A portfolio is a group of stocks, a few or many, owned by an investor. A paper portfolio is the same group of stocks except that it uses theoretical money. The purpose of selecting stocks for a paper portfolio is to practice investing without risking any real money.
As a kid, you may not have the money to invest. But you can practice picking stocks and learn to keep track of your imaginary investments on paper. Even if you have money, it is a good idea to go through a learning process before you risk your cash. After the practice drill on paper, you will be ready to invest.
Select a diversified group of stocks from different industries so that your portfolio will fluctuate less and minimize risk compared to stocks from a single industry. With diversified stock, the price changes of each stock in a group tend to cancel out each other since some move up and others move down. Even though the legendary investor, Warren Buffett, lost over $200 million in investing in USAir stock, he still had a good year because he diversified. In fact, Peter Lynch had only two down years out of his outstanding thirteen-year career because he diversified.
For most individuals, a practical way to diversify is to have about the same amount of money in five to ten stocks of different industries. In the example below, Peter Lynch uses a theoretical $100,000 to buy stocks for a paper portfolio. He puts $20,000 in five companies of different industries. The table below shows his portfolio:
Source: Peter Lynch, Learn to Earn: A Beginners Guide to the Basics of Investing (New York: Simon & Schuster, Inc., 1995) 127.
Some of the stocks did not do as well as others. However, overall--look at the 72.6% gain! Peter Lynch still has that Midas touch, six years into his retirement. To learn how to setup a paper portfolio to keep track of gains or losses on the Internet, click here.