Practice Makes Perfect

bullseye

A lot of people message me about great investment ideas after it’s already jumped 30 or 40 percent.  The real question I ask is, did you invest?  A lot of people just stock watch.  That’s all they will ever do and never put it into practice.  The reason for not trying for many people is fear.  The fear of losing money trumps all logical reasons to invest.  It’s not losing money when you gamble at the casino, because you are having fun doing it.  It’s not losing money when you buy an expensive phone that you drop and break 1 month later because you got some instant gratification from it.  We fear losing money on investments because we are short sighted.  We need instant gratification and for most people patience is a word that doesn’t exist in their vocabulary.

When you fear something you don’t do it, but if you don’t do it how do you know if you are even good at it?  Losing money on investments is actually a learning tool.  It teaches you want you did wrong and perhaps what you still need to learn in order to become successful.  Thankfully, there is another way to approach this and that is through practice.  It’s not uncommon for online brokerages to offer services such as an online practice trading account where you can test your abilities without the fear of losing money.  This allows you to try out the trading interface, understand how to buy and sell, without ever having to put any of your real money into play.

When you practice, it isn’t about trying to be reckless and gamble on things that you wouldn’t normally do  This is not the way you should be approaching this exercise.  Practising should be about learning how the online brokerage works for one.  There are many nuances that you might come across when trading and there will definitely be many terms that you come across that you might not understand.  What’s a limit trade?  How do I buy shares on the brokerage?  What are the high-low spreads?  When you start using the interface to trade equities or fixed income assets, you’ll soon learn that there are many new things that you have to learn.

A practice account is also a good way to stress test how an actual portfolio you build will perform over a period of time.  Are you comfortable with the fluctuations that happen on a day to day basis?  Are the ratios of the assets you bought appropriate to meet the goals that you set out?  I generally like to use my own practice account for this particular purpose.  It serves as a benchmark for my own portfolio because I sometimes decide to deviate, or I might change my plan, but I want to check out what would happen if I had stuck to my original plan.

Of course a practice account is all hypothetical.  At the end of the day you have to apply the same things that you learn from the practice account to your own investment thesis.  There is no purpose to the practice account if you are recklessly trying to gamble your way to riches because that is something you will probably never do with your own real money.  The practice account should be taken seriously.  Do you normally take practices with a grain of salt?  How often does it happen that things  blow up in your face once you have to do it for real?

If your online brokerage has a tool that allows you to practice trading and try out their interface.  By all means take advantage of it.  Regardless of whether you are successful at trading or just starting out, a practice account can help you avoid making real mistakes when it comes to the real thing.

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