What Rate of Return Can I Expect From Trading?
The following is an extract from some great Q&A with one of the YourTradingCoach newsletter readers:
Really enjoy your site dude... I am a beginner/novice trader and really enjoy all aspects of the profession. My question...what rate of return should I expect from all this effort/cost? As you know, one could put their $ in a low cost index fund and traditionally gain around 9% per annum...So, I would HOPE that a professional should be earning at least 2-3x that? I have asked this question to others and have never gotten a straight answer.
Yeah, you could invest in an index fund and get historically an average of 9% or so, but then when you take out the management fees, effects of inflation, and the risk of having to sit through a 50% drawdown as we've experienced in the last year and a half, it doesn't sound to me like a whole lot of fun.
I'm not surprised that you can't get a clear answer as to expected rates of return. The fact is it's impossible to say what you will achieve.
There's possibly a couple of problems here. One is that I (and possibly the others you've asked) are not licensed financial advisors. We cannot provide advice, and cannot even provide anything which you might perceive as advice. It's a very grey area, but if someone was to say you can get 50%pa and you didn't, they risk getting themselves sued. Unfortunately, that's the poor state that this world has come to.
Certainly, if a professional cannot get 3-4 times what an index fund is earning, then they need to seriously consider whether their time is being wisely spent.
Is it possible to get these returns? Yes, absolutely. Very few traders post their actual results. I'm not going to. One who does if you're interested is Don Miller, who writes an excellent blog at http://donmillerjournal.blogspot.com/ . He got over 200% in 2008. However this is an exceptional return from an exceptional trader. You cannot expect to get this sort of return, especially as a novice trader. It takes years to get to that level, if you ever can at all.
What can you reasonably expect to get in returns? Impossible for me to say. However here's a safe bet - given that 95% of traders NEVER achieve consistent profitability, the highest probability is that you'll lose money rather than make it.
So, get into trading because you love the game, not for any expected returns. Great reward is a potential outcome and something to strive for. If you can prove yourself worthy of being part of the top 5%, then you'll be rewarded far in excess of index fund returns. But don't plan on it. And don't get into trading as a novice expecting consistent profits 3-4 times an index fund return - for most people it just won't happen.
Added 18 Apr 09:
Follow-up to Article - What Rate of Return Can I Expect?
Neil, one of the YourTradingCoach readers, shared the following...
'If you told a student to spend 3-5 years minimum to qualify in a profession (full time incurring debt along the way) and then flipped a coin at the end of it to see if he will be paid a salary on passing - that's trading!'
I love it. Absolutely brilliant. Thanks Neil.