“90 % of day traders fail”
“You really think you can beat the big banks?”
“If it was that easy everyone would do it”
We have all heard some variation of “You are not qualified to make that trade”. It almost seems like the only people who are qualified are some variation of Ivy League graduates and mathematicians.
I don’t buy it, but even if I did my goal is not to make trades and succeed every day, it’s just to outperform the market over the span of a year, which is much, much easier.
Lets make some assumptions:
- The average yearly return of the stock market is ~7%
- I have money that I can lose without becoming homeless.
- I also have money in my 401k.
- The money I am using for trading would most likely sit in a 401k or a checking account anyways.
These assumptions are all crucial for trading as a young adult and are the basic tenants of personal finance for people of any age. Now Let’s break these down one by one.
The average yearly return on the stock market is ~7%
This is one of those sayings that is so common most just accept it as truth — but is there any data to support this? Yes, there is and this link does just that.
For those of you too lazy to click the link, it basically says if you control for price, dividends, and inflation, the returns between 1950 and 2009 are almost 7% exactly. It is important to know this number because chances are, if we just put our money in a index fund, we can get 7% with no work whatsoever.That means this 7% is the number to beat.
I have money I can use without becoming homeless
I would not even think about putting in the market that I cannot afford to lose. Personal finance 101 will tell you to have an emergency fund set aside. This should not be part of that emergency fund.
I also have money in my 401k
Even after I had an emergency fund put together, I also put money in my 401k. For me, this was beneficial since my employer has a matching program and I would be a fool not to take advantage of this.
The money I am using for trading would most likely sit in a 401k or a checking account anyways.
Now that my emergency fund and future is adequately funded, I finally am able to assume some risk. I’m finally ready to jump into the markets knowing that no matter what happens, I’m going to be okay.
With all those assumptions aside I now get to the main point of my trading thesis — I just need to outperform the market.
Seriously — the target is 7%. I’m not on a trading floor that expects me to generate consistent returns with weekly evaluations. I don’t have a boss that will fire me if I don’t hit 20%, and honestly none of this matters because of the money I have set aside.
I believe most traders fail because they are greedy and look for returns way out of their reach. I also think many traders fail because they have to meet quotas set by their bosses or a need to feed themselves.
A Main Street Warrior doesn’t have to worry about any of that. This may be one of the largest advantages of trading to supplement your income — you can wait for good trades to come along and only take good trades.
Am I less qualified than the Harvard graduate who is sitting at Goldman Sachs? Probably, but I don’t need to show the returns he does, I just need to beat the 7%.