In the previous sections we addressed the importance of the risk:reward and position sizing to help us stay consistent in our trading. In this section, we will address the Return on Investment (ROI).
Here are the typical returns on a few ETFs as well as other investment opportunities. Sometimes keeping things simple can yield the biggest returns. In general, establish investments like your ROTH and work to create opportunities in the market for you to beat the averages seen below.
SPY - 12.97% average annual return
QQQ - 17.18% average annual return
ROTH Accounts - 10-15% average annual return
Broker investments - varies by brokers, but some see 7-30% and in some cases more.
The question you need to figure out is whether you can make more money on your own or via another investment.
In general, I want a minimum return of 2% per month on my portfolio; this would give me a 24% return on my money for the year. Most hedge funds and other fund managers return 7%-30%. Personally, my ROTH has returned 10%-15% per year. If I cannot exceed that amount, I may as well invest it in instruments that can earn me a higher return.
2% per month return: $1,000 capital, ROI of 24% = $240/year, $240/12 months = $20/ROI per month
2% per month return: $50,000 capital, ROI of 24% = $12,000/year, $12,000/12 months = $1,000/ROI per month
Understanding your ROI for the month gives you perspective on what you want to achieve so you can stop worrying about holding on too long to scrape out more monies when you have already earned your ROI for the month.
Find the BEST SETUPS ONLY. You can make your goal on a single trade and begin to increase your account risk and ROI that you desire.
Small wins add up.
$240/month on 4 trades = $60 profit per trade, 10 trades = $24.
Winning $24 a trade is a lot easier than finding one $240 winner to cover your monthly goal
Remember, you may be purchasing 10, 15, or even 50 shares to make $24/profit
$24 / 50 shares = $0.48 of profit needed per share to hit 2% for the month
$24 / 15 shares = $1.60 of profit needed per share to hit 2% for the month
$24 / 10 shares = $2.40 of profit needed per share to hit 2% for the month
When you become consistent in your returns and trading, this will enable you to increase your position and risk
What happens when you are profitable? Should we reinvest it or diversify in other assets?
Depending on your goals, opportunities, and strategies there are a number of things you can do with your profits
First and foremost, you will most likely increase your capital to raise your position size and risk. Since many of you will start with small accounts, the money you make will help you to accumulate more shares and reinvest in other areas.
For those who become consistent in their gains, once you reach a capital/bankroll that allows you to generate additional income, you may consider paying yourself and taking money out of the market; reducing your capital back to your starting (e.g. you start the year with $50,000 and you grow the account to $65,000; you then take $15,000 out of the account to invest in other assets.
People often believe that at some point you should cap your total investment as it reduces your exposure and allows you to truly diversify your assets (e.g. having various stocks from different sectors is a diversified portfolio, but even good stocks in a bad market all come crashing down).
$50,000 initial Capital
If 2022, you started with $50,000 and made 24% you would now have $62,000
In 2023, if you made 24% you would have $76,880 ($62,000 x 24% = $14,880)
In 2024, if you made 24% you would have $95,331.20 ($76,880 x 24% = $18,451.20)
In 2032, if you continually made 24% gains each year, your portfolio would be worth over 10x your beginning capital at $532,854.38 ($103,133.11 in 2030).
If you added just $500 a month, as capital to increase your portfolio and to size up your Account Risk, you would have $1,261,711.93 in 2032.
$500 Account
You would have $5,328.54 by 2032
Adding $100 a month ($1,200/year), for a$500 account, would be $52,413.98 (total capital added $12,500; 4x times your total investment)
20 years later, you would have $497,553.50; in 24 years, you would be a millionaire.
Adding $500 a month ($6,000/year), by 2030 you would have $240,755.73 (total capital added $60,500; 3.97x times your total investment); millionaire by 2039
$1,000 Account
You would have $10,657.09
Adding $100 a month, for a$1,000 account, would be $73,088.73 (total capital added $13,000; 5.6x times your initial investment)
20 years later, you would have $543,349.27; in 23 years, you would be a millionaire.
Adding $500 a month ($6,000/year), by 2030 you would have $240,755.73 (total capital added $60,500; 3.97x times your total investment); millionaire by 2037
Note: This does not take into account taxes and years you do not get a 24% ROI, but you get the idea of small wins each trade can yield huge results. You would also need to up your account risk per trade and not spend any of your investments until later.
At some point, your 24% return will be substantial enough to replace your income from other sources and could potentially live off your gains (see FIRE/Personal Investing - Things to Consider/4% distribution)
Even on a $1,000 account, adding $500 a month, by the time you hit 2036 you will be making over a $100,000/year
You could continually use the $100,000 as annual expenses each year, while continually making money in the market
I would even encourage you to take a a portion of your money to have a reputable broker to handle your money. They can diversify your holdings into more secure assets like bonds and real estate that can provide a health return to live off annually.
You may personally consider real estate or other assets to make you passive income (monthly income with little effort)
For my Covered Call (CC - see selling calls) positions, I want 24-50% of my investment back by years end
For my CC, if I invest $2,000, I want to see a return of $480-1000 within a year of purchasing.
I am aggressive in order to accomplish four things:
To recoup my initial monies invested (If I have gained all of my money back, the stock could hit zero and I would have lost nothing)
To leverage my returns on The Wheel Strategy (selling cash secured puts, selling covered calls)
Dollar cost averaging into more shares that allows me to sell more CC's to increase my ROI each year
Implementing other trading strategies to increase my portfolio ROI
While you may be making 2% per month on your investments, what if you could invest a portion of your money to get back 5% in the same amount of time? Would you do it?
As mentioned in our previous sections, if you cannot see returns on your investment in a reasonable time frame, are you potentially missing out on greater returns? When trading, you will consistently see multiple opportunities to invest with similar risk:reward ratios, but one ends of hitting the target in a week, while the other takes one month. While the ROI might have the same profit, was there another alternative that could have been more beneficial?
The concept of having to make a decision over the next best alternative is called the opportunity cost. If I only have enough money to position myself in one stock, how do I know which one I should select? You will often find that the charts of two different companies could look identical, but could react to the same news and market sentiment, but price action will be slow in comparison.
So how do we decide? As investors and traders we learn to accept that we will miss great opportunities due to us being in other positions that tie up our money. While you could also cut your winners short in order to get into another position, you should consider tax implications and whether this opportunity is worth the time of reallocating your money.
Would you rather....
You have the following holdings and foresee a wonderful opportunity to invest in an Initial price offer (IPO) being offered at $100 a share with a 35% upside to the stock growing. However, you do not have any other monies available to invest. What would you do? Why?
Bank of America - 100 shares at $32/share; you have held this position for 11 months. Currently BAC is up 30% and you think it could rise $1 -2/share by years end.
Visa - 20 shares at $200/share; you recently purchased into this position 3 months ago; up 10% and you believe that this is just the start and have targeted V to reach $240 in the next months