Practically every week, I get an e-mail or two from an aspiring trader. “I want to make some extra money trading”, the story usually goes. Sometimes it is from young adults, already scrambling to get out of the rat race. Other times it is from a retired folk who suddenly realize that money is tight, and working at a fast food restaurant is a loathsome option.
For some reason, $50,000 per year after taxes seems to be the amount most frequently requested. I guess it makes sense – who wouldn’t have a more comfortable life with an extra $1,000 spending money each week in their pocket?
Most want this amount by part time trading. They have obviously seen all the trading “gurus” out there bragging about their alleged profits (spoiler alert: most gurus do not even trade, and the alleged profits are fairy dust!), and the people who e-mail me want just a little taste of that but do not want to be full time traders.
Let’s forget about the sheer audacity of the request – seriously, what kind of part time job pays someone with zero or little experience $50-75 per hour?
And let’s forget about the difficulty in making ANY money in trading – the statistics tell us more than 90% of people lose at trading – which is absolutely true.
Casting the sheer difficulty of the task aside (becoming a profitable trader is a whole book in itself!), let’s just look at the math. How can someone net $50,000 per year from part time trading?
First, how much capital would you need? Assuming a 30% tax rate, to net $50,000 per year, you’d need to make around $71,000 in a year. Not a trivial amount. If you only had a $10,000 account to start, you have to have over 700% annual return! WOW!!!
Unfortunately, it is even worse for most part time traders, who might only have $5,000 to start with. They would need over 1400% return per year, for every year they trade, since they are withdrawing all profits.
Of course, some gaudy returns are possible, but those returns are possible only with EXTREME risk – basically losing it all versus a slim chance at an extraordinary gain. I call it a “lottery ticket” approach, since it has about as much chance of occurring as winning the big prize in the lottery.
Obviously, as the amount of starting capital goes up, the annual return goes down. But even with $180,000 starting capital, you’d still need 40% annual return to meet the profit goal. Most professionals do not hit that kind of annual percentage return, and even if they do, it is hard to do multiple consecutive years.
So, what about an alternative: take some money out and slowly build the account? The good news is you’ll eventually be able to take out $50,000 after taxes, every year. The bad news is that even with 50% annual returns (VERY difficult), and taking out only 60% of net profits, it will take 26 years of this kind of performance to hit the $50,000 withdrawal level. In other words, not very palatable for most part timers.
Even for someone willing to forego current income to reach the $50,000 goal has it tough. Assuming 50% per year return, 30% tax rate, and reinvesting 100% of net profits (taking out 0%), it still takes 10 years before one can withdraw $50K per year without dropping the account balance.
As daunting as even this scenario sounds, remember two things:
- This assumes 50% annual returns, each year, for 10 years! In other words, you will be in VERY rare air to reach this return level.
- This ignores the inevitable drawdowns that will accompany such returns (assume 25-50% annual drawdowns, as a likely minimum).
I have included a spreadsheet for you to tailor to your own situation. Just change the numbers highlighted in blue for your circumstances.
You can definitely become a part time trader - that is not an issue. But make sure your goals and objectives are realistic before you start trading. For most people, the math simply does not work out. Unrealistic expected returns, small starting capital, and pie-in-the-sky income requirements make part time trading very difficult for most.
Remember, trading is a marathon, not a sprint. Keep your requirements for return and income small at first, and focus just on growing the account and trading well. If you do so, profits will eventually follow.
Get in touch to Download files, resources, and some materials to take the advantage.
-- Kevin Davey of KJ Trading Systems