Keeping Score

August 27, 2013

How much money should you expect to make trend trading stocks and ETFs ?

The real question should be….How much can you afford to lose ? , because that will have a huge bearing on the strategy you pick and how much you risk.  It will have a bearing on whether you swing for the fences or aim for a high on base percentage.

Assuming that you subscribe to the number one Wall Street rule….Don’t Lose Capital….I would think that your first question to yourself would be….what is a reasonable and prudent expectation ?

I have often read that over the past 70 years the market has averaged about a 10% return per annum.  That conforms to my methodology in reconciling reward and risk.  My rationale is geared to a multiple of a risk free 10 year US Treasury instrument…. currently +/- 3%.    If I invest in this  market I want 3% for my money, 3% for the additional risk , 3% for my expertise and  3% as an inflation kicker.  Total = 12%.

If the 10 year Treasury were 4%, the total would be 15% and all risk would be measured against the likelihood of achieving that return.

In this market SPY has returned 16% year to date.  Facebook has returned plus 50% and an investment in the Brazil ETF – EWZ has returned negative 25%.  Within those parameters, 12% looks like an  entirely reasonable and realistic goal to strive for.

KEEPING TRACK…. Using big round numbers,  a 12% return on a $1 million nest egg would mean I’d need to average $2,300 per week or $460 per trading day.  This assumes you are ” all in “.  If you are only 50% invested, such as I am at the moment,  you need to double your daily result to reach your 12% goal.  The 50% you haven’t invested may be safe, but it will require a lot more return and more risk on the invested portion for you to achieve your 12% target.  Plus, not only are you earning practically zero on your 50% cash , but this money is sitting there being eroded by inflation.  So, lots of time taking no risk means being caught between the devil and the deep sea.

I keep a daily / weekly log of results to give me a better picture of what needs to happen going forward to achieve my goal.

None of this addresses how strong your stomach needs to be to cope with accumulating loss on your investment portion.  Today the market is down 1.4% ( $14,000 on 1 Million ) at 2:30 pm and here I am, hoping to achieve my daily average of  positive $460 by 4pm.  Think its going to happen ?  I don’t.  I’m beginning to wonder ( not worry )  about another $14,000 down day tomorrow.  How many days in a row can you swallow $14,000 before your emotions begin to kick in.  Its probably better ( for my psyche ) to say 1.4% down day rather than $14,000.  I’m committed to a strategy that requires a lot less courage than ” buy and hold ” .  If the market is below its 200 day moving average at the close August 30…I’m gone and I can tell myself it was all planned in advance as part of a scientifically back tested strategy. What has a buy and holder to look forward to….a 56% grinding decline such as occurred in 2009 ?.  That would try a brave man’s soul.  Yes, the market would ( did ) come back, but how many years do you need to spend under water to make you afraid of the sea ?

That’s why I’m a trend following timer with a plan for going in and a plan for exiting the market with my confidence unshaken.

Richard Maurice Gore






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