Wednesday, July 11th, 2007
Setting reasonable goals in the stock market
The biggest beginner-trader mistake is to set unachievable goals. It’s totally understandable because most people start in the stock market to get rich. They’re bored at work, but dream of riches.
The stock market looks easy and there are numerous tales of people becoming millionaires overnight by speculating. The problem is that attitude will set you up for a huge disappointment.
After a few years you’ll realize that you probably won’t become a millionaire in one year and be able to retire. When that becomes clear, I suspect a lot of people quit and go onto some other get-rich-quick scheme.
You can become rich – very rich – in the market. But it’s a longer, slower process than almost any beginner can imagine.
The question then is: what are reasonable returns to shoot for with your trading?
The most comprehensive analysis of stock market returns probably ever conducted is detailed in the book Triumph of the Optimists.
The authors found that over 100 years US stocks returned a compound annual return of around 10 per cent.
I think it is reasonable to shoot for compound annual returns of around 12 per cent after all your costs, including data, broking etc. That’s a measly 2 per cent more than the market.
But it’s actually an amazing achievement if you can do that over a long period.
The obvious question is: why bother?
Say you started with $100,000. If you generated a 10 per cent return over 20 years you’ll end up with $704,250. But at 12 per cent you end up with just over $1m.
After 30 years, the respective figures are $1.8m and $3.3m.
Most neophytes would laugh at setting such small goals. I mean imagine having only $3m in 30 years time!
Look around at people aged between 60 and 70. How many have that kind of cash? Very, very, few.
To make it a more attractive, assume you also save $10,000 a year. Then at 12 per cent you end up with $6m.
I believe the benefit of trading for yourself is that you’re nimble and not constrained by size, which tends to cut returns. You can also shoot concentrate your portfolio and find little niches that are too small for the big guys to exploit.
That means you have a good chance of beating the market.
But don’t sabotage the chance to get wealthy with unreasonable expectations.
Word Count: 383. This entry was posted on Wednesday, July 11th, 2007 at 10:11 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
July 17th, 2007 at 5:42 pm
A well written article. This should be a mandatory reading for every novice entering the markets. I know a few who lost all of their trading capital due to their greenhornish greed.