diversification of stocks. Consequently, these three companies are from the same industry and listed on the same index. The comparable portfolio result speaks for itself, although I was expecting worse. I suspect the downside has been limited by the fact that the chosen companies are all well-run firms.
Setting up a virtual portfolio is relatively easy. Finding stocks to add to it is definitely harder. However, I hope my examples have given you some ideas.
If you’d like to see what ratios I used for my initial stock filter, they’re listed on my financial ratios freebie in the resource library. [Get the password for the library by filling out the form below.]
Using a virtual portfolio is a lot of fun and is a great way to build your confidence to invest for real when returns and benefits are tangible.
Give it a go! I’d love to hear how you get on in the comments below.
Have you used a virtual portfolio? Do you recommend them? If not, why not?
FREE DOWNLOADABLE CHEATSHEET OF BENJAMIN GRAHAM INSPIRED FINANCIAL RATIOS FOR SUCCESSFUL STOCK PICKING
Get the password for the library containing the cheatsheet by filling out this form:
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