Does getting a 6% return from the market in a month excites you?
This means that if you started with a capital of $10,000, by the end of one month, your capital grew to $10,600. In other words, you made a profit of $600 in that month.
Well, you may be thinking, “Not too exciting, just a little bit of money.”
Really?? What if you can make 6% return every single month compounded?
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In other words:
- 1st month: 10,000 x 1.06 = 10,600
- 2nd month: 10,600 x 1.06 = 11,236
- 3rd month: 11,236 x 1.06 = 11,910.16
- 4th month: 11,910.16 x 1.06 = 12,624. 77
- and so forth until you get to the 12th month
Go and punch the calculator right now and see the end figures (I know you are lazy, you can visit here to auto-calculate for you).
By the end of the one year, your $10,000 account grew to $20,121. You have made a 100% return in a year. Simply speaking, you have doubled your money!
Do you see what I am seeing now?
Let’s say your trading capital is $50,000. You get $100,609 after 1 year based on a 6% compounded interest monthly. What if this $100k is compounded 6% monthly again for a year? That’s right… you doubled your money again to $200k.
Of course, all these figures above are theoretical. You may get drawdowns in some months or you may make much more in certain months. But what is important is to really understand and grasp the magical effect of compounding.
How about lowering it further to a mere 2%?
Do you know the Straits Times Index (STI) returned about 19% and the S&P 500 returned 12% for the whole of last year 2012?
How about a 2% return instead of 6% monthly for a $10,000 account? You will get $12,682. Not too bad… your return is about 27%. You are beating the market by a wide margin, you holy cow!
Making 2%, which is $200, from a $10,000 account initially sounds very boring right…
You don’t have to make much. Just 2% consistently every month. Take your time and make it grow bit by bit. After a while, your account will look very interesting.
So instead of shouting, “I want to make $10,000 per month from trading!”, why not change your goal to “I want to make a 2% return monthly from my trading account”?
It is much more realistic instead of focusing on an absolute arbitrary amount.
A thousand miles journey starts with a single step.