Is trading worth it?

 

If you’re considering giving trading a go, I expect some of the thoughts running through your mind might be …

‘Why do I think I can beat the markets?’

‘Why would I do any better than a fund manager? Or even the rubbish interest on a savings account?’

‘Don’t most people lose at this?’

‘Isn’t it just a mugs game?’

And if you already trade, I expect you’ve had some of these things said to you, even if it’s only by your inner voice.

So, is trading worth it?

The easy answer to these questions would be about ‘believing in yourself’ … ‘battling the odds’ … etc. But that’s dodging the issue here. These are reasonable concerns and are genuinely worth addressing.

Many people question the wisdom of us ‘retail traders’ who spend our spare time trying to make our money work harder for us. We’re often portrayed as naïve fools who blindly follow the latest get-rich-quick guru.

I find this image quite offensive.

And I certainly don’t align myself with people who reject experts or join up with conspiracy theories and ‘alternative facts’.

So, let’s consider the experts …

Even the top hedge funds tend to produce very modest returns, especially when viewed over several years. In 2020, the average fund returned 11.6% – a bumper year, but still lagging behind the S&P, which grew by 16%.

I’m not suggesting that hedge-fund managers don’t know what they are doing, or that I could do a better job. The reality is that we’re doing very different things. They are investing huge, market-moving sums of money and have to avoid volatility and carefully balance their portfolios, using hugely complex algos. My investment pot is considerably smaller, and my investing can be a lot nimbler.

It’s like comparing a homemade pasta with a mass-produced, pre-prepared microwave meal, made to a chef’s recipe and with a team of food scientists behind it. I feel pretty confident that the homemade meal will taste better. Yes, I can get what I want better than a professional can do for me – but we’re really not trying to achieve the same things.

If you put your money into the hands of a financial expert – you’ll get a mass-produced result designed to suit the parameters they are working within.

If you manage your money yourself, you know exactly what your risk appetite is, you know how deep your pockets are … and you get the knowledge and satisfaction that comes from learning to do it yourself.

What about the downside?

Doing it yourself puts you directly in the line of fire for financial risk, plus takes up a chunk of your time and effort.

The effort that goes into trading for yourself needs to be managed – it’s easy for this to eat into our lives and makes the ‘is it really worth it?’ question all too valid. Trading needn’t take up much time, unless we want it to. Set limits and look for trading strategies that will work within those limits.

As a basic rule of thumb, longer term trading strategies will take up less of your time. Day trading takes up more screentime, but is easier to dip in and out of.

Managing financial risk should be your main priority. No one likes losing money, but trading losses are particularly tough. Most of us will shrug stoically if our managed pension funds take a modest loss, but we’ll beat our breasts if our own trading accounts take even a small drawdown.

Follow the basic ground rules here:

• Only trade with money you can afford to lose
• Risk no more than 2% of your fund in any trade
• Use drawdown limits
• Watch your exposure in correlated markets

Plus, be realistic about the kind of returns you expect. If hedge funds have averaged around 5% pa over the past 10 years, it’s realistic to think you can better that. But expecting 100%+ in a year isn’t something that can be maintained.

What drives us?

The obvious answer is … money.

But it’s important to put that into some context. In most jobs, financial reward is consequence of a service or a product we supply, but with trading, financial reward can feel like it’s everything. If we focus too hard on the money, there are some dangerous side effects …

• First off, our risk management can suffer if we aren’t happy with how much money we’re making.
• Secondly, if your entire motivation is the money, then a period of drawdown can seriously damage your self-worth, having a knock-on effect on your trading, even causing you to give up.

It’s very useful to find other ways to measure your trading success. Of course, turning a profit is what matters in the long term, but along the way, become a better trader is all part of that journey.

But one of the big driving forces for many home traders I speak to is about building something themselves for their financial future. It’s about the intellectual and psychological challenge, and the sense of accomplishment that comes – not from a big win (although those are nice!), but from seeing a modest fund grow and grow over the years.

 

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