Friday, September 24, 2010

Can Retail Traders Be Successful?

After the article last weekend, a subscriber wrote a thoughtful comment essentially asking whether anyone but a professional could make money in the markets and whether it didn't just make sense to have a professional manage his (or as I interpret it) any amateur's money in the market. These are important issues that are definitely worthy of discussion in my view.

First, let me say that one need not be a professional trader to succeed; only a knowledgeable, disciplined trader. I consider myself to be living proof of that proposition. I started trading after reading a book that captured my interest. I studied, worked, practiced, attended seminars, and watched DVDs to achieve a level of success in trading with which I am very happy. However, there is no question that successful trading does take hard work and diligent study, yet one need not be a professional.

I regularly work with individuals who come for coaching and who have full time jobs yet have wound up trading successfully. I have written a whole book, "Smart Investors Money Machine," that is designed to show amateurs and those with jobs, families, and time limitations ways in which they can add streams of income to their lives. Some of the strategies included in "Smart Investors Money Machine" take little time while others take more, but none require the person be a professional to utilize them provided he is willing to make the necessary effort.

This free newsletter that you are now reading is definitely not directed to full time professional trading and traders. It is instead designed to help educate the retail trader by offering principles and illustrating pitfalls in an effort to help readers improve their own trading knowledge. Trading is not something that is likely to be successful without effort. It is a business and like any business, whether full time or part time, it does require education, training, knowledge, and practice, but it can definitely be done successfully other than professionally.

Why not just use a professional money manager? The first answer is that no one cares about your money as much as you do. If you accept that premise then you may ask yourself why you want someone who doesn't care about your money as much as you do to manage it. Of course, there are a variety of reasons why someone may make that choice. However, as the subscriber noted on the blog, many professional money managers don't even do as well as the S&P although they garner a hefty fee for their services. Check out the performance of the common open end mutual funds that frequently incorporate hefty management fees and administrative fees and see how well the fund must do for you to just break even. "Smart Investors Money Machine" includes a discussion of these fees and costs that may be worth a look.

On the other hand there are vehicles available through which one can approximate the returns of the SP-500, the Dow, or the Nasdaq 100 if that is what an investor is seeking. ETFs like SPY which approximates the movement of the S&P 500, DIA for the Dow, and QQQQ for the Nasdaq 100 are designed to approximate those returns and at relatively modest fees.

As is so often true in life, much depends on what we are willing to do. Can a retail trader who is unwilling to spend time educating himself about trading and who is unwilling to practice be successful? Maybe, but my guess is probably not over the long haul. Naturally there are reasons why someone may be unable to undergo the education and practice. Jobs, families, other interests, other time constraints may make it difficult, but for many who seriously want to make trading and investing work for them, time can be set aside and strategies chosen that fit their station in life. After all, it is the choices we make that determine who and where we are.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

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To comment on Bill's article click on the "comments" link below.


Anonymous said...

In addition to Bill's books, I'd like to recommend Bill Schulthesis book, THE NEW COFFEEHOUSE INVESTOR.

The author has a simple, clear at message. The average investor will do very well by following four simple rules: save early and often; build a diversified portfolio and maintain your allocation over time; keep expenses low by investing in low cost Index Funds; ignore the finance industry's marketing and hype.

A simple allocation that Schulthesis recommends is: 25% small-company stocks; 35% international stocks; 40% large-company stocks. Low-cost ETFs and Index funds work just fine for this.

The author offers another, more diversified portfolio recommendation: adding small-company value, large-compay value and REIT Index funds or ETFs i.e., having a total of no more than six ETFs or Index funds. Schulthesis notes that using six instead of just three funds does nothing more than fine-tune an already good thing by taking diversification one (small and probably unnecessary) step further.

I plan to work on becoming a better options trader with a small portion of my portfolio while allocating the rest according to Schulthesis's recommendations. The plan: To add more money to my trading account only if I "prove" myself by doing well in it.

Meanwhile, I know that following Bill's prescription for improving one's trading -- studying, working, practicing, attending seminars, and watching DVDs (Bill's DVD, btw, is terrific: it's definitely worth ordering) -- is on the money.

Also, I think that anyone who thoughtfully studies the archives on Bill's site will be rewarded for the effort.

Finally, one-on-one coaching is not to be ignored. (Full disclosure: I've had a full weekend of Bill' coaching.)

~ Nona

Anonymous said...

I have found financial advisors to only be interested in how much money you will give to them and not the performance of investments they put your money into. I used 2 different advisors who both lost over 100,000.00 without ever saying a word to me. Since educating myself and monitoring my own portfolio my returns are great and far outperform any funds I ever had with an advisor.
I say " Fire your advisor and be your own best investor." Bill Krafts books are some of the best instruction I have read and are in my personal library. Press on.

Anonymous said...

Mr.Kraft: Thank you so much for your wonderful suggesstions and advice about trading.
One question I do have is: What is the difference between a "Day Trader, and an "intraday Trader?

Michael Hicks

Bill Kraft, said...

Thanks, Nona. I appreciate your input as always.
Bill Kraft

Bill Kraft, said...

Thanks, Anonymous. I'm always glad to hear when someone takes over their own investing after educating themselves and then becomes successful. Congratulations!
Bill Kraft

Bill Kraft, said...

Thanks for writing, Michael. Essentially an intraday trader and a day trader are both doing the same thing. That is, each opens and closes every trade within the same trading day so all trades are made intraday.
Bill Kraft

Mike Jones said...

Hi Bill... Thanks for your weekly newsletter, I find it full of useful and very sound principles. I'm interested in learning how to trade the 2--5--& 10 year Treasury Bonds, due to low margin requirements. Where does one go to find info on these and this market?? I have read your Book Trade your way to Wealth and enjoyed it very much. Thanks again.. Mike Jones

Bill Kraft, said...

Thanks for writing, Mike. Unfortunately, I can't be of much help regarding bond trading since I generally don't trade bonds. I guess I would check Traders Library to see what might be available and what readers recommend. Sorry I can't be more helpful.
Bill Kraft