Some call it investment goals, others call it trading goals, depending on the type of trader you are. Before you even embark on your trading journey, you should have a goal in mind. It can help to guide you as a trader if you ever felt lost.
Knowing when to enter and exit a trade is no doubt one of the most important skills as a trader. But to truly profit from investment decisions in the long run, you need to have a clear investment goal. And money management is a skill that most traders often learn too late.
2 Main Types of Goals
There are two main types of investment goals - cash flow and capital gains. You either want to generate a certain monthly income or build a certain dollar value in your account.
Capital Gain Goal – I want to have $1 million in 10 years’ time
Cash Flow Goal – I want to make $5,000 a month in 3 years’ time.
These two goals are not mutually exclusive but having two types of goals at the same time is a tricky issue and can sometimes affect a trader’s decision-making. For example, when a trader is losing money in short-term trades, he might be tempted to close positions in longer-term trades that were made for capital gains.
What is the difference between capital and cash flow gains?
Capital Gain
Returns from capital gains are usually a large sum and are paid out when an asset is sold. This happens when people sell stocks which has appreciated in value over time, usually a few months or years. In order to keep pursuing this strategy you will have to acquire another asset to eventually sell.
Cash flow - Passive Income or sometimes known as Portfolio Income
Cash flow is about generating regular returns for your amount of investment from time to time as long as you own that investment. In trading, this typically means a person invested in dividend-paying stocks for a passive income for cash flow.
Reasonable returns
It is common for investors to have an unrealistic target to benchmark themselves. People looking at capital gains should assume 10% to 12% returns per annum as a very conservative estimate.
Some of you might disagree with this number. While it is good to aim for a higher percentage of returns, do not make goals too difficult. It will be rather discouraging right from the start.
S&P 500 Index(USA) 3.94%
Dow Jones Index(USA) 3.87%
Nikkei 225 (Japan) 4.76%
Straits Times Index (Singapore) 13.39%
The average returns of the major indices from 2002 to 2012 shows that most major stock markets are performing well below 10% in the 10 years. Warren Buffett has even caution investors in U.S. stocks to expect a 6% to 7% return.
Start with a conservative target and aim higher as you improve your skills over the years.
Realistic Timeframe
As a regular trader who is working towards a cash flow goal, one needs to be specific in setting the time needed to achieve the desired outcome.
For example, it is an unrealistic goal of doubling your money in a trade, in an hour or a day. But it seems more plausible to do so in x number of trades over y number of months.
But also keep in mind that a goal that is too long term is not motivating because your current actions have no influence. A goal that is too short term may induce you to force trades and act without prudence.
You should take into consideration your starting capital and the risk you are willing to take when trading. While trading for cash flow, it is much easier to make $5,000 in profits with a $100,000 account (5% return) as compared to a $20,000 account (20% return).
It would be an unrealistic goal, if you have a starting capital of $10,000 and you have a goal of having $1 million in a year.
Rewards
When you plan your trade and trade your plan, you can benefit from a successful trading career. Beyond that, people often ignore another important part of setting investment goals which are enjoying the returns of your investments.
Rewards provide an incentive for the long period of hard work you have put in. It can be as simple as vacations paid for by market winnings.
The trading career is one of the most unstructured endeavours we can partake in. This is why we need rules and plans to create the needed structure to survive.