What Does It Take to Make 10% Per Year? (Part 5)

I concluded the e-mail exchange from previous posts with these thoughts:

> When I am talking about “realistic returns,” the denominator
> is total net worth. I believe this is the only way to ensure
> apples-to-apples comparison. People sometimes say things
> like “I’m trading a $50K portfolio” when $50K is what they’re
> trading but $300K is what they have to invest, for example,
> and $400K is everything they have in all asset classes.
> $400K should be the denominator for this return calculation:
> not $50K.

My compatriot, now a coach for a nationally-recognized options education company, suggested 10% annualized is pretty straightforward. She even claimed “much more” to be realistic.

I think I made a pretty convincing case that is not realistic. A 10% profit on vertical spread trades is fine but what about the losses? She did not account for those. When I start averaging in some negative numbers (losers) then I better have some outsized winners to offset those losses. Going for outsized gains increases risk of even bigger losses. On another hand, I could look to cut losers short to prevent large drawdowns. This will cut out winners too as many winning trades were once in negative territory. That won’t help me reach my goal, either.

My colleague left the door wide open to total amount of capital being traded. I like the “Superman” analogy: if you have $10M to your name then you can trade $100K like it’s peanuts. Even if you lose it all, you’ll still have $9.9M remaining. How large the account is does not matter: the total net worth does. This is something nobody divulges but at its core, this is the determining factor of how brave or risk-tolerant I will be. People often toss around lofty ROI numbers without specifying where the capital in reserve is coming from. It all must be included in the denominator, folks.

Ten percent per year… easy or difficult?

You be the judge.