Set Up a Play Account and You May Even Learn Something
Smart investors in the stock market know that they need to sit tight with their investments for at least three to five years before they are likely to reap gains. In fact, it's far better to wait 10 years or more because that's when stocks really shine against competing investments, such as bonds or money market accounts.
But the urge - read greed - for short-term gains is there in all of us. TV shows, investment newsletters and magazines enjoy mass popularity because they regularly tout "hot" stocks of the month, quarter or year. The truth is that no one knows how much stocks will gain or lose in so short a time frame. But investors continue to dump money into flavor-of-the-day stocks and stock mutual funds, expecting big gains in no time.
While that's not a sound strategy, there is a way to have your cake and eat it too. Set up a separate account for "playing" rather than investing in the market. Know well in advance that you may lose every cent in this account given your short-term focus. Perhaps the safest thing to do is set up the account at a different broker and even label it, "play account." That way you won't confuse recreation with investing.
Put only a small amount of your total assets in this account and never add to it in order to keep your potential losses to a minimum.
With this "play account" you can test whether the "brilliant" tips your sister-in-law gives you are right, whether you can time the ups and downs of the market, or make gains large enough to offset commissions and other trading expenses. Most professors of finance and studies contend that you can't succeed using any of those strategies.
Bottom line: If you actually make money with your "play" account, congratulations. If you lose, even better. You'll learn that your long-term investment approach in your real investment account is the way to go.
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