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?”

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.

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