Updated: Dec 29, 2019
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Expected returns for a investor (In theory)
Investment capital: $50,000
Investor timeframe: 10 years
Expected average returns a year with dividends: 25% on a good company
Expected net worth after 10 years compounded: $50,000 X (1.25)^10yrs = $465,661 (realised at the end of 10 years)
*Not all stocks will give an average 25% returns for 10 years. But think optimistic like investing in Amazon, and Google.
Expected returns for a trader (In theory)
Trader capital + margin: $50,000
Trader timeframe: 1-month intervals for 10 years (i.e. 120 months)
Win Rate: 50%
(estimated 6 trades a month, that means 3 wins, 3 losses)
Risk reward ratio: 1: 1.5
(limit each trade loss to $1,000 using a stop loss, take profit once trade nets $1,500)
Expected cash returns a month: (3 X $1,500 – 3 X $1000) = $1,500
(3% realised monthly returns)
Expected net worth after 10 years (reinvested returns):
$50,000 X (1.03)^120mths = $1,735,549
*Not all capital will be invested at one time depending on strategies. There will be losing months but there will also be surplus months, thus actual compounding effect might vary. You can adjust many variables above to achieve the desired ROI (i.e. more control).
Whether you wish to be an investor, a trader or even taking up both roles, it is imperative that you follow the rules of each game and clearly separate your mindset between a trade and an investment.
Some common mistakes that confuse the role of a trader and investor include:
Trader: Holding your trades way beyond the trader’s time frame and convincing yourself that you are treating them as long-term investments. This happens usually when you can’t accept realising your losses or your stocks are doing so well that you are greedy for more.
Investor: Selling investments just within a few years instead of holding it long term like an investor should. This happens usually when investors hear bad rumours about the stocks, recession, or just jumping around for opportunities while the businesses of the stocks are still fundamentally strong.
While trading and investing strategies can complement each other, the rules for each game are vastly different. Investors and traders shall remain disciplined, decide which model to adopt and abide by the pre-determined rules and strategies.
With that, you may then stand some chance to make consistent returns from the financial markets.
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