Listen to the Podcast
Hey this is Sasha Evdakov and thanks for joining me here for another lesson.
In today’s lesson what I’d like to do is share with you a concept of how much money do you need just to get started into trading, just to start trading and start investing, how much money do you really need.
And then how to ramp that up or how does the growth process look like, meaning how much money can you really make and potentially how does that look like for your lifestyle.
This video is different than one of my other videos, which is, how much money do you need in order to trade for a living.
In general, this video right there is really focusing on your lifestyle, the lifestyle that you have, if you live in a fancy house, if you have a fancy car, that’s really what it comes down to, it’s about learning about your expenses and then how much do you need to make on a weekly or a monthly basis, so you need to do those calculations.
But in this video I want to show you more the emphasis on the growth process, on how that exponentially looks as you grow as a trader and your realistic potentials for the future to grow for your retirement, to just grow your account for whatever needs you want it to grow.
You can start small
Really when it comes to growth, when it comes to getting started in trading or investing, you can start with something as simple as $100, $50, $10, you can start at a very minimal amount.
What’s a good amount to start with? When I first started, I basically put in the minimum that I could in the broker, so all brokers will have these minimums, so when you look at a broker, like an online broker, they’ll have a minimum.
Some of those minimums might be $2500, other minimums might be $5000 and some minimums are $10000 or even more, so if you have something around $2500 or even $500 if you spot some promotions or specials, some of those discount brokers do have that, and then what you do is you go ahead, put your money in, and now you have an account, it’s open and now you’re able to trade, invest, buy a stock, buy an ETF.
That allows you to just get started, but that doesn’t mean you’re going to be successful from trading, now what you need to do is start executing trades, meaning you need to put on trades and take trades off, which allows you to collect more and more money, and the more money you collect, the more you can reinvest, and that is really the frequency of your trading.
Wins vs. Drawdowns
There are a couple of things that affect your profits or growth when it comes to trading. One of those things is your percentage of win, or your win rate percentage. Win rate ration.
If you have for example something like 7 out of the 10 trades that you put on are wins, versus maybe one out of the 10 trades that you put on are winning trades.
The other thing that could affect it is something called a drawdown, so for example. A drawdown might be if out of these three trades from here that are losers, if those 3 trades, let’s just say you have 3 losing trades that are $750, $500 and $400, so these are all loss trades, and then your gains are maybe only $100, $125 and $175.
So your drawdowns are much larger than your wins, and if you’re constantly doing about $100, $100, $100, you might be breaking even, even though you have 7 out of 10 wins. And that is simply because your drawdowns are a lot larger.
Imagine if you have one drawdown, let’s just say, of $3000 to make matter simple, versus your average win is maybe only $200, so again, you can see how that really would affect your account, so it’s important to watch your drawdowns, if they’re huge drawdowns then you can really suffer greatly in your account, so that’s another thing that would affect your profits.
And the third thing that would affect your profits is the frequency. So for example, if you’re trading, let’s just say 10 times per month and you’re able to reinvest those profits into the next month, so now you have month number one, month number two, three and four, so what you do then is with all these months, now you’re able to take that profit and put it back in, month after month.
Whereas if you’re taking those profits and you’re just doing it on a yearly basis, so now you have year one, two, three, now your frequency is a lot slower.
If you look at it on a timeline, if you’re doing something like on a month to month basis, let’s just say, this is kind of what the frequency might look like, so that’s your frequency and you’re doing about one, two, three, four, five, six, let’s just say every single month you’re doing a frequency to continue to accumulate and compound those earnings.
If your frequency was every two months, now you can see how that frequency is a lot less, and if your frequency was even slower than that, maybe once every six months you put on a trade, now you have to wait a little bit longer to take those profits and reinvest them back into the next trade.
Again, the more frequently, which is why some people are attracted to day trading, the more frequent you can compound those earnings, the more that you can make, which is something that affects your profit.
Keeping percentage of that win ration, the more you win, obviously the more successful you’ll be on those trades, will affect those profits. The drawdown, if you have a very bad drawdown, let’s say one month is really huge and it loses a major percentage for your account, that’s also going to affect your profits, and also if your drawdowns are larger than your profit days or your profit months or your other time frames that you’re hitting, that’s also going to affect your profits and the frequency, so the more often that you can create profitable trades, the better you are at compounding.
Those are some of the things that affect your profits, of course there’s other factors, there’s other little external factors, and there’s other things that will affect it, such as, let’s just say taxes, if you’re in different tax brackets, if you’re doing longer term investing, if you’re doing shorter term investing, if you’re able to get that 1256 contract break through options, through that tax code and tax rules.
All those things start affecting your profits but in general to simplify things, let’s just say the percentage of your win ratio, the more times that you win, it’s going to affect your profits, the drawdown, also going to affect your profits if you have a larger drop, and the frequency.
If you can start there, now we can start getting an idea of how we can calculate things, or if we just pick up percentages, it allows us to calculate our potential future.
Let’s talk about growth
Now what I‘d like to do is take a look at the growth side of the profits. So, looking at a little more of a realistic potential, a realistic return and how the growth really happens in trading or in the stock market.
When you look at just the market overall and let’s just call the market the S&P, if we define the market, so let’s just say it’s the S&P 500, the average return for the S&P 500 is roughly around 8% per year. So when you have $1000, your rough return per year at 8% invested is, you’re looking at a $80 profit target. Doesn’t sound like a lot, but this is $1000, it’s a very liquid asset so there’s other advantages.
As you start adding this up, let’s say year after year, you get another $80, you get another $80, you get another $80 and another $80, so after 5 years, and of course this will compound, so it might be $82, $83, $84, but 80 times 5 you’re looking at right around $400.
This doesn’t sound like a lot, but when you compare it to your initial investment of $1000, now you start looking at it, it’s almost half that, it’s really almost a full 50% profit on that $1000, it’s really right around that half way mark.
And this assumes also that the market is earning 8% all the time and obviously no taxes at this point, because you would have to pay a large tax bill on the capital gains taxes that you also incur from investments.
That takes a few things into account, but let’s just say we negate and don’t think about taxes for the time being, let’s just look at the overall figure, so overall this looks as a fairly nice number when you talk about $1000, 8%, this also assumes that the market is going to go up every time $80 on your profit, meaning 8% each and every single time. And that may not happen.
Sometimes you might have the market pull back 2% or 5% or 10%, so you’re looking at really ideal conditions in this scenario and situation, and that may not always happen, so really if you take this $400, you might want to slash it in half to be a little more conservative, so really that $400 might only be $200 when you look at it conservatively in a 5 year period.
If you start breaking things apart in a little more detail, this 8% is really right around let’s say half of a percent on a month basis, so if we’re looking at half of a percent per month, that’ll give us, multiplying that times 12 months, you get about 6% per year, so that’s a little more conservative, but now you’re looking at a monthly figure.
If you want to be even more conservative, you could say, not half of a percent, but maybe let’s say a quarter of a percent, or something like .33, a third of a percent, so you need to determine that based on the capital that you have.
The way to figure this out is to go ahead and make some trades, once you’re trading and you’re trading consistently, you can now see, am I making 1% per month? Am I making 2% per month? 5% per month? 10% per month?
The 8% mark
An ideal goal, what people try to do while they try to trade themselves is they’re looking to win and beat this 8%. So if you’re even doing 10% per year, then you’re way ahead of it.
For me the way I look at it actually is, if I’m hitting 8% per year on a consistent basis, you’re actually doing quite well because of this draw down effect. Because the S&P will pull back, and if you’re still making your % per year, even on pull back months or years, then you’re way ahead, because many other people are just holding it, looking for that 8% per year on a consistent basis, but you will also get the drawdowns.
But for you, if you’re just constantly making 8% every year, and you’re able to trade short, trade long, that’s what’s going to allow you to make your 6% per year every year, 8% or 10% per year if you’re a little better.
If we take a little bit more of a conservative approach, I’m aiming for let’s say a 2% per month, which is something over here, I’m looking to do that every single month on my money.
If I’m looking at this $1000, 2% of that $1000, I’m really only looking to make about $20 as far as 2% goes every single month on $1000, now in the stock market, if you catch just a small little run, executing one or two trades, you’ll be able to make $20, of course, you do have commissions, you do have taxes, and all those other things to account for.
If we’re aiming conservatively, let’s say 2%, now we’re able to kind of get an idea of how the growth will happen. So now, let me take you on screen to a little excel spreadsheet so you get an idea of how this continues to grow and compound, month after month, year after year, so that way you can easily see and understand how the growth process happens.
Of course this percentage factor, you will have to change on your own, depending on how you’re trading, if you’re consistent trading, depending on your drawdowns, depending on your win ratio, a lot of other factors, depending on your frequency.
In this case, my frequency, what I’m looking for is a month to month compound frequency, I’m not long for a day to day compound frequency, because in trade days moves in the stock market will move like this, now if you’re in a day trading scenario and situation and day trading business, then that’s fine, you can look at it like that and start breaking those things apart and putting on a larger frequency.
But in this example, I’m looking at a month to month basis, to see what is the monthly potential along with your annual potential, because sometimes the market’s going to pull back and then maybe one or two weeks where you’re not trading, and the next of the moth, one or two weeks where you’re trading and being a little more active.
The potential of the business
What’s the potential for that? Let’s go to the excel sheet, and I want to share with you based on a simple 2%, 2.5%, every single month, compounding, how it looks like over the next couple of years, over the next decade or the next 20 years.
Here we are on a simple excel sheet and let me explain to you how this works and how the breakdown of all these figures are coming up.
Basically this top line right here, right at this top is just my variables, my set up functions, so what I can do is just set up, put in $1000 starting point, I can put in $100000 starting point, whatever your starting amount, so for this purposes, just for right now, let’s just start at $10000.
Over here is my percent that I’ll be making on a month to month basis, because I’m looking at a monthly figure. I’m not looking for a day trading action. What I want is at the end of the month, am I profitable? At that end of the month, am I bringing home a paycheck? Is my account increasing? That’s what I want.
Because if I‘m increasing month to month, then at the end of the year, I should also be increasing, so the way these figures work right here, in column B and column C, what happens is column B just takes C1, it just takes this figure, because what I need to do is get that some and then again reinvest that money back in, now this doesn’t always work out perfectly, because sometimes your positions last a little longer, but it gives you a rough idea.
Here what we do is basically we pull C1 and we pull it there, now this C column, what it does is it takes the figure right here in the B column, multiplies it times the percentage, 2% and adds that B column, because if I didn’t have the addition of that original amount, it would just give me the amount I would make from the 2%.
So this gives me a total account value, and you can see that right here, we keep that 2% right there, and if we go even down here at a lower level further on, you can see it’s still here, multiplies it times 2%.
You can see how that works in column B, all it does is just get the one right above into the right, so it just takes the one, the previous one and puts in right in there. So that’s all it really does.
Here what I’ve done is put in the month, so if you’re trading month number 2, then you’re trading month 3, and you can put this all the way down, multiple timeframes.
You can put it in multiple years, and here is the year break down, basically we’re just dividing the number of months by 12, because there’s 12 month in a year, so by the time you hit right here 12 months, that is 1 year exactly. So when we get to 18 months, that’s 1.5 years, and you can see you can break it down all the way down to 20 years if you like.
That’s what I did there on that column, and now the monthly income here, this column is simply C2-B2, so it’s that B column and C column, the difference between them, because that is what I’m actually earning, so that’s the same thing as if I didn’t add that, so that would be my monthly income.
And then a yearly estimated figure, based on this monthly figure, so all I did was just multiply it times 12, so meaning if I had a 10 thousand dollar account and I’m making $200 a month, my yearly estimate is $2400, really it will be a little bit more than that, because I can re-compound that in, because if you look at month 12, my total up until this point, meaning it would add $202, the next month it would add $204, $208, $212, $216, so it adds all these figures, so my total up until this point is really all it does, it just adds all the previous numbers together, so that is the sum of these over here.
You can see up until that point, so that’s what it’s doing there in that column. So really it would be, if I did it up to, let’s just say one full year, I’ll just mark it yellow here, you can see my total would actually be $2434, rather than $2400 and that is just simply because we’re re-compounding those earning and you can see my account value would be right around that, $12189 and then that previous month, the end of the month after month 12, I would have that $12434, so those match up really, pretty much with my $10000 investment, so if I add $10000, $2434, that adds up to that final sum right there.
That’s how it really works; the yearly percentage is basically what I would make on a yearly basis divided by that investment amount, so that’s looking at what I would make on a year basis, 23%.
If I’m making 2% every month, I’m looking at a yearly gain about 23%, which is much more than the S&P500 8%, so if I did even 1.5% you can see I’m up at 17% there, so let’s just leave it at an even 2% for the time being.
It might not seem like a lot
In either case, this may not seem or appeal very interesting for you at a $10,000 level, or even at a $1000 level, and that is simply because it’s $20, and $20 to you may not seem like a lot of money, especially if you’re a little more of a spender, if you’re going out, you’re spending money, you’re buying fancy clothes, $20 is $20, it’s not really worth much to you.
But when you talk about $20 back in 1930, a newspaper back in 1900 was 5 cents, now the newspaper is 50 cents, $1, 75 cents, so things are more expensive.
A car and a vehicle back in those days also, you might be able to buy a car for $1000 or $2000, now you need to buy a car for $20,000 an average newer car. So it’s due to inflation that your perception of this $20 doesn’t seem a lot.
Focus on the percentage
What you need to do in your mind is shift to this percentage yield, this percentage game and look at it that way, the percentage in relative basis.
And this is why I’m telling you that you need to look at it like this, is because once you start ramping this up, right now we’re at $1000, so $20 of investment income on a month to month basis isn’t going to cover your lifestyle, it probably won’t even cover your cellphone bill.
You’re doing that for a whole year to make $240, that’s not a lot of money in a relative number terms. But on a percentage basis, you’re making, when you look at it from comparing to what you had, $1000, to making about $240 - $250, that’s nearly 25%. So that’s pretty good when you look at it on a percentage basis.
Here’s what I want to show you, the escalation and how the growth really starts to kick in. So let’s say we start going to $25000 and you’re doing 2%, now you’re making on a monthly basis $500 and this is at 2%, if I jump this to 3% you’re at $750, so now this starts to get to a reasonable modern day lifestyle.
$750 per month, $900 per month, for some people this can cover their groceries, this can cover their house or rental property, a smaller mortgage might be around $900 if you have a good interest rate, but for other people, if you have a fancier life, $1500 - $2000 is where you need to be at in order to cover your mortgage and your lifestyle, so for other people it’s even much more.
You can see how this at least would cover some basic groceries, your cellphone bill, internet fees, and things like that, some basic expenses, and that’s just at 3%. But you’re making like 35% per year, putting you at right around $9000 on a yearly basis. $9000 from that $25000.
And this is where things start really getting interesting. If I put $75000 in here, look at what it does. My monthly income is $2250, which on a yearly basis is about $27000 that’s some great extra income just for letting your money sit in appropriate investments and doing some trading.
Here’s where we get even further, so as I start going down a few months, even if you’re starting at let’s say $75000, things start to ramp up really as you start getting into some of the higher numbers, and building up your investing portfolio, so this is where things get even more fascinating.
As your account continues to grow, let’s say by month 36, you’re starting at $75000. So here, at $205000 of investment, at 3%, you’re making a monthly income of around $6000, a yearly income of $73000, this of course doesn’t take taxes into account, but you get the idea, you start to really ramp things up.
Once you’re in the $400000 range, you’re right around $150000 a year, making about $12000 a month, as you continue to ramp that up, you can get it up to about $700000 within six and a half years, if you start with $75000, and now you’re at $21000 per month. $255000, you’re living better than the top 1% or 2% of the world.
When you’re making more than $150000 a year, about $200000 a year, you’re already at that 1-2% bracket when you talk about the rest of the world, because most people are not there. They’re just not there.
I mean, you’re not living like a billionaire, but $20000 a month, as you start living conservatively, driving an average car, having a nice house, you can live really well when you’re doing $21000 every single month.
For me, I come from a much poor background, I was born in Siberia, so for me, I could live on pennies really, because there’s been days where I’ve been without food. Whereas many people don’t even experience that, so for me, I can live on $300 a month really, I mean, you can do it.
How much money do you need?
Realistically, if you have a job now, and of course now I’m in a much better situation, I can buy the things I want to buy, go on the trips I want to go on, and I don’t have to worry about the money side of things, but here, if you really want to look at how growth is happening in an account, and you just put in that $75000, as you start ramping this up, even if it takes you 10 years right here, at a 3% rate, you can get your monthly to $73000 a month, when you’re almost making a million dollars a year, but this is about being in trading consistently.
That means you’re making 3% a month. Even if I go down to 1.5% a month on a conservative basis, and now we go into 15 years of investing and you ramp it up to a million dollars, you can still make $15000 a month, $190000.
It’s not mega millions, but how much money do you need? That is the big question, how much is enough for you?
Like I said, for me, a couple of thousand dollars a month would be more than enough, especially in my early years. That’s a goldmine, nowadays with a little more inflation and things like that, I little bit more cushion is always nice, and now of course I’m running a business and I have people working for me, so all those things help with a little extra cash in order to compensate and cushion your retirement.
But you have to determine that, is $100000 enough for your lifestyle, or do you just need $30000-$40000? I know people who would love to just make an extra $15000 or $20000 a year just to pay for vacations that they go on, and they can go on vacations and things like that.
You have to determine that, and if you want that kind of lifestyle, just to be able to go on modest vacations, and you have $100000 in your retirement account or stock trading account, right here, and you’re starting with $75000 and you’re making 1.5%, you can be making about $18000 a year.
That will give you a couple of nice vacations. It won’t get you in the top 5 star hotels, and you’re not going to be buying gold and jewelry and diamonds in your trips, but you’ll be able to see some really pretty sites in the world and have a completely different lifestyle, without worrying about where that money is coming from for your next trip.
It takes time
Again, look at this, play with this, you can set up your own formulas and spreadsheet, it’s just about doing some math.
If you’re starting at a lower sum, let’s say $5000, you can ramp it up, but it’s a slower process, the acceleration curve takes time, so the hard part really is the acceleration curve, and that is because your value, your relative value is not that large.
Your percentage is the same, but relative to the world and how to spend that cash or what things cost, it’s not that much, so that’s why it takes you a little bit of time to ramp things up, so you’re only making $90 per month here, and as you continue to grow that account, which you really want to do when you’re first starting out, if you’re at a $5000-$10,000 you really want to ramp up and grow that account first.
That way, even if it takes you 10 years to grow that account, now at least you’re at a $400 a month bracket, where every year you’re making $5000 extra. Those could be to help pay for your car, it could be used to pay for your mortgage, it could be used to pay for your kids’ schooling, or just take a little vacation or something like that, pay for the Christmas season, however you want to allocate that money, but it’s an extra $5000, once you start ramping those up.
But sometimes that takes time, but I know that if you’re starting and if you’re just 17-18 years old. In 10 years you’re at age 28-30 years old, may be your starting now at $30000 but now you’re building experience and you can continue to grow this to 20 years, and 20 years at 1.5%, now you’re starting to make $2500 and that’s if you’re starting at a low amount.
If you bump this up and you’re starting at $100000 and you go down to doing a 20 year plan, you’re making $51000 per year, at just 1.5%
If we go back to that 3% that we had before, you can make some serious, serious money but this really comes down to growing that account and not really taking anything out of that account, because again, once you set this up, and you start being consistent, whether that’s you get into the $10000 a month - $5000 a month range, what you might end up doing is set up an automatic withdrawn, where you’re withdrawing $1000 a month, $5000 a month, $3000 a month, whatever the sum is. But you can see that once you’re trading with a large sum.
Later on, it gets easier to grow your account
This isn’t warren buffet or some of the big investors trade, but once you’re in multiple million dollars, it’s pretty easy to make a few million dollars a month, because you have such a large account and now it seems really big, you’re still only making 3%, even if you go down to 1.9 or 2%, once you have this large account, you really can start ramping things up, now you’re at 8 million, you’re making $160000 a month, how much money do you really need? It really comes down to growth of that account, and of course if you add an extra zero at a million dollars.
Once you start ramping this up, you can see that the ease of funds if you find your consistent strategy is a lot easier.
Trading isn’t always linear
Of course, trading in the market isn’t always as linear as this, because as you start trading larger, your positions become seen in the market place, so it becomes a little more difficult to trade.
I just wanted to share with you the percentage here of what’s possible and how to really ramp that up and grow that account slowly as you start looking at percentage figures, rather than looking at just a dollar figure, which is what some people do here and say, $90 a month is not that much, but you’re making 22% on a year. Think about that. Think about the bigger, longer term picture.
I hope you found it helpful and insightful to seeing the profit potential and how things compound.
Remember if you’re looking for let’s say a $5000 per month income or salary, then it’s a lot easier to make that $5000 per month if you have two million or 5 million dollars in your account, than it is if you have let’s say $20000 in your account, because you need to make a much larger percentage gain to compensate for your lifestyle. So really it comes down to making a modest amount on a percentage basis and consistently doing that time and time again.
If you’re looking at it in terms of a lifestyle, if you want to fly in a private jet, a fancy car, live in a fancy house, then that’s going to be a much more expensive lifestyle, and you’re going to need to make much more to compensate for that lifestyle, and it’s a lot easier if you have a larger account or capital account.
But if you have a smaller trading account and you can definitely still live on a modest income or a modest trading income and still be completely happy if you’re living modestly. Driving a normal car, living in a normal house, because that allows you to grow your account and continue to use those funds for your retirement, your children’s education, or just have a little more free time to take some more vacations.
Hopefully this gave you some insight on that profit potential in a linear way, but of course, this doesn’t take into account the taxes and some other things that you will need to pay for and account for.