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When trading/starting out with small capital, earning the average 8% on $2000 is like $160....IN A YEAR! Thats chump change...and back then and still to this day, I'd rather trade an Apple call/put and make up to 50%-80% on that $2000in a day. I have no problem doing it, however the next day I get too greedy and trade more and lose what I gained. I still have this problem, was up 70%+ for the year, back down to 15%.
I swear, I've just read a posting from 1987 Big G.
Given that, and fully remembering how headstrong I was at that time, I'm certain you're going to go out and do what you're going to do - probably trade puts and calls on a 1-2 day basis. Nothing I can tell you is likely to dissuade you. But, here goes, anyway.
Options will eat you alive. Here's why.
1) Unlike straight equity investing, which has an upward drift (the 8-10% long-term total return), options are a zero-sum game. And the guy across from you at the (invisible) table? Quite possibly a hedge-fund guy or someone at Goldman Sachs. More experienced, better-capitalized, and has information resources you can't even dream of.
2) The spreads on options are crazy wide. It's rare to see them less than $0.05, and often $0.10, $0.20, or more. Problem is, that's huge relative to the option price. If you're trading, say, a $2 option, that's a 2.5% raping coming AND going that you need to make up. Now, you might blow that off, figuring that a trade where you hit a 75% profit can easily cover spread/commissions of 5%. But don't neglect that the 50% loss becomes a 55% loss. Or the break-even trade becomes a 5% loss. Every trade has to cover that 5% (or 2% or 7%) gap. And with small amounts, even the commissions can become an issue percentage-wise.
3) The time element is a ticking bomb. If you don't understand Black-Scholes backwards and forwards, you're going to be taken to the cleaners by those who do.
4) Behavioral Finance doesn't show up in the CFA curriculum until Level III, but you should at least seek out info on the term " prospect theory". In short, people tend to overweight low-probability outcomes and underweight high-probability outcomes. Just human nature, going back to caveman days, when you had to be ready for the unusual events, not the normal ones.
With options, the underlying price can go up, down or sideways. Option traders focus on the up and down : "If it goes down, I'm hosed. I accept that. But if it goes up, I can triple my money!" Problem is, the probabilities aren't 1/3, 1/3, 1/3. More like 1/5, 3/5, 1/5. The human mind underweights the most likely outcome, which is the option floating at the money, and withering to zero from time decay.
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If you have the stomach for it, go back over your cash inflows the past few years, and compute a weighted average of what you'd have if you would have just done a buy-and-hold on the Vanguard S&P 500 ETF whenever you put new money in. Unless your current balance is higher than that, you have your answer.
the thing most people will tell you (and they will be right) is that you can not expect to grow your 100k into $1 million in 10 years. not only that, but if you try by making big bets on high risk investments, you will probably end up losing a lot of money.
if you want to live a short and exciting life, then maybe you should just take your 100k and move to Thailand. you can eat pad thai and nail ladyboys until you croak.
This is what I'm thinking.
OP, you're too impatient. That is the problem with youth. You know the saying, "Haste makes waste". Well, that's you right now. Trying to turn 100K into $1M in 5 or 10 years is a lottery player's mindset. Sure, maybe you'll be the 1 in 10,000 to pull it off, but I won't be holding my breath.
Take the 100K. Put it a fairly boring, but solid performing balanced fund like one of the ones I listed in my previous post. Keep adding money to it.
If you put 100K in a balanced fund that gets 9% and you save $1K per month, you'll have over $1M in 18 years. You'll be what age, 42? If you can come up with $1500 per month you'll hit $1M in 16 years, by age 40.
That's what's realistic.
And believe me I was sooooo much like you not too long ago. If I had just gone the moderately boring route, I would now have a net worth at least 50K to 100K greater than I do today. Trying to go for the quick buck succeeds so rarely, it's not even worth mentioning. Here's to me hoping you don't have to learn the hard way like I did.
Last edited by mysticaltyger; 04-11-2014 at 08:48 PM..
You get a couple of winners and you think you have it all figured out. Then you hit a bad streak and start losing. It's no longer fun or exciting, but stressful. Just like gambling, if you must do it, have a fixed amount you're willing to lose and when that's gone, the experiment is over. You'll be smarter, wiser, and ready to get rich slowly instead.
I think VWINX is a bit conservative, but I'm thinking along similar lines, such as:
PRWCX (T. Rowe Price Capital Appreciation)
VWELX / VWENX (Vanguard Wellington)
DODBX (Dodge & Cox Balanced)
MAPOX (Mairs & Power Balanced)
yeah, I would have suggested vwelx but I chose vwinx based on the quote below:
Quote:
Originally Posted by mrgrape
The 70k I want to park in a safe, yielding vehicle. I could try to come up with a portfolio of stocks that look good technically and fundamentally, but want some opinions on how to best manage this.
Despite passing Level 2 of the CFA, I've never had more success in investing by actively trading as opposed to passively investing.
I highly recommend you divide you portfolio into 2 portions, 1 passively managed and 1 actively traded, the latter obviously in the minority (i.e. 10-20%). Do whatever risky strategy you want with the active portion and let the passive portion do its work over the years. Periodically rebalance back to your active and passive portions to their target weights.
I strongly advise against this line of thinking: say you make a 50% return day trading one year, you continue risking 100% of your principal AND earnings in your subsequent trades. WRONG. In a perfect world, you can get a nice 50% compounded return over the next 10 years. However, this involves risking everything you've got every single moment the stock market's open over the next 10 years. The anxiety, panic, and frustration you'll deal with over the next 10 years will quickly wear you down. Trust me, if you survive that, $1 million won't be enough compensation for the sheer anguish you'll need to endure.
When you're constantly risking all or most of your wealth in day trading, it becomes difficult to think clearly. Plus, a single bad trade over the next 10 years is enough to wipe out most of the hard work you've put in to grow your wealth.
Instead, risk a small portion of your net worth each year like I said above. Transfer your profits to your passive portfolio (where the vast majority of your wealth is held) each year. Stick with a relatively safe and simple allocation in your passive portfolio (i.e. 60/40 stocks and bonds or the Permanent Portfolio). If you lose money in your day trading portfolio, do not replenish it with your passive portfolio.
Good luck.
Last edited by ragnarkar; 04-12-2014 at 12:32 PM..
At your young age, it's important not to be too conservative with your core holdings.
Use what you know of the CAPM and seek out ETFs that are skewed towards high-risk, high-return. Go underweight on stuff like bonds, and overweight on aggressive funds like emerging markets, small-caps, etc.
You're young, and can let time make up temporary setbacks. This is your time of life for higher risk - but the kind with positive expectation, not negative expectation.
Keep an eye on expense ratios as well - a lot of the "out there" funds have expense ratios too high for what you get.
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