Career trader's perspective on living off trading profits vs living on salary?

[newwurldmn]

First of all you are way over generalizing here anyway, since not everyone pays the highest tax bracket. Also, a serious trader might trade inside a corporation with deferred taxation by an individual until withdrawn, and only withdraw marginal amounts enough to live on and tax treatment is different yet again than individual taxation on all gains when trading under their own name in nonregistered retail account. So money can continue to maximize market gains. I think most traders consider taxation being a factor but being taxation, there are too many scenarios to make blanket statements.

Volatility presents trading opportunities. In a defined bull market with no volatility, buy and hold wins. In a bull market with lots of volatility trading in channels, trading makes more money provided someone sells short term peaks and buys back at short term bottoms lower than their sell price. Perhaps gains enough to overcome frictional losses of taxes, as I presented in my earlier example.

And like the other guy said, most traders trade because they want to way out beat the market and achieve out sized gains, not something that only beats the market by 1%. Take this year. The S&P is flat to negative now for the year. Pretty much any trader who traded this year with a profit made more than any buy and holder.

But you ultimately agree with my original point. Theres no broad stroking generalization here. You might as well compare S&P buy and holders vs failed traders who are down a lot this year as evidence that buy and hold is the better method. A trader can achieve gains that make it worth while even after taxes. Traders may also value capital preservation and their in and out of positions affords them the ability to choose when to risk capital. Someone who does buy and hold and never looks at it again, might be sitting on losses for a few years. E.g. S&P buy in @ 2007 breakeven was 2013. Citigroup buy in 2006, down +80% in 2014.

Finally, someone who is a career trader as their only breadwinner will need to draw down from cash. Someone sitting on a huge paper gain on non-dividend payers can't pay the bills.

A lot of straw man arguments here.


You cannot deny that the taxiation of short term gains vs long term gains makes the hurdle rate for trading short term higher than that of long term. You cannot deny that the higher the hurdle rate the harder it is to succeed at something.

 

[newwurldmn]

+1

Its so true and sad about how many of us retail traders do not treat their trading like a business. Any trader that doesn't think about taxes especially if profitable...its a trader that won't last long.

Worst, tough to get folks to talk about taxes or the business aspects of being a trader. The few times its discussed...only a few replies. In contrast, start a thread about trade signals and the thread goes on forever.

You see it in this thread here. People put their heads in the sand thinking that trading is a game.

The goal of a real trader is to maximize his financial net worth, not optimize his stock picking method.

 

[maler]

The combination of taxes and inflation is a significant hurdle for traders.
What counts is the real inflation not some bogus CPI number here.
If your pocket book feels a 5% inflation and you are taxed at 50%
you need 10% return just to break even in term of purchasing power.
A long term investment portfolio is immune to this while a short term
trader needs his buying power in cash or cash equivalents.

 

[butterfacetrader]

A lot of straw man arguments here.


You cannot deny that the taxiation of short term gains vs long term gains makes the hurdle rate for trading short term higher than that of long term. You cannot deny that the higher the hurdle rate the harder it is to succeed at something.

I don't think I ever denied it. I don't think anyone here or elsewhere denied it. Tax is an issue. Commissions are an issue. I don't understand why you had to make a big deal out of taxes. I think its obvious that being taxed is a frictional loss, like commissions are, like interest loans are, like inflation are, like bid/ask spreads are. Its pretty obvious. Any person who understands the complex trading concept of "buy low sell high" probably have enough wherewithal and IQ to realize the complex theory behind 'taxes hurting the bottom line'. Not exactly a novel theory here, I mean we have political parties drumming this argument all day long, every day, for decades about taxes of all forms. But you decide to make a show about taxes and say 'most traders don't realize it'. I think most do. I don't know where you get this 'strawman' anecdote to begin with.

But I just completely disagree with the statement that 'buy and hold' means you beat 'active trading' on the basis of taxes. Not true statement at all. Too many variables. Thats my point. You might invest in some crappy buy and hold return and a trader might trade high beta and still come out on top. Everyone is seeking alpha, thats the point. And plus, a majority of traders value the nimbleness and the security that comes from being in and out of positions only for the short term. Thats why some traders are exclusively day traders with no overnight positions. Being "buy and hold" isn't always the winning formula. If so there will be no people trading. Everyone just buys something and sits on their hands if its such a sure winner. Even for a market with upward bias, you have to have a LOT of faith in the future that everything is rosie. You simply can't know that about anything and believing the glass in half full is simply a leap of faith. For some guy who throws his money on the SPY at 200 later, and then market sells off to SPY100 because of a black swan? He might need to sit on his hands for 5-6 years for a recovery if that. Trader's who's sole profession is trying to make money in the markets can't sit on their hands having paper losses for a decade and 'hope' to recover while living in the streets with no cash at hand because 'it ain't a loss until you've sold right?'.

 

[butterfacetrader]

You see it in this thread here. People put their heads in the sand thinking that trading is a game.

The goal of a real trader is to maximize his financial net worth, not optimize his stock picking method.

Investing/trading _is_ a game. It has rules, it has character and money are the points in this game. Thats the main reason why quants do so well in this field. They approach this like a game and just another scientific problem and use hard science and statistical methods to try to beat the odds and come out on top in this game. The most dangerous (for their own good) kind of traders/investors are those like yourself who are nothing short of koolaid drinkers and completely blind to the reality of the financial markets to begin with and look at everything with the glass half full.

The financial industry wants people to view the market places and their industry as something legitimate and different from a casino. The capital markets have their purpose at times, but most of the time the financial industry is just one big koolaid drinking party. Anyone who is ever honest with themselves can see that. The fact is, every retirement account and pension fund is linked to the financial markets and assets because thats where people's money is parked and net worth is linked. And so everyone has a vested interest in the general health and legitimacy of the financial markets and financial assets. But its all just a big koolaid drinking party. There are often no good reason people pay more than tangible book value + one year's worth of projected EPS on shares and perhaps during which one can collect high 10-20% dividend so you double in a few years. Unless of course you can see the future. I can't. Yet, most shares trade at very high multiples in developed markets and half paltry dividend yields that require tens of years to double with dividends reinvested. In the developing markets? Some stocks trade close to tangible book value have have high 10-20% dividend yield. Lots of 'multiples expansion' in stocks traded here I see, aka lots of fluff and bath bubbles. Sure high yield stocks have risk, but the point here is you've not made out like a bandit with your investment until you've doubled it from dividend yield and can walk away saying the stock can go to $0 and you're ok. You can't double with most 2% yielders for 69 years.

Buy and hold? Suppose someone "bought and hold" Citigroup in 2006 with a trailing 12 months of 1% dividend at the time (not bad). How are they feeling today down 80% and dividend yield even purchased at today's deflated prices is below 0.1%? Oh right, its not losses until you've sold right? Oh, and you can tell them they are actually benefiting by not selling because the taxman has not taxed them anything and so they still haven't suffered any 'frictional losses from taxes' in their position, which afterall is important to growing your net worth -- the idea of having less frictional losses from taxes. Many other market participants would rather be that trader that flipped Citigroup for a 5% profit somewhere along the way, and had the tax man take away their share from the 5% profit some 5 years ago, than to still sit in an 80% paper loss 5 years later. But you're right, looking at this with the glass half full, we can at least say the buy and holders have not been taxed yet.

 

[markettimer]

For me, this is a very timely question. I've recently left a high-paying job in my early 30s and will trade as my only source of income. If I had the choice, I would have worked a few more years to build up my trading capital, but circumstances would have made this difficult.

First, my trading income and expenses: For the past three years, I've had a trading account with an average balance of $100K that has returned about $5K/month (market neutral) fairly consistently. My wife has a stable career that provides my health insurance, and we have a paid off condo with no property taxes. My share of household expenses is currently about $20K/year.

Second, my capital: I'll have starting capital of $500K. Since my expenses are about $20K/year, a 4% withdrawal rate from a typical balanced portfolio should cover my spending indefinitely. The financial incentive for trading is simply to provide luxuries to my family. The downside is potentially losing a nest egg that could provide the necessities indefinitely, requiring me to get a job. My motivation for trading is primarily intellectual, not financial.

Third, money management: I've set aside $150K in cash equivalents (high yield savings account, CDs, and savings bonds) to cover a prolonged unemployment spell if I fail as a trader. I've increased my trading capital to $150K, and will keep $200K in a typical retirement portfolio. My plan is to draw living expenses at a rate of 4% from my retirement portfolio (currently $8K/year) and draw the remainder ($12K/year) from my trading capital. If my combined account balance rises above $500K, I plan to raise my withdrawals consistent with spending down 4%/year. In other words, if my combined accounts grow to $800K, I'll raise spending to $32K/year. Growth in account value will be split between the trading portfolio and and typical retirement portfolio as a way of "banking" profits. If my account declines in value, I'll still need to spend $20K/year, so would trade with less money and eventually need to find another source of income.

 

[butterfacetrader]

For me, this is a very timely question. I've recently left a high-paying job in my early 30s and will trade as my only source of income. If I had the choice, I would have worked a few more years to build up my trading capital, but circumstances would have made this difficult.

First, my trading income and expenses: For the past three years, I've had a trading account with an average balance of $100K that has returned about $5K/month (market neutral) fairly consistently. My wife has a stable career that provides my health insurance, and we have a paid off condo with no property taxes. My share of household expenses is currently about $20K/year.

Second, my capital: I'll have starting capital of $500K. Since my expenses are about $20K/year, a 4% withdrawal rate from a typical balanced portfolio should cover my spending indefinitely. The financial incentive for trading is simply to provide luxuries to my family. The downside is potentially losing a nest egg that could provide the necessities indefinitely, requiring me to get a job. My motivation for trading is primarily intellectual, not financial.

Third, money management: I've set aside $150K in cash equivalents (high yield savings account, CDs, and savings bonds) to cover a prolonged unemployment spell if I fail as a trader. I've increased my trading capital to $150K, and will keep $200K in a typical retirement portfolio. My plan is to draw living expenses at a rate of 4% from my retirement portfolio (currently $8K/year) and draw the remainder ($12K/year) from my trading capital. If my combined account balance rises above $500K, I plan to raise my withdrawals consistent with spending down 4%/year. In other words, if my combined accounts grow to $800K, I'll raise spending to $32K/year. Growth in account value will be split between the trading portfolio and and typical retirement portfolio as a way of "banking" profits. If my account declines in value, I'll still need to spend $20K/year, so would trade with less money and eventually need to find another source of income.

Nice plan. Its good you have the house paid down and the wife is working too for continued salary over the longer term. And judging from your $20K expense, it looks like you live frugally as well. Someone who has a mortgage to pay and car payments and depending on where they live, I think living expenses can easily be higher, probably multiples higher, from there.

One of the hardest thing for the pure @home trader is they don't have salary to 'top off' accounts to 'buy the dips'. They rely solely and entirely on what they have at the moment to make more of it. Losing money is worse for these folks than so called traders who continue to earn a salary and can continue to top off accounts with more money 'to buy the dip'. It puts 'market timing' to a new perspective because market timing becomes critical when you can't 'buy the dip' anymore once buying power dries up, due to a lack of a salary.

Good luck in your trade. I think your weighting of assets makes sense, but have you considered also the implications of putting 100% nest egg into the trading account to 'go big or go home' before scaling back into safer assets like what you're doing? Assuming you make $5K per month on your $100K account like you said, thats pretty good at 60% annualized return?

 

[markettimer]

One of the hardest thing for the pure @home trader is they don't have salary to 'top off' accounts to 'buy the dips'. They rely solely and entirely on what they have at the moment to make more of it. Losing money is worse for these folks than so called traders who continue to earn a salary and can continue to top off accounts with more money 'to buy the dip'. It puts 'market timing' to a new perspective because market timing becomes critical when you can't 'buy the dip' anymore once buying power dries up, due to a lack of a salary.

This is part of the reason for dividing assets roughly evenly between cash reserve (30%), trading account (30%), and retirement portfolio (40%). There is still the option to "go big or go home," as you suggest, in the event of an unusually good opportunity. I have considered a larger allocation to the trading account, and might do so in the future. However, I experienced an account wipe-out in 2008 that makes me far more cautious today. Also, as I noted earlier, the downside (having to get a job) means much more than the upside (buying a nicer car, staying in better hotels). I'm no longer at the stage of aiming for the stars, just want to maintain freedom.

 

[wrbtrader]

I don't think I ever denied it. I don't think anyone here or elsewhere denied it. Tax is an issue. Commissions are an issue. I don't understand why you had to make a big deal out of taxes. I think its obvious that being taxed is a frictional loss, like commissions are, like interest loans are, like inflation are, like bid/ask spreads are. Its pretty obvious. Any person who understands the complex trading concept of "buy low sell high" probably have enough wherewithal and IQ to realize the complex theory behind 'taxes hurting the bottom line'. Not exactly a novel theory here, I mean we have political parties drumming this argument all day long, every day, for decades about taxes of all forms. But you decide to make a show about taxes and say 'most traders don't realize it'. I think most do. I don't know where you get this 'strawman' anecdote to begin with...

For me, the issue is that here at EliteTrader.com and a few other well known trader forums...its is not obvious to most traders...just obvious to a few. I only say that because I've seen the type of traders that discuss these issues versus those that don't discuss them and those that do discuss such are a minority. I don't have any specific facts but I'll guess its less than 10% of a forum membership that do discuss such issues here at EliteTrader.com and at other popular trader forums.

Just as important, threads about any of the specific issues you've mentioned are short lived with very little replies in comparison to the typical trade signal talk threads, career talk thread and other typical trader talk threads. Simply, it is obvious to a few including yourself...its just not obvious to most members or it may be that traders prefer not to discuss such as if its not important in comparison what they typically prefer to discuss at a trader forum.

I'm serious, just start a thread on these topics here at ET or at any other typical trader forum and then compare the number of replies, views it gets to the other typical trader threads...you'll see what I said above and more importantly you see that most of those that say they are consistently profitable or trading for a living...they aren't participating in your thread. I just assumed that its normal behavior of a trader forum.

I'm saying it is discussed, just not with the same importance as the usual trader talk at the typical trader forum. ET is one of the few forums that has made an effort to dedicate a little of itself to these topics.

Taxes and Accounting @ http://www.elitetrader.com/vb/forumdisplay.php?f=68

Career Trader @ http://www.elitetrader.com/vb/forumdisplay.php?f=24 (still very little discussions)

P.S. I want to learn as much as possible about this stuff involving the true cost of trading for a living. .

 

[wrbtrader]

butterfacetrader,

I forgot to mention in my prior reply, thank you for starting this thread and hopefully it'll spark or spawn other topics raised in this thread.