Investing Adventures

Before Christmas I had the bright idea of quickly calculating how much it would take to go from a typical 9 to 5 job to trading full time. I admit, I was grossly conservative in my calculations. So much for doing things on the back of an envelope as your professors tell you to do at a dinner party, eh? In any event, I decided to revisit the full time trader idea but this time armed with what I think are real life parameters and a couple of assumptions that I would consider if I were a full time trader.

Here’s the parameter list for the updated calculations:

• My future financial status will have me earning roughly $100,000 per year as described by salary surveys in my current field as an average starting point.
• The short term capital gains tax can range from your tax bracket to 35%. This model uses a 35% tax rate for conservative purposes although at the levels of capital being worked with, it may be a fair assumption.
• Monthly expenses consist of the 9 to 5 yearly salary divided into 12 months; in this case, monthly expenses are capped at $8,333.33. Living the American dream requires living paycheck to paycheck for some unknown reason so the monthly expenses above are conservative for those with more financial sense than the average public.
• The rate of return will be calculated monthly, i.e. investments will compound monthly instead of yearly. This is the major difference between the initial calculations and the current ones. Ideally, calculations should be done with a daily or weekly basis to account for day trading, etc. but for now the assumption is that most holdings are in the short term / swing trader investment style category.
• Any amounts owed for taxes will be removed at the end of each calendar quarter (March, June, September, December). Initially, calculations were done with taxes being removed at the end of each month; however, my current platform provides tax information at the end of each quarter making it much easier to calculate the capital gains tax. This also results in a higher rate of return since additional capital is not removed at the end of each month with the monthly expenses withdrawal. The calculations also assume all capital gains taxes are paid (no deductions or any of the more complex tax calculations – see your tax specialist if needed).
• Investments are profitable and consistent each month. This is highly important. No matter how great of an investor someone is, there will be a month where their monthly returns will be less (or if they’re doing well greater) than the calculations take into account or even suffer a loss. However, in order to keep the calculations as relatively simple as possible, each month will have an assumed return rate of 10%. This is the ideal situation so please keep that in mind.
• Trade commissions were not taken into account. Commissions vary both in price and the number of trades so modeling it would have been a nightmare. If I were to use my own commissions ($1.25 per option contract), a short term or swing trader could easily burn through 500 contracts a month I could assume. Fees would then run about $625 per month which is minor compared to the amount of capital in the calculations.

I believe the model is a bit more realistic this time around. Although not perfect, I believe it gives a better picture as to what is truly required in order to trade full time and break the bonds of job hood.

The first calculation compared the “double your living expenses” advice I received from my friends over on Option Addict dot net. There appears to be a good reason why you need a bit more capital invested as compared to your monthly expenses.

If you’re serious about trading full time, I think you definitely need more than matching your living expenses in an investment portfolio. Even assuming a generous, but highly attainable 10% rate of return per month, starting off with $100,000, assuming the exact same amount is needed to live each year, is insufficient to convert into a full time trader. Starting off with $200,000 in an investment portfolio, which is much less than I initially calculated and the readers pointed out (thanks Franklin / Dave), the returns on investment using the same generous monthly percentage do allow you to live off of your investments without needing supplemental income. However, it would appear that starting off with $200,000 at a 10% monthly return would be cutting things close. Remember that the calculations are using a constant monthly return. If that monthly return were to fluctuate downward, the results would not be as kind.

Since I’ve proven to myself at least that $200,000 is a decent target for attempting to live as a full time trader, what would happen if the monthly returns were different? Here are some calculations using a 5% and 15% monthly return.

Hopefully as a full time trader you’re pulling in more than 5% per month! From experience, I’ve been able to return a profit of about 15-20% of my portfolio in a month; however, I was more lucky than good. What I’d like to know is some of the more experienced traders’ track records in terms of return rates per month. Percentage wise, a 15% return per month doesn’t seem out of reach. Even 20% might be attainable. For some of the more experienced folks out there, what sorts of returns do you all average per month?

So there you have it, I think. Yes, the amount of capital required is much much less than the initial millions I thought. Never trust the back of an envelope. Most traders can easily obtain $200-300k as an initial starting point for a portfolio. My plans? After running these more realistic calculations, once I reach a portfolio of about $200k, I may look to throttle back in terms of working a day job. I wouldn’t feel comfortable the second I hit an investment portfolio of $200k leaving whatever job I may in the future outright. Although as Franklin pointed out, if you’re serious about trading, it’s best to start now. Leaving the 9 to 5ers behind in 3 to 5 years does seem like a reasonable target. And until that time comes, hopefully I’ll have many years of serious market experience under my belt.

If I missed anything or if the calculations are still a bit on the odd side, let me know so that I can correct and update. It’s always exciting to see what it really takes in order to get what you want!

The finance & investment center are full time trader. They usually lend money at high interest rate. Now it is not hard to get a loan for people with bad credit. Now even students can apply for student loans which have less interest rate as compared to other loans. You can also get online car loans, house loan or business loans with the help of credit card. If you don’t have it then you can simply apply for a credit card online. And your card will be delivered to your house. With the help of these cards you can also pay off your debt. You can locate free home mortgage quotes online and also a calculator for home mortgage that computes the fixed or uneven rate, with additional costs and monthly payment plan.