Back on February 22 I put up a post that looked at Savings vs Returns vs Trades. It pointed out that your savings rate has one of the biggest impacts on the final value of your account. However, it also made me think: why don’t I rewind the clock 20 years and actually follow the simple idea of starting with $1,000 in an account, add $100 every two weeks, and show how the trading evolves as the account works its way to $1,000,000?
So I did.
Why? Because it’s an opportunity to build a small account to a large account using everything I’ve learned trading over the past 20+ years. I want to see how quickly it can be built when your tuition to the school of hard knocks is significantly lower than the first time around. I never want to say tuition is completely free because a trader should always assume they’ll find new ways to make mistakes, but the cost of ignorance and emotional stupidity should be much lower.
6 Weeks Later…
When your account is really small, trading costs matter. You can’t trade strategies that involve frequent small wins and losses. It also helps if you stick with commission-free ETFs. So where does that leave the portfolio? Well, I bought an initial slug of EWY (not commission-free), some FREL (commission-free), and since then I’ve been dollar-cost averaging into FREL.
The account is up to ~$1,300 in spite of the two ETFs each going absolutely nowhere. How did it get up to $1,300? Remember: $100 is deposited every two weeks.
So in 6 weeks I’ve knocked out 4% of the 142 trades I need to get the account to $1,000,000 with a sideways market and zero trading acumen.
Where do we go from here?
This is what the roadmap looks like:
- With every $100 deposit buy commission-free ETFs that have the best momentum. Do this for the next 14 weeks until the account gets to $2,000. Average cost of a trade is $0. Risk management doesn’t really matter at this point given how small the account is. Note: this is the only time you’ll ever see me write this.
- Once the account gets to $2,000 then we’ll have access to margin, which means we control $4,000. If the average win is 5% then we’ll pay $10 in commissions for every $80 in trade profits. That’s higher than I prefer but it’s the cost of trading with a small account. As the account grows in value the commissions will eventually become a rounding error.
By the time the account gets to $3,750 the $100 deposits will still be meaningful for a while longer but we’ll have effectively knocked out 27 trades, or 19 percent of the total trades we need to get to $1,000,000. I realize this simple analysis doesn’t include taxes or the inevitable losing trades, but it’s a simple heuristic that gets the point across.
The Voodoo of Margin
Some of you might have done a double-take when you read the part in the roadmap about maxing out margin. In general you want to avoid margin or leverage or at least only use enough to reach your goals (think about buying a house or a business). On retirement accounts and my main investment account I don’t use any leverage because it’s not necessary to generate the generally low return I’m looking for. Plus those accounts run diversified strategies that include buying, holding, and rebalancing super-broad and super-cheap index funds. Only a quarter of it is devoted to an active trading strategy with all the bells and whistles of position sizing, risk management, risk to reward analysis combined with probability of a successful trade, and sequence of returns risk.
What I’m saying is that buy & hold and leverage generally don’t work together in an investment portfolio because you’re subject to mark-to-market risk. But when you manage mark-to-market risk and have a strategy with positive expected value and a reasonable sequence of return risk profile then leverage will get you wherever you’re going faster. And for this fun $1,000,000 experiment, I want to see how fast I can get there without doing something dumb or relying on lottery tickets.