Building Wealth

M

MacThor

I have been trading for 3 years now and have been consistent enough to pay the bills without "touching" my original bankroll, except to put a down payment on my house (my worst trade yet!). My frustration is that my net worth, despite very good % returns, has not been growing. Like many traders, I am not compounding my returns because I am withdrawing my profits to my bank account as my "salary."

Over the past 14 months I have had one month where I had to touch my money-market reserves -- in other words my profit did not cover my expenses. I have paid off all non-mortgage debt and reached the point where I am confident that my trading profits will exceed my monthly needs.

Before I became a trader, I was always a "pay myself first" guy, socking away 10% of salary into my brokerage account no matter what. It's how I built up the bankroll that allowed me to pursue my trading business. I'd like to resume this habit because I believe it's a key to long-term wealth. My dilemma is what to do with that 10%?

Do I just hold back 10% of monthly P&L in my trading account and trade incrementally bigger (I typically trade using a 2% risk position size)? Or do I send that 10% to a separate account for long-term holdings and dollar-cost average?

On one hand, knowing that my % return in the trading account is so much higher than a typical mutual fund, it seems silly not to reinvest and try to compound. On the other hand, a key to wealth-building is maximizing UNrealized income and nothing in the trading acct gets long-term treatment. Plus, with my 2% position sizing rule, I'm not sure adding new money will do anything but LOWER my IRR%.

How about it, career traders? Do you invest elsewhere for long-term growth or do you reinvest all excess capital in your business?
 
You're better off focusing on trading because that is how you'll make your "big money". Keep trading, keep building up a cash reserve and look into other ways to increase your assets under management. If you do extremely "well", an IRA, Roth, 401K and other traditional brokerage accounts will become irrelevant.
 
yeah. If's are great, aren't they....

If your confident in your abilities and you perform well, and you don't think that increased position sizes will be a detriment to your trading then it is a good idea to start scaling up. That being said one would be a fool to ignore the long term potential of good fundamental investments and the values of something like an IRA. (by the way a roth is a type of ira).

So I guess I fence sit on this one and tell you to do both.

Since your goal is the accumulation of wealth as oppossed to the quick kill then obviously leaning more towards outside investments is a better idea. I hate mutl funds but thats your call of course. Good luck.
 
Quote from Mschlau:

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Since your goal is the accumulation of wealth as oppossed to the quick kill then obviously leaning more towards outside investments is a better idea. I hate mutl funds but thats your call of course. Good luck.
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your goal is to grow your worth from the taxable to the non taxable...where eventually your taxes are only 1/10000000000000000000000000th of your net worth...and not most of it....peace
 
Quote from MacThor:

I have been trading for 3 years now and have been consistent enough to pay the bills without "touching" my original bankroll, except to put a down payment on my house (my worst trade yet!). My frustration is that my net worth, despite very good % returns, has not been growing. Like many traders, I am not compounding my returns because I am withdrawing my profits to my bank account as my "salary."

Over the past 14 months I have had one month where I had to touch my money-market reserves -- in other words my profit did not cover my expenses. I have paid off all non-mortgage debt and reached the point where I am confident that my trading profits will exceed my monthly needs.

Before I became a trader, I was always a "pay myself first" guy, socking away 10% of salary into my brokerage account no matter what. It's how I built up the bankroll that allowed me to pursue my trading business. I'd like to resume this habit because I believe it's a key to long-term wealth. My dilemma is what to do with that 10%?

Do I just hold back 10% of monthly P&L in my trading account and trade incrementally bigger (I typically trade using a 2% risk position size)? Or do I send that 10% to a separate account for long-term holdings and dollar-cost average?

On one hand, knowing that my % return in the trading account is so much higher than a typical mutual fund, it seems silly not to reinvest and try to compound. On the other hand, a key to wealth-building is maximizing UNrealized income and nothing in the trading acct gets long-term treatment. Plus, with my 2% position sizing rule, I'm not sure adding new money will do anything but LOWER my IRR%.

How about it, career traders? Do you invest elsewhere for long-term growth or do you reinvest all excess capital in your business?
More...

Trading is a business, and in this business you eat what you kill. Problem is you have been overeating, and that's one reason that you havn't built any wealth.

In this business, you are either growing or you are dying, and if you are barely getting by every month and not building any profits, it's only a matter of time before a bad trade, or a bad string of trades, takes you out of the game. I hope you're right and have reached an inflection point, and your earnings are finally going to exceed your expenses. I suggest you really watch and monitor this closely. Positive cashflow is priority number one!

Here's my suggestions. First and foremost, build a very large emergency/reserve fund. At least 12 months of expenses. Keep that money in a seperate, liquid account, segregated from trading/market risk. At some point, you will go through a period where you really struggle to make money, usually, it occurs because what you were doing no longer works.

After your large emergency/reserve fund is funded, set yourself up either a traditional, roth or maybe even a mini 401k. You'll have to get some earned income but it can be done. If you really want to build wealth, having an account where you can build and compound profits without paying taxes is an absolute necessity.
You can fund it once a year, or you can do a regular transfer out of your checking account.

Once you've got those things funded, I would then set up a seperate account for longer term trades. One of the biggest challenges we face as traders is that desire to book profits daily. This is inconsistent with long term investing, and the only way to avoid the temptation to trade out and book profits is to not watch on an intraday basis. Develop a pay yourself first attitude and when you pull money out of your trading account, invest whatever is left over into this account. If you don't want to actively manage your account, then go with a regular investment into a good growth mutual fund and watch your wealth grow exponentially!
 
Quote from nazzdack:

If you do extremely "well", an IRA, Roth, 401K and other traditional brokerage accounts will become irrelevant.
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You are obsolutely right. I do not think that the majority of the people appreciate this point as they should. Once one becomes well at trading and build (say a million dollar capital) then they are free from income worries forever.

This cannot be said of another individual of similar net worth who has to pay 5% (50K on 1 million) to a supposedly good fund manager and hope that the "expert" does not lose his money. Such individual continues to worry and will have his money growing so slowly (if any) that the one million dollar good trader will be as wealthy as a guy with a 10 million net worth, because these two individuals will have different cash flows (both in terms of amounts and reliability).

That is the reason why I spent years to learn trading, and is the reason why I continue to study it, and love doing it. It is a great profession (the most difficult profession to be an expert in, in my view).
 
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