When it comes to trading and investing, there are a lot of different opinions on what the best course of action is. Do you take your profits and run, or do you let them continue to grow?
Both have their pros and cons, and the right choice for you will depend on your personal goals and circumstances.
What Is Your Goal and Current Account Balance?
To answer the question of whether you should take your profits or let them grow, you first need to ask yourself what your goals are and what your current account balance is – because it very much depends on these two factors.
If your goal is to leave your work and invest/trade full-time, it is likely you will have to build up your account to a significant size to live off from. If your goal is to create a retirement nest egg, you will also likely need to let it build over time without ever touching it.
However, for those who have been fortunate enough to begin with a sizeable balance to begin their trading or have already built up their trading stake, they may be able to live off their trading account and investments.
My goal with this post is to help give you the clarity you need in order to understand the reality of how much you actually need to trade with and what you can realistically expect to achieve in order to live off your trading and investment profits.
Financial Freedom VS Financial Abundance
If you want to live off your trading and investment profits, it is important to understand the difference between financial freedom and financial abundance.
Financial freedom is when you no longer have to work because your trading and investment account can support your lifestyle. Financial abundance, on the other hand, is when your trading and investment account grows to a point where it can support you AND provide you with extra money to reinvest or spend on other things.
The amount of money you need in your trading and investment account to achieve financial freedom or financial abundance will depend on your lifestyle and how much money you need to cover your living expenses.
For example, if you live in a small apartment and have very few expenses, you will need less money than someone who lives in a large house and has a lot of expenses. The same goes for how much you spend eating out versus eating at home.
The important thing to remember is that, in order to achieve financial freedom or financial abundance, you will need to have a trading and investment account that can support your lifestyle. This means ensuring the returns you generate can actually cover your lifestyle expenses on a somewhat consistent basis.
How Big of an Account Size Do You Need?
Now that we’ve covered financial freedom and financial abundance, let’s talk about how big of an account size you will need in order to achieve these things.
For clarity, it’s probably best I explain this with an example.
- Let’s say you have $10,000 in your investing and trading account.
- And let’s say you would like to replace your salary of $50,000 a year with that amount.
- To do that, you would have to generate a 500% return on the $10,000 account to replace your income.
Please bear in mind that the world’s best achieve a 30% p.a return consistently over a long period of time.
To believe you can achieve 500% is unrealistic and also very dangerous because of the risk you will take in trying to achieve this. You will likely lose your entire account trying to use financial leverage (i.e. borrowing money to invest/trade).
However, for someone who is lucky enough to have a $250,000 account, to achieve $50,000 means they ‘only’ have to achieve a 20% return on their capital. Although still a tough ask, it is a much more achievable and realistic aim this time.
Most People Should Let Their Accounts Grow
Given that most people don’t have a large enough account balance nor the investing expertise to consistently generate a large enough return to replace their income, it is probably best that they let their account grow until it can support their lifestyle.
There are a few reasons for this:
- The account will have time to compound and grow at a much faster rate than if you were withdrawing money from it every year.
- You will be less likely to take unnecessary risks with your account if you know you can’t afford to lose any money.
- You will be able to reinvest your profits back into the account, which will help it grow even faster.
This was what I did when I first started – I saved as much as I could from my corporate job, slowly but surely building up my trading stakes / position sizes over time.
I did not spend my returns, and in fact, I had deliberately separated this account into a pure trading account so I couldn’t touch it. I knew this was the beginning of my financial freedom and if I was to spend the profits I generated from my trades, then I would not have gradually been able to grow this account to build my wealth.
Eventually, I got to the point where I had a relatively consistent process in place to generate income from my account, and I had also grown the account to a size where it could support my lifestyle.
And that’s when I decided to leave my corporate job and pursue investing and trading full-time.
You Can Always Change Your Mind
After leaving my corporate job, it was bliss – at first at least.
For the first time, I was completely free from the 9-5 grind and I could do whatever I wanted, whenever I wanted.
But after 18 months of travelling and ‘living the life,’ I started to get antsy. Sure, it was great that I could do whatever I wanted, whenever I wanted, but all of my friends were still busy working in their jobs and never really had time to do anything with me.
On top of that, life started to feel meaningless. Don’t get me wrong – I loved the freedom that came with not having to work, but I missed the structure and purpose that came with having a job.
So I took some time to think about my life’s purpose and decided that I would find meaning in helping others achieve financial freedom and a better quality of life.
And that’s when I started giving more to charities and causes I believed in, managing money for others (friends, family), and eventually started The Freedom Trader. I decided to stop living off my investing/trading profits, and instead, reinvest it all back into my business so I could help others achieve more of what I had – the freedom to be their best selves and pay it forward to others in need.
I connected the dots and found that having a larger account size also meant I could have an even bigger impact on the planet – since then, I’ve gone back to working and letting my profits grow instead of living off them.
My Suggestion For You
So there you have it – whether you live off your investing/trading profits or let your account grow is entirely up to you.
If you have a large enough account size and are confident in your investing/trading ability to generate a consistent return, then by all means, go ahead and live off your profits.
But if you’re like most people, here’s my suggestion for you…
While you begin your investing and trading journey, find other ways to supplement your income if you begin with a small account.
By doing so, you not only relieve the pressure of needing to achieve unrealistic returns to fund your lifestyle but you also become a much better investor and trader since you now focus on the process and not the results, which is income to live on.
Growing your investment and trading account takes time. Nobody said it was easy which is why most people think it is impossible.
However, by taking your time, doing so without the added pressure of needing the profits to fund your lifestyle, and instead focusing on the process of becoming the best investor you can be over time and just letting compound interest take effect, your account will surely grow into significant size to then achieve decent achievable returns you can then live off.
This is what I did, beginning from scratch and so can you.
Become the tortoise that wins the race.