What is a good ratio between net worth and trading account size?

[FXbeachbum]

Ok if you want to put 75k in a brokerage account I’d ask these questions first

1. Have you ever traded before?

2. If so do you have a trade plan?

3. Are you consistently profitable?

If you say no to those questions I’d probably say you could allocate 75k for trading but don’t put it all in an account at once. Start as small as possible maybe 10-20k

Beyond that it’s really hard to tell an individual how to allocate their money. Personally I’d wonder how much they have in retirement accounts, What’s the age, what are possible future expenses, sounds like you already own a house but how much you owe on it, how many kids, future goals. Too personal to share here and don’t lol.

I could answer what I’d do with an extra 300k right now if I just started trading but that’s based on my situation. Most likely I’d pay off my remaining mortgage. Dump about about 100k in a non retirement brokerage account for investing, wouldn’t lump sum invest it in this market though, would systematically invest some while waiting for the next recession. Then ya I could see dropping about 75k to 100k in a trading account. But I’d definitely wait until I’m conistently profitable to put it all in. Would most likely start with 10-20k in a trading account unless I’m trying to day trade then 30k(but I’m not a day trader) Most likely keep the rest in savings or money market until I’m ready as I’m not a fan of CDs.

Sad thing is you could ask a financial advisor but those guys would lump sum invest it in a mutual fund. Probably put you in a front end load too, to top it off. They’d tell you you’re nuts to try and trade it yourself.

 

[bookish]

*net worth without primary house

Net worth minus 500m dollars = trading account size.

 

[JackRab]

Your (actual, not projected) annual return from trading is a good place to start. 10% return, 10% net worth. 50% return, 50% net worth. 0% return, 0% of your net worth.

Really? I would argue the opposite... since a 50% return seems like a high risk strategy, therefore you wouldn't want to put most of your net worth in that.

 

[JackRab]

I think it should depend on your total net worth. If you don't have much... than you might as well put everything in a trading account. If you have millions... perhaps not, since then you would be more concerned with capital conservation.

 

[FXbeachbum]

I think it should depend on your total net worth. If you don't have much... than you might as well put everything in a trading account. If you have millions... perhaps not, since then you would be more concerned with capital conservation.

Perfect example I say If your 19 with 10k and no responsibilities(family etc.) go for it with 10k. If you have 3mil liquid net worth(and responsibilities) preserve the majority and use the 10% or less rule for speculation.

 

[lindq]

Really? I would argue the opposite... since a 50% return seems like a high risk strategy, therefore you wouldn't want to put most of your net worth in that.

I stand by my advice. A higher ACTUAL ANNUAL return justifies a higher level of investment. Lacking any other evidence, it would indicate that the trader has a higher level of competence and confidence in his or her abilities.

Conversely, a much lower return from active trading does not provide a confident basis for higher levels of investment as a percentage of net worth.

By your logic, an active trader who has established a solid track record and experience should do what? Reduce his level of investment? And an active trader who has failed to perform should increase her level of investment in her trading?

Really? I think not!

 

[JackRab]

I stand by my advice. A higher ACTUAL ANNUAL return justifies a higher level of investment. Lacking any other evidence, it would indicate that the trader has a higher level of competence and confidence in his or her abilities.

Conversely, a much lower return from active trading does not provide a confident basis for higher levels of investment as a percentage of net worth.

By your logic, an active trader who has established a solid track record and experience should do what? Reduce his level of investment? And an active trader who has failed to perform should increase her level of investment in her trading?

Really? I think not!

Where did I state that a failing trader should increase their account size? Do you know how many people blow up their accounts when they think they are the king, simply because they got lucky a few times and now think.. hey I'll put everything in my 3x long SPX active trading strategy... poof...

We are talking about ET... the majority isn't exactly high level HFT people. No lack of confidence, but most actually lack the capabilities... even if they manage to hit 50% or 100% in a year.... which would point more towards luck in gambling than a capable trader.

And I refer to my other post regarding actual net-worth. If you're a high flying active trader, you will at one stage have a decent net-worth, and you should at one point think about capital preservation. Everyone knows a small error or move can wipe you out... that's one of the reason any active trader should not use too much of his/hers net-worth in an active account.

 

[JackRab]

Perfect example I say If your 19 with 10k and no responsibilities(family etc.) go for it with 10k. If you have 3mil liquid net worth(and responsibilities) preserve the majority and use the 10% or less rule for speculation.

Exactly.... and it might go up again if you hit say 50 mln. It's about capital and lifestyle preservation.

 

[Pekelo]

I stand by my advice.

You could, but most high net worth people don't follow it. At that point it is more about capital preservation, instead of going for the stars. If you already have a luxurious lifestyle, why would you risk it?

That is just silly... Some people might follow your advice but they seldom end up in even more luxury....

 

[jk90029]

Ok if you want to put 75k in a brokerage account I’d ask these questions first

3. Are you consistently profitable?

Let us explain "consistently" more precisely.

There is many types of "consistent" trading logic. Also there is yearly tax in Federal 1040.
Probably there is no sugnificant meaning in return rate less than a year.

I would say at least three year is necessary. Five is better and ten is enough.

For example, if one can say annual return compounded (after tax) of 10%, then he should show
61% in account by 1.1^5 =1.61051 and 159% by 1.1^10 = 2.593742.

Account of 100K should be 161K and 259K respectively.

Imagine annual 20% compounded so that your initial seed of 100K is going to be 9100*100K by 1.2^50 = 9100.438, for 50 years (from 30 to 80), which is similar to Buffett's 50-year record.