“Should you live off your trading profits or let it grow?”
Last week a viewer of mine asked me this question and it was a question that I asked myself when I began all those years ago.
“It depends” I say…
Because it depends on your goals and current account balance.
If your goal is to leave your work and 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.
I believe this post will also give many viewers the clarity they need and not be sucked into some false dream a seminar presenter sells to them (in order to sell a trading course) and think they can begin with say a $10,000 trading account and think they can replace their income after their training is over.
If you are one of these people, you may want to continue reading as I hope I can shed some light in regards to the realities of trading.
➜ Related Article: 4 Tips To Avoid Dodgy Get-Rich-Quick Type Seminars
The 90/90/90 Rule
Many may not have heard of the 90/90/90 rule.
It simply states that 90% of traders lose 90% of their trading account within 90 days, which is a very sad but true statistic.
I hope I can help you avoid becoming part of this statistic.
For clarity, it’s probably best I explain this with an example.
For simplicity’s sake, we will use the same $10,000 account from the previous example.
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.
For me personally, I also began very small, slowly but surely building up my trading stakes 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.
➜ Related Article: Why Leveraged Investing/Trading Is Dangerous
The Rule of 72
I also want to explain the Rule of 72 to you.
Some people may have heard of this rule, but for those who haven’t, it simply helps you calculate the time it takes to double your investment if you achieve a specific return.
Say you achieve a 20% p.a return.
If you take 72 divided 20, it means it will take about 3.5 years to double your $10,000 account to $20,000.
What people forget is that if they don’t spend this increased amount, then through the power of compound interest, it takes just another 3.5 years to double that again to $40,000 and another 3.5 years to double that again to $80,000.
So in just over a decade, you have increased your original account of $10,000 by eight times, simply because you didn’t spend it. You allowed the profits to compound and generate returns over the years. This is why the famous Albert Einstein called compound interest the ‘eighth wonder of the world.
My Recommendation to You
So 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.