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. You'll find out how much money do you need.
And then how to ramp that up or how does the growth process look like, meaning how much money can you 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 to trade for a living.
In general, this video right there is focusing on your lifestyle, the lifestyle that you have. If you live in a fancy house, if you have a fancy car, that’s 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. It is necessary for you 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 develop. For your retirement or to build your account for whatever you need.
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 begin with a very minimal amount.
What’s the right amount? When I first started, I put in the minimum that I could in the broker so that 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. Some minimums are $10000 or even more, so if you have something around $2500 or even $500, it's excellent. 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 just to get started, but that doesn’t mean you’re going to be successful from trading. Now what you need to do is begin executing trades. You need to put on trades and take trades off, which allows you to collect more and more money. The more money you raise, the more you can reinvest, and that is 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 triumph, or your win rate percentage. Win rate ration.
If you have for example something like 7 out of the ten trades that you put on are wins, versus maybe one out of the ten trades that you put on are winning trades.
The other thing that could affect it is something called a drawdown. A drawdown might be if out of these three trades from here that are losers, if those three trades (let’s say you have three losing trades that are $750, $500 and $400), and then your gains are maybe only $100, $125 and $175.
So your drawdowns are much more significant than your wins, and if you’re continually doing about $100, $100, $100, you might be breaking even (even though you have 7 out of 10 wins). And that is because your drawdowns are a lot larger.
Imagine if you have one drawdown. Let’s 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. Watching your drawdowns is essential. If they’re huge drawdowns, then you can suffer much 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. For example, if you’re trading, let’s say ten times per month. Then you’re able to reinvest those profits into the next month (now you have month number one, month number two, three and four). That means that you are now 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 every year, so now you have year one, two, three, now your frequency is a lot slower.
Look at it on a timeline, if you’re doing something like on a month to month basis, let’s say, this is what the frequency might look like. That’s your frequency, and you’re doing about one, two, three, four, five, six, let’s 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. That is something that affects your profit.
Keeping the percentage of that win ration, the more you win; the more successful you’ll be on those trades. It will affect those profits. The drawdown, if you have a very bad drawdown, let’s say one month is huge and it loses a significant percentage for your account, that’s also going to affect your profits. That means that if your drawdowns are more extensive than your profit days or your profit months, that’s also going to change your earnings and the frequency. Remember, 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 are other little external factors, and there are other things that will affect it. I mean taxes if you’re in different tax brackets if you’re doing longer-term investing. Also, if you’re doing shorter term investing, if you’re able to get that 1256 contract breakthrough options, through that tax code and tax rules.
All those things start affecting your profits but in general, to simplify things, let’s 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 change your earnings if you have a more significant drop and the frequency.
If you can start there, now we can start getting an idea of how we can calculate things. Another thing is if we pick up percentages, it allows us to estimate 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. Looking at a little more of a realistic potential, a realistic return and how the growth happens in trading or the stock market.
When you look at the market overall and let’s call the market the S&P. If we define the market, so let’s say it’s the S&P 500, the average return for the S&P 500 is roughly around 8% per year. When you have $1000, your rough return per year at 8% invested is you’re looking at an $80 profit target. Doesn’t sound like a lot, but this is $1000, it’s a very liquid asset, so there are other advantages.
As you start adding this up, year after year, you get another $80 and another $80. After five years (and of course, this will compound) it might be $82, $83, $84. But 80 times five 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 it is. Now you start looking at it, and it’s almost half that, it’s nearly a full 50% profit on that $1000. It’s right around that halfway mark.
And this also assumes that the market is earning 8% all the time and no taxes at this point because you would have to pay a massive tax bill on the capital gains taxes that you also incur from investments.
That takes a few things into account, but we negate and don’t think about taxes while looking at the overall figure. Overall this seems like a reasonably 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% every single time. And that may not happen.
Sometimes you might have the market pull back 2% or 5% or 10%. What you do if you’re looking at really ideal conditions in this scenario and situation. However, 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. That means that $400 might only be $200 when you look at it conservatively in 5 years.
If you start breaking things apart in a little more detail, this 8% is right around half of a percent every month. If we’re looking at half of a cent per month, that’ll give us, multiplying that times 12 months, you get about 6% per year. 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 a quarter of a percent, or something like .33, a third of a percent. 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 decide 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 is, if I’m hitting 8% per year consistently, you’re doing quite well because of this drawdown effect. Because the S&P will pull back, and if you’re still making your % per year, even on pullback months or years, then you’re way ahead because many other people are just holding it. The reason for this is looking for that 8% per year consistently, but you will also get the drawdowns.
But for you, if you’re just continually 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. That can be 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 a 2% per month, which is something I’m looking to do every single month on my money.
When I’m looking at this $1000, 2% of that $1000, I’m 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 (2%), now we’re able to get an idea of how the growth will happen. Let me take you on the 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. 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 — depending on if you’re consistent trading, on your drawdowns, on your win ratio, and your frequency as well.
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 proceed like this. Now if you’re in a day trading scenario 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 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 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.
This top line right here, right at this top is just my variables, my set up functions. What I can do is just set up, put in $1000 starting point, I can put in $100000 starting point, whatever your starting amount is. For this purposes, for right now, let’s start at $10000.
Over here is my percent that I’ll be taking 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. The way these figures work right here, in column B and column C, what happens is column B takes C1, it makes this figure. What I need to do is get that some and then again reinvest that money back in, now this doesn’t always work out correctly. Sometimes your positions last a little longer, but it gives you a rough idea.
Here what we do is we pull C1, and we pull it there. This C column 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%.
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 get the one right above into the right, so it just takes the one, the previous one and puts in right in there. That’s all it 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 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 (there are 12 months in a year), so by the time you hit right here 12 months, that is one year exactly. When we get to 18 months, that’s 1.5 years, and you can see it 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. All I did was multiply it times 12. That means if I had a 10 thousand dollar account and I’m making $200 a month, my yearly estimate is $2400. 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. That means it would add $202, the next month it would add $204, $208, $212, $216. My total up until this point is 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 say one full year, I’ll mark it yellow here, you can see my total would be $2434, rather than $2400. 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 month after month 12, I would have that $12434. Everything matches 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 works; the yearly percentage is basically what I would make every year divided by that investment amount. That’s looking at what I would make every year, 23%.
If I’m making 2% every month, I’m looking at a yearly gain of about 23%, which is much more than the S&P500 8%. You know, if I did even 1.5% you can see I’m up at 17% there, so leave it at an even 2% for the time being.
It might not seem like a lot
In either case, this may not sound or appeal very interesting for you at a $10,000 level, or even at a $1000 level, and that is 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 worth much to you.
But when you talked 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. 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 a shift to this percentage yield. This percentage game and look at it that way, the percentage in a relative basis.
And this is why I’m telling you that you need to look at it like this. That's 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 make about $240 - $250, that’s nearly 25%. 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 starts to kick in. We might start going to $25000, and you’re doing 2%. Now you’re making monthly $500, and this is at 2%. If I jump this to 3% you’re at $750, so far 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 to cover your mortgage and your lifestyle. 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 necessary expenses, and that’s just at 3%. But you’re making like 35% per year, putting you at right around $9000 every year. $9000 from that $25000.
And this is where things start getting interesting. If I put $75000 in here, look at what it does. My monthly income is $2250, which yearly is about $27000. That’s some tremendous extra income just for letting your money sit inappropriate investments and doing some trading.
Here’s where we get even further. If you’re starting at let’s say $75000, things begin to ramp up quickly as you start getting into some of the higher numbers. That way you're building up your investment portfolio. 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. Here, at $205000 for investment, at 3%, you’re making a monthly income of around $6000, a yearly salary of $73000. This doesn’t take taxes into account, but you get the idea. You start to 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. Furthermore f you start at $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 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 beautiful house, you can live 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 have 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 easily, I mean, you can do it.
How much money do you need?
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. Now, if you really want to look at how growth is happening in an account, and you just put in that $75000, you can start ramping this up. Even if it takes you ten years right here, at a 3% rate, you can get your monthly to $73000 a month. That way you’re almost making a million dollars a year. But don't forget one thing; 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, a little bit more cushion is always lovely. 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 to compensate and cushion your retirement.
But you have to determine that. Is $100000 enough for your lifestyle, or do you need $30000-$40000? I know people who would love to make an extra $15000 or $20000 a year. To pay for vacations that they go on, and they can go on vacations and things like that.
You have to determine that. If you want that kind of lifestyle, 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 beautiful 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 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 is the acceleration curve, and that is because of 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. That’s why it takes you a little bit of time to ramp things up. Yes, you’re only making $90 per month here, and as you continue to grow that account, which you want to do when you’re first starting if you’re at a $5000-$10,000 you want to ramp up and expand that account first.
That way, even if it takes you ten 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 take a little vacation or something like that. Maybe 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. 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. Maybe you're starting now at $30000, but now you’re building experience. That way 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 do 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 comes down to growing that account — and not 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 setting up an automatic withdrawn. That is the scenario 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 amount.
Later on, it gets easier to grow your account
This isn’t Warren Buffett or some of the big investor's trade, but once you’re in many 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 significant. 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 need? It comes down to the 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. Then 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. That is a better way than looking at a dollar figure, which is what some people do. They say $90 a month is not that much. But you’re making 22% on a year. Think about that. Think about the more prominent, longer-term picture.
I hope you found it helpful and insightful to see 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. If you have $20000 in your account because you need to make a much more significant percentage gain to compensate for your lifestyle. All 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 more extensive 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. You are driving an average 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 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 an account for.