How much percentage of trading profits should one reinvest in his/her trading account so as to enjoy compounding and how much to withdraw to enjoy luxuries of life.
Does compounding concept work in “Trading” not sure?
In “Investing”, I understand holding a MF/ETF over a period of time will have compounding effect.
I have seen the beauty of compounding in a recurring deposit. Everymonth, you contribute and quarter end, accrued interest gets credited and the revised corpus get the accruals in future.
Few of the powerful quotes on Compounding:-
Albert Einstein called compound interest: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.
Warren Buffett, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Benjamin Franklin described compound interest as: “Money makes money. And the money that money makes, makes money.”
Ofcourse it does, compounding works everywhere, you need money to make money, so the more you have in your trading account the more you will be able to make, in investing people generally don’t withdraw their investments regularly that’s the only difference.
There are different types of investing, people surely withdraw their money. There are different types of trading too.
And then there are different levels of investing and trading.
So it is up to the individual, as these are personal questions.
Yeah i know its a personal prefrence but just wanted to know about other traders philosophy on this, you can’t copy something like this but yiu can surely get some ideas on how to go about it
Sure.
If one can keep generating the same profit as before with lesser capital, then I guess it is not wrong to withdraw some capital.
Or if there is an uptrend in the market, or even a downtrend, and if one has been consistent in generating good profit, and if he wants to make hay while the sun shines, make profit with a trending market, contrary to a withdrawal, he can even add more capital and make more profit.
Compounding works esp well in trading where DD in time and price is much much better than investing.
Its probably the most important thing else you will become slave to the market for a regular income but with uncertainty of income. This is perhaps even more important initially so that you can grow your capital to a good size and its best to make more than your target income because of the uncertainty we have to deal with.
So for me, answer is to keep compounding as much as you can, esp in initial few years. Best also to have a portfolio of systems along with compounding overall capital.
Also, if you assume that competition will keep increasing, then the returns we get will reduce and eventually be in line with what we can get overseas. so more money you have easier it will be to be able to maintain/increase your income. This is very imp i think, and i have seen how it has kept me comfortable in a tough year. ofc, if system stops wokring then your income goes, but even then atleast you will more buffer to absorb the impact.
I think compounding means the growth of capital over a period of time, and when inflation is factored in the real rate of return could be less in debt instruments, but with inflation beating asset classes there will be some real rate of return, which if remains stable, will double or triple the initial capital over the course of decades.
Of course, when the cash flows are irregular, then we can calculate XIRR along with CAGR.
Personally, depending on the time allotted and effort put in, if I am getting more than a FD, for a particular type of investment, I will be more than happy.
Index investing suits here, no time spent, no effort, take what the market gives, but of course in a non linear fashion.
I’ve seen many traders on different online forums who buy options worth Rs 2500 and call it an investment and talk about CAGR there.
Scalability in option buying is quite an issue, strategies based on option selling or futures are more easily scalable in my opinion.
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