How to get 1 Million Dollars (or Euros, or British Pounds…)

Introduction

The other day, I had a really interesting conversation with one of my friends. It was the kind of thought that we can have on Sundays. We were wondering how to get one million dollars (or Euros, British Pounds, it's applicable to all currencies)

Discussion

In the beginning, we were saying silly things that come from social media and it's difficult to verify if it's true or not. After that, we briefly talked about real estate. Everything looked great but the high capital required to invest in this kind of asset makes it difficult (without having already saved part of the mortgage)

We follow the main hedge funds, so we started talking about trading legends such as Jim Simons, George Soros, Warren Buffet, Ray Dalio, Steve Cohen, William Ackman and Ken Griffin (The list is really big, they are only a few of the best)

The next table shows the 3-year compound return for some hedge funds:

                 Penta Top 100 Hedge Funds, Source: Barrons

You can find the whole list on the link below:

https://www.barrons.com/articles/penta-top-100-hedge-funds-1497665963?tesla=y&mod=article_inline

This idea was great but considering that some of the strategies used by hedge funds (and asset management, CTAs… ) require big sums of money, it was discarded automatically. In addition, we don´t know wealthy investors and we don’t have any track record.  Another solution is to invest directly in one of these entities, but again, the mínimum investment is pretty high.

At this point, we were aware of the reality but I said that we can get it! The only requirement is commitment and patience (this will be discussed later on)

The model

Before I explain this model I would like to make some assumptions:

• I consider that the money saved every month is the same for the whole life of the individual.
• All the savings are for investment purposes.
• The individual can’t withdraw any money once it´s invested.
• The return is positive for the whole life of the investment (the return is considered as an annual average return of the investment)
• The investment is not defined

So basically there is no secret, the idea is based on saving money every month and invest it in the asset that you consider suitable for you. 

       The table used for the calculation, own elaboration

As you can see the table has different columns, let me explain them. The year and the month are in order for charting purposes. The savings is the amount saved per month (in the example is 500 but I´ve done it for 300, 700 and 1000 units of currency every month) The rest of the columns represent a financial calculation to reflect the effect of investment (in that case, I’ve chosen monthly compounding (Amount saved * (1 + Annual return % ) ^ (1/12)) 

     Example of the first 5 months and the last 5 months, own elaboration

This is the same table as the previous one. I want to show the top and the bottom of the table used for the charts that I’m going to explain now. 

      Total savings after 40 years without investing them, own elaboration

These are the amount we would have after 40 years (or 480 months) without investing. Obviously, if you save more, you will be wealthier in the future.

      Final amount after investing for 40 years, own elaboration

This table is really interesting because shows the capital after investing for 40 years. Here we can see why investing is very important to build wealth. Let's say that we can afford to save 300 units of currency per month. After 40 years, we check the account and we can find 2 outcomes depending on if we decided to invest or not. Without investing the savings, we would have 144000 while if we had invested at 5% per year, we would have made 446569,38. Investing generates 3 times more money than only saving (there is risk in every investment and you should check if it’s suitable with you or not) Returning 10% or more per year is not impossible but doing consistently is very difficult. However, if you get it, you will see your investments grow quickly. 

  Charts about the lifetime investment for the different average returns and savings levels, own elaboration

Here we can see the effect of compound interest over time. As Albert Einstein said once: “the power of compound interest the most powerful force in the universe”

Now coming back to the title of this post, let’s find out how many months of savings we need to reach 1 million:

      Months needed to reach 1000000, own elaboration

Sadly for the lower saving quantities is not possible to reach this figure or a high return is needed. Sadly there is a high risk involved in strategies that return high return.  For the rest is easier but it’s not an overnight process. At this point, we need patience and keep working hard.

Why only a few percentage of people become as wealthy as in the example?

• Investing is not as linear as I showed. There are years in which you make a profit and years in which you may lose money or even you can be breakeven.
• Saving money sometimes depends on a personal situation (There are so many things in life more important than saving a fixed amount every month)
• At the beginning of your professional career the salary is low and after that, it should adjust according to the experience.
• After saving “X” amount of money, you can think of relocating to a better property, getting a car or something that won't allow you save as you have been doing until now (maybe your salary has increased enough to cover this expenditure via personal loan but it’s difficult and it doesn’t apply to everyone)
• The example shown doesn’t apply to everyone because you need to work for the next 40 years.

Conclusion

Even if getting a million is difficult, it’s not impossible. If your personal situation allows you to save and invest every month, the only secret is Commitment and Patience. You need to understand the investments and the risk involved.

All the best!!

#investing #savings #CompoundInterest #HedgeFunds #USD #EUR #GBP #BuildWealth #HowTo #Get1Million

Trading system based on proprietary indicator, Part 3

This is the third part of the series of posts about the trading system based on my own indicator. We will see how the commissions affect the performance of the system. I will compare with the benchmark in the future.

Comparison table

Comparison table including the backtesting with the commissions included and deducted from the portfolio, own elaboration

As you can see there are big differences between the backtesting without commissions and the ones that include them. The daily average return differs in the amount I chose as a broker fee. In this case and considering the size and the price of the security, I decided that the commissions will be 40 Euros per trade (20 Euros per side, buy and sell) Obviously the maximum and minimum daily profit differs in the amount of the broker fee. (There is one problem that I haven't fixed in the 10 Yrs backtesting and 10 Yrs backtesting with Fees. The max profit differs due to an early error in the data) The skewness and kurtosis are exactly the same. The returns have been significantly affected by adding the commissions and taking out the value of the portfolio.In the case of the 5 Yrs Backtesting the return is almost half due to the commissions. Considering that the system trades the same size all the time, this issue was expected. The advantage of that is that as soon as the portfolio grows, and even if the loss is the same amount as the beginning, the loss represents a lower percentage of the portfolio. I chose this way as a risk management in which I risk more in the early years while the portfolio is growing. Probably I should link the trade size with the value of the portfolio but depending on the system or the period studied can generate worse performance and could be riskier. The Sharpe Ratio is affected as well because the returns are lower. Another important point is that including the fees the max drawdown is worse than the one shown before. Depending on how we invest our savings, we should run an extra spreadsheet with all the cost related to the investments. 

Graphical description of how the fees affected to the different backtesting

5 Years test

    Differences between the portfolio with and without commissions, own elaboration

Sometimes a chart represents an idea better than the words. Here we can see the impact of the commissions in the system. The difference in the last trade is almost 5000 Euros. The system returns 37.15% which is the equivalent to 7.43% per year. It´s a good return considering the risk taken. The system without including commissions returns more than 12% per year.

10 Years test

     Differences between the portfolio with and without commissions, own elaboration

The differences are bigger in the 10 years study. The difference between both systems is 28000 euros. At this point is better not to do these numbers, giving away this amount of money is crazy. The best aspect is that after fees it returns an incredible 425%.

Sum up

I hope you like it. You shouldn´t focus on the effect of the commissions or the performance. The most important idea is considering all the cost related to running the trading system or the investments. In this case, I simplify the idea considering that a broker executes the trade on your behalf. If you trade on your own, you should add the market data, the brokerage commissions, and the trading platform costs. There is another point that I haven´t commented, the taxes. Sadly the trading costs and the taxes (if you make money) will reduce your profits.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Trading system based on proprietary indicator, Part 2

Today I will show the trading system behaviour from October 2008. Let me introduce the macro situation before I review the backtesting results.

Brief description

The financial crisis started later in 2007. The stock market suffered a big correction in 2008. The volatility was far higher than nowadays. The central banks implemented the quantitative easing programs in order to stabilize the economies around the world. This is an example of the German Dax index and the Eurostoxx index.

     Source: TradingView, DAX vs Eurostoxx futures, daily, from 2008 to 2018

Results from October 2008

      10 Yrs Backtesting results, own elaboration with Excel and RStudio

The main difference is the volatility in the underlying. As you can imagine later in 2008 the volatility was really high and the stock market was in free falling until it bottomed in 2009.

As you can see the big bounces in 2008 are the reason for the big range shown in the backtest.

Comparison with the 5 Yrs Backtesting

                                          Comparison between the 5Yrs and 10Yrs backtesting, own elaboration

You can see a big improvement in the 10 Yr study vs the 5 Yr. The average profit was 151.28 EUR vs 95.86 EUR. The standard deviation and variance were higher due to the volatility from 2008 and 2013. The range is bigger as well because the stock was trading higher. Considering the strict risk management, I´m surprised about the winning trades percentage. I believe that a mean reversion strategy was the best one at this time, even more with the actions taken by the central banks. In addition, the return’s distribution changed and it shows higher extreme figures (in the positive side, which means a high probability of bigger profits) The system traded 733 times vs 130 times in the last 5 years, the profits are concentrated in the first 300 trades. The Sharpe Ratio is slightly worse.

                                          Max Drawdown, own elaboration using RStudio

I´m happy with this figure, losing 2820 EUR was the equivalent to 3.16% of the portfolio. This is a very conservative figure which I consider ideal. Sadly this is not applicable to another kind of strategies because the system opens and closes the positions on the same day.

         Portfolio growth, own elaboration using RStudio

There is not much to say about this chart. You can see the change in volatility from the first years to the recent years. The biggest profits are concentrated in the first 300 trades. The initial portfolio was 20000 euros. I haven´t included the commissions.

Sum up

We have seen how this system behaved during the last 10 years. You can think that is overfitted and this post doesn´t have value because I tested the system in the right period. This is not the purpose of this little article. I´m surprised with the performance but if you had bought the Dax in 2009, you would have multiplied your portfolio’s value by almost 4. In the next post, I will compare the trading system vs the DAX. I hope you like it. Thanks for reading.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Why should we save money and invest it? First lesson for a new investor

Introduction

Even if you have a small salary you can become a wealthy individual over the time. In order to do it, or at least to try, you need to be disciplined and save a certain percentage every month. There is no rule to save a certain percentage of your income every month. It depends on your personal situation and the goals that you set up before starting this journey.  

Example

Let’s make a hypothetical example. A young person has a salary of 20000$ per year after taxes. This person knows that he/she can live with this salary but he/she can’t afford to pay certain hobbies. Let me call this person David to make it easier. One day, David decides to write in a paper his desired lifestyle for the future. He doesn’t want to change the job because he likes it and the workplace is nearby. He knows that saving money is not enough, so he starts looking for an extra income. He lives in a medium size town so there are limited opportunities. After thinking about it, he decides that is going to save 10% of his salary and invest it at the final of the year. In this case, he will be saving 2000$ every year and this amount will be added to the portfolio at the final of the year.

Let’s supposed 4 type of portfolios he can invest in and the returns that he can get if he is committed with one of them.

         Different portfolios, own elaboration

These calculations are made by the assumption of that 2000$ are saved and added every year, the interest rate is fixed (2%, 5%, 7% or variable in the case of S&P500), it’s calculated for 40 years and he doesn’t withdraw any money.

As you can see if he decides to invest in a portfolio that returns 2% per year, after 40 years, he will have 123220.05$. Considering that in his lifetime has saved 80000$, means that this portfolio has made 43220.05$. This is a very conservative portfolio that probably is not the best to meet your goals. Let me compare the last figure (accumulated savings + return generated) of the rest of the portfolios:

                5% per year = 253679.53$

                7% per year = 427219.14$

                SP500 annual return = 1212688.82$

The last portfolio is the riskiest, but what a great return.

What are the steps to start your own journey?

1. Set up your future goals
2. Evaluate your current situation, make a spreadsheet with your income and expenses and figure out how much money you save and how much money you will put in the investment portfolio
3. Choose an investment that suits your risk aversion and risk-reward ratio, make sure that you understand the chosen investment and the risk involved.
4. Ask for advice about the best way to set up your ideal investment account, with a risk and money management system (online, in your bank, with a financial advisor, in a brokerage)
5. Be disciplined, keep saving an investment as your plan dictates

Why is the Risk management important?

One of the most important things to succeed as an investor is the risk management. I can’t talk about this topic because I haven’t described a strategy to follow. It depends on the type of investment you choose. But probably, the first thing I would teach to a new investor is the Asymmetrical Leverage. It refers to the required gain to recoup from a loss increases geometrically. 

      Asymmetrical Leverage, own elaboration

This chart is a clear representation of the definition above. It means that if you lose 10% of your portfolio you need to gain 11.1%, which is more than the original 10% loss. Let’s imagine a 1000$ portfolio that loses 10%, so the portfolio is valued at 900$. The difference with the original portfolio is 100$ which is the same amount we need to gain to recoup the initial portfolio. If you divide 100$ by the new value of the portfolio, 900$, the result is 11.1%

As you can see in the chart the amount to recoup grows geometrically as soon as we incur in bigger loses. 

I think this is the first thing that an investor or a trader should learn. If you check, all the successful investors and traders have a sounding risk management and I guess that they have this chart on the wall.

Conclusion

Saving part of our income and investing it over the time is one of the best things we can do. Every time I say investing, it's in a responsible way. There are a lot of practices to avoid such as invest according to the media or the comments on the internet. You should generate your own ideas or reasons. If you are not ready or you don't have time, there are a lot of kind of investments and professional services that can help you. In that case, and depending on your resources, you can invest in Exchange Traded Funds, talk with your bank, open an account in an asset management or invest in hedge funds. If you want to try the joy of trading or investing on your own, there are a lot of resources to learn the basics. I would recommend spending several months with a paper trading account. This post shows only a hypothetical example of how lucrative can be. If you don't, believe me, Tony Robbins has a book with real examples of people that committed to saving part of their income and they became successful financially speaking. Please bear in mind that the past returns are not indicative of the future ones. As I said one of the most important things is the risk management. All the best of luck in your journey!

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#asymmetricalLeverage #investing #journey #loses #profits #returns #rRskManagement #savings #TonyRobbins, #Trading #wealthy #creating value # compounding_interest