You're probably not following your plan, you know the part about keeping losses small.
Do you compare your trading results to just buying and holding the S&P500? Why or Why Not?
- Thread starter Tall Mike
- Start date
I seek to out perform buy and hold on an after tax and after living expense basis. (But not necessarily risk adjusted).
However there are other reasons to trade than to beat the spx. Instead of trying to “maximize your return on the long run” your goal should be to ensure you earn enough to fund your liabilities. The problem with the first goal is that it takes no consideration of the risk of losing whereas in the second it should (knowing how important your liabilities are).
Over the last 10 years, earning 20percent actively trading has not really outperformed a buy and hold because you are paying near 50percent tax which makes your return closer to 10-12percent with the spx cagring about that over the last 10 years or so with deferred taxes at a much lower rate of like 30-35percent.
However there are other reasons to trade than to beat the spx. Instead of trying to “maximize your return on the long run” your goal should be to ensure you earn enough to fund your liabilities. The problem with the first goal is that it takes no consideration of the risk of losing whereas in the second it should (knowing how important your liabilities are).
Over the last 10 years, earning 20percent actively trading has not really outperformed a buy and hold because you are paying near 50percent tax which makes your return closer to 10-12percent with the spx cagring about that over the last 10 years or so with deferred taxes at a much lower rate of like 30-35percent.
The thing you are probably missing is that you are testing an "indicator" based method. Look at the market to see how other trader are behaving. You shouldn't have to look back for more than two or three days to see the effectiveness of your method.
Never understood "Risk adjusted". Isn't that why you implement a risk management strategy?
Mine is simply to not hold losers in the portfolio.
As for taxes, that is true. Up here in the frozen north we have tax free savings plans that can be used for trading although the government frowns upon making obscene amounts day trading. Still I have to pay quarterly, one of the downsides of making money.
My objective is to preserve my capital while funding my lifestyle. As long as I have a greater liguid networth at the end of the year than I did at the start, I'm relatively happy. I no longer have liabilities. (no debt)
There are years when I do not outperform the S&P. Those are the years that it makes huge gains. But the years it crashes I end up in cash. It works for me!
I’m glad your model works for you.
Some clarifications : risk adjusted means return/volatility. The idea being if you are running higher volatility you will have a greater risk of blowing up. This is one of the risk optimization philosophies that the trading community follows. I personally follow the graham and Dodd model for risk management which treats volatility as noise and instead stresses permanent impairment of capital.
Liabilities means all expected uses of cash. This can be lifestyle, retirement, inheritances for your kids, etc. it doesn’t strictly mean debt.
taxes are probably the 2nd greatest source of slippage in one’s wealth generation efforts as a trader after transaction costs.
Some clarifications : risk adjusted means return/volatility. The idea being if you are running higher volatility you will have a greater risk of blowing up. This is one of the risk optimization philosophies that the trading community follows. I personally follow the graham and Dodd model for risk management which treats volatility as noise and instead stresses permanent impairment of capital.
Liabilities means all expected uses of cash. This can be lifestyle, retirement, inheritances for your kids, etc. it doesn’t strictly mean debt.
taxes are probably the 2nd greatest source of slippage in one’s wealth generation efforts as a trader after transaction costs.
Volatility of what? I look at my account balance (Liquid net worth) and it is not that volatile. If I have a 20% return with a 5% max drawdown what is my risk adjusted return?
I differentuate between liabilities and expences. Liabilities are what I owe, expences are what funds my life style.
If I buy a new vehicle and finance it, I have a liability of the loan balance.
If I buy a new car and pay cash, I have an expence.
Both affect my liquid net worth the same.
I agree. If you have the opportunity to avoid them legally, you should take advantage of it.