Savings vs Returns vs Trades

Signalee is ostensibly about position trading. But there’s a second point that is important to make for anyone trying to a large trading account: adding a relatively small amount of money on a periodic basis to your account initially “compounds” the value of your account faster than the position trading strategy we use.

Using simple math, if a trader starts with $1,000 and compounds the account by 5 percent per trade, then after 142 trades she’ll have $1 million. However, if the trader deposits $100 every two weeks into the account from a paycheck then that deposit is just as good as a successful trade.

The first $100 deposit will knock out 2 of the 142 trades needed to get to $1 million. Now, the number of trades that can be knocked out with a $100 deposit will get smaller and smaller as time passes and the account grows, because, you know, math. But at the end of the first year of a trader’s road to $1 million, even if she doesn’t make a dime from trading, she’ll have knocked out 26 of the 142 trades. By the end of Year 2 she’ll have knocked out another 11 trades and have 105 trades remaining with an account value of $6,200. Still a long ways to go until $1 million, but in 2 years she has reduced the number of trades needed to get to her goal by 26 percent. She’ll be a quarter of the way there.

Savings vs Returns vs Time

Building a large account balance is a function of savings, returns, and time. Increasing the amount of any of them has a fairly drastic impact on the final balance with a long enough time horizon. Consider the following scenarios:

Scenario #1:

  • $10,000 starting balance
  • $1,000 added annually
  • 6 percent return
  • $71,064 ending balance after 20 years

Scenario #2:

  • $10,000 starting balance
  • $1,000 added annually
  • 10 percent return
  • $130,278 ending balance after 20 years

Scenario #3:

  • $10,000 starting balance
  • $5,000 added annually
  • 4 percent return
  • $176,757 ending balance after 20 years

You’ll notice that Scenario #3 has the highest ending balance after 20 years even though it has the lowest annual return. It’s not until you get past 20 years that the 10 percent annual returns in Scenario #2 start to overcome the higher savings rate of Scenario #3.

What’s the point?

Of the three variables tweaked above, savings rate, returns, and time, which do you have the most control over?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s