How Much Should I Expect To Make A Year?
Posted by Pete Stolcers on June 17, 2006
Option Trading Question
Today Rich asks such a great question that I will post it all. “This is more trading goal oriented. I would like to setup goals to measure progress. Is this a good idea? What can be reasonably expected as far as a rate of return? I hear about these great trading systems that will make me a gazillion percent return. I've read articles about professional traders that try to beat the return on bonds or to generate 12% a year no matter what the markets do. These are very low returns compared to what the people trying to sell me their products claim. What would be considered a reasonable rate of return for somebody that is a "part-time trader" utilizing somewhat conservative stock/options trades? Should the goal be based off of the market's return or something more static like 3% a month? Personally I am not looking to hit a home run. I'm more of the slow and steady wins the race mentality. I am trying to be realistic and don't know at what rate of return can be considered realistically obtainable? Could this be something that you could write a piece on?"
Option Trading Answer
One of the first key phrases is “trading goal”. Your portfolio needs to have a diversified look and trading represents the speculative portion that takes greater risks and offers higher rewards. It is important that you are realistic. The answer lies in your risk profile.
I have three goals. My first is not to lose money. While this may sound ridiculous, we are talking about trading and losses are very real. I continually take money out so that I have to start from scratch. It keeps my ego in check and I’m more cautious than if I have a wad to throw around. If I start to draw down, I cut way back and pick my spots carefully. Remember, the market does go down. I won’t accept that as an excuse to lose money.
My second goal is to beat the S&P 500. If I can’t do that then I might as well put my money in the SPY and find another job. Considering that I don’t want to lose money even if the market is down, but I want to have at least the same upside, this goal is more ambitious than it sounds. To put it into perspective, any large fund would put billions into a program that could produce these results. My advantage is that I can move quickly in and out of positions and I can adjust my exposure. The more money you work with the more normalized your returns will eventually be.
My third goad is to make 25% a year. I have found that reaching for more opens me up to too much risk and it brings in too much volatility. There are years when I do better and that is a bonus. Given my past performance over many years I know this is attainable. I was up 10% going into May and it looked like a banner year. I carry a long/short portfolio and my shorts were outperforming my longs by a ratio of 3:1 when the market was making multi-year highs in March/April. I was able to unwind my positions and keep what I had made. I considered that a big victory.When you can weather a storm like that it sets up the rest of the year. I have found that my style generates small choppy returns - and then I go on a run. I may have two or three of those a year and that’s when I make my money.
To Richards point, there are many “snake oil salesmen” who are selling get rich schemes. They “cherry pick” their trades and numbers like 300% are tossed about like candy. They just want to sell you their crap for $3,0000. Before you sign up for their programs ask to see a 3-year and a 5-year end-of-month brokerage statement. If you find someone that will do it, let me know. I’ll take the seat next to you. I could learn from someone like that. If you asked that question you would hear, “I’m too busy teaching and I can’t watch my positions so I don’t trade or these are back tested results.” People that are greedy will line up for these programs. These commercials have the affect of setting up unrealistic expectations. People will also look at the hottest sectors and rationalize, “Why should I listen to someone who can only make 25% a year. I could have made 40% if I would have just invested in basic materials stocks.” We all know what’s happened to that sector in the last month.
Richard also asks about big professional traders who aim to make 12% a year no matter what. That is a fantastic return when you are moving large money. It is the hedge fund mentality and there goal is to reduce volatility through a variety of trading methods. What I do is similar, However, I’m not managing hundreds of millions of dollars so I can move quickly and produce higher results.
There are also Wall Street traders who make millions of dollars a year. Realize that they are working with an enormous capital base on a leveraged basis. These are the “Michael Jordans” of trading. There aren’t many of them and they had to prove themselves before they got their shot. I’m sure any of them would be elated to make 25% a year on their capital base.
As a trader you need to feel comfortable with the risks you are willing to take to generate the desired return. Aim too high and you run the risk of losing your money. As time elapses, you will know what to expect.
As for Rich, I think he has the right attitude. Look for consistency. IF YOU CAN TRADE BOTH SIDES OF THE MARKET, I think a 20% rate of return per year is attainable for a part-time trader who puts in 2 hours of research a day and does not take unnecessary risks. The problem is that most people only know how to be long. If you want to be a good trader you have to learn how to short.
If you want to rip on some of these “get rich” schemes you’ve seen or experienced, post a comment. It might help other traders.