It is very tempting to manage one’s own investments and many dive head first into it. There are two aspects that drive people to try this: being in control and save money. Although most of the people that claim that the latter is the reason, the fact is they want to be in control. Because of that there are zillions of companies and individuals advertising and teaching the “hidden secrets of trading (or investing) success”. However, one aspect that not a single one touches is the costs of trading for a living. So, let’s get to it and do some number crushing.  In the first article we discussed the long term investor. In the second article we moved to the other end of the spectrum and evaluated the numbers for the day trader. In this third article, we will crunch the numbers for the very popular swing trader. The last article will wrap it all with some considerations and suggestions.

Swing trading

This is by far the most popular form of trading/investing. I am using both terms here because there are a number of very popular strategies that combine both. Swing trading is also the easiest one to learn and get some success. Notice I used “some success”.

Among the traders and investors I know the most successful ones adopted a mixture of long term investing and swing trading. However, very few can beat the index consistently. My informal research tells me that the vast majority of the profitable group makes on average 4 to 5%/year. With some good annuities paying that much in Canada, I wouldn’t be motivated to spend my time on that.

However, for many there are good reasons to invest a few hours per week to research the financial markets and manage trading orders. So, what are the costs involved? A successful swing trader will follow the financial markets every day. The fact is they like it and would do it anyway. But, to be fair we need to approach this like a business and consider that activity working hours. In general two to three hours a day is enough to be up to date. I will use three hours for our calculations.

Since a swing trader does not place a lot of trades, the discounts will not be big. I will use a figure of $5.99 for each side (buy or sell) of a trade. For most there will be an average of two round trip trades (a round trip trade is a buy and a sell) per week. The number of hours spent managing the trades are not many. I will use half hour per day for your simulation. Our model swing trader does not follow many companies and do not keep many traders open at the same time. Most will never have more than five trades going on at the same time.

First, let’s consider a portfolio size of $50,000.00. The table below shows the amount of profit necessary to cover the costs for the same income levels I used in Part 1 and Part 2.

 

 

Trading cost ($)

Hours per week working

Hourly wage ($/h)

Labour + trading cost ($/Year)

Amount invested ($)

Profits to cover cost (%/year)

$479.20

17.5

25.00

23,229.20

50,000.00

46.46%

$479.20

17.5

40.00

36,879.20

50,000.00

73.76%

$479.20

17.5

70.00

64,179.20

50,000.00

128.36%

$479.20

17.5

100.00

91,479.20

50,000.00

182.96%

 

Well, considering the index averages over the long term, these numbers are not too attractive. Considering the four to five percent a year I got from my informal research, our model swing trader is being paid roughly $2.00/h to manage a $50,000.00 portfolio.

With a larger portfolio, the numbers get better.

Trading cost ($)

Hours per week working

Hourly wage ($/h)

Labour + trading cost ($/Year)

Amount invested ($)

Profits to cover cost (%/year)

$479.20

17.5

25.00

23,229.20

500,000.00

4.65%

$479.20

17.5

40.00

36,879.20

500,000.00

7.38%

$479.20

17.5

70.00

64,179.20

500,000.00

12.84%

$479.20

17.5

100.00

91,479.20

500,000.00

18.30%

 

Once again our simulation shows that it is not very compelling to become a Do-It-Yourself investor or trader. Although I am sure it is possible to list hundreds of reasons to do it, research shows the benefits of working with a professional. It is a lot like self-medication. One is better off going to the Doctor than using the modern “Google doctor”.

In the next article I will go over some research studies that clearly shows the benefit of working with a professional. Stay tuned!

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Or focus is on you, our client. Our focus is to help you understand the possible outcomes of the different options available to you, inspiring you to think beyond where you are now; helping you move into action and supporting you along the way. Insurance products are provided through Customplan Financial Advisors Inc Mutual funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc. The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed have not been approved by and are not those of Investia Financial Services Inc. This website is not deemed to be used as a solicitation in a jurisdiction where this Investia representative is not registered. Privacy policy: https://ia.ca/privacy-policy

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