Last summer I took $30,000 that I had been saving for two years and put it in a brokerage account to start active trading.
Now this wasn’t my first foray into stock trading. I started actively trading stocks back in 2011 but realized after 4 years that I was making money on the actual stocks but slowly losing money due to all the commissions and fees. A small account in the $10-15k range simply wasn’t enough to overcome the trading costs. So I stopped trading with real money and paper traded instead while I saved up.
I finally got back in the game last August after reaching the $30k mark. I detailed my trading results each month where overall I was making a profit but underperforming the market.
And now after all that hard work that went into paper trading and saving for two years, I pulled my money out after just nine months.
Here are the motivations behind that decision:
1. Not Enough Time
As I mentioned in my latest post, I spent the first half of 2018 preparing for the CFA Level I Exam. This required a huge time commitment, typically 3-4 hours per weekday and 6-8 hours per day on the weekend.
To be studying and active trading at the same time simply wasn’t doable because active trading is exactly that — ACTIVE.
Swing trading, where typical trades last 2-6 days, requires an hour or two of time per day in order to do daily market research, stock scanning, trade planning/analyses, and entering/modifying orders.
Stocks can move incredibly fast and you can never pay attention 100% of the time, so you have to create systems in order to identify the good opportunities AS THEY ARE DEVELOPING. Otherwise, they will very quickly pass you by.
Even though opportunities are abundant, the window of opportunity is very small. You have to be ready to strike at any moment.
2. Not the Right Time
Markets only trade during certain hours and uncoincidentally those hours are the same as work hours. It’s a challenge when the time that’s available for me to focus on trading is outside work hours a.k.a. when the market is closed.
The biggest challenge pertains to entering new positions. Rather than simply opening a position when a stock fulfills my entry criteria (I prefer to enter positions in the afternoon), I have to wait until the next day. The best positions end up taking off the next day without me or I have to pay a higher price.
Lots of missed opportunities.
In order to combat this, it requires double or triple the amount of time outside markets hours in order to prepare for all the different scenarios.
3. Commissions, Fees, & Trade Minimums
I thought $30k would be enough to overcome the burden of trading costs. That proved to be somewhat true. On my much smaller account, the costs used to average 1-2% per month!
Through nine months, trading costs this time totaled $617 or 2.06%. That annualizes to 2.74% — much lower than before — but still a hefty hurdle to overcome.
My preferred trading platform is TradeStation, which has much lower fees for active traders. Instead of a $5-7 commission per transaction, it’s a penny per share with a dollar minimum. But there’s a catch for the per-share rates: you must trade $5,000 shares per month or get hit with a $99.95 fee. (Or have an account balance over $100k)
My normal trading averaged about 2,000 shares per month, so I would have to make some undesired and unnecessary trades at the end of the month, buying and instantly selling just to meet the minimum. This would cost about $40-50 instead of paying the $100 fee, but still a
Patience is important in trading in order to wait for the right opportunities and not force trades. The trade minimums force you to trade more, not necessarily a recipe for success.
4. Opportunity Cost of Time
Although $30,000 is quite a sizeable amount of money, it’s not really that much when you start talking about the returns it provides. A 10% annual return, which would be a solid performance, would result in an annual gain of $3,000.
That would be all fine and dandy if this money were just in a passive investment vehicle like a mutual fund. But it’s very different when it requires active management.
You have to consider the cost of your time.
Actively trading stocks required about 12 hours per week of my time. That makes 624 hours per year. Now that $3,000 gain doesn’t look so great, does it?
That equates to $4.81 / hour for my time.
What’s worse is that I wasn’t even on pace for a 10% return. Although I was on track in the first 6 months, my performance slipped in the final months and I finished with a 1.38% return net of fees.
Factoring in the time involved, that’s about a $1.20 / hour for my effort.
Is that really the best use of my time?
5. Focus / Peace of Mind
I’m finally learning the importance of having less on my plate. I’ve always had the tendency to try and juggle 3-4 projects at the same time and never see my desired results actualized. Preparing for the CFA Exam forced me to cut everything else out and now I realize that level of focus is a necessary ingredient to achieve extraordinary results.
At the same time, active trading is way more stressful than passive investments even though they both move up and down every day. For passive investments, you can set it and forget it. Even if you check how it’s doing, there’s no decision to make. The money stays there… for decades.
But for active strategies, you are constantly bombarded with decisions to make… and many times make quickly. On top of the time involved, it can also be mentally and emotionally draining.
Putting this money to work in a passive way can provide a similar (or even better) return while allowing me to concentrate more and better on other pursuits.
Where We Allocated Money Instead
One of the reasons I was willing to put all our savings in stocks is due to the liquidity. Just like that — we can get the money back.
Since this was also our emergency fund, I couldn’t repurpose all of it (or else we would have no emergency fund!) Here is the breakdown:
- $5,500 applied to mortgage principal to hit 78% LTV (eliminating PMI payment)
- $9,500 applied to principal on student loans (all on highest interest rate of 6.8%)
- $6,000 banked in checking account (to provide higher cushion)
- $9,500 banked in savings account (as emergency fund)
Without accelerating the mortgage pay down, it would have taken 11-12 more months to reach the PMI termination threshold, resulting in over $1k in additional PMI payments. Altogether, paying down these debts down guarantees us about $2,000 in interest and PMI savings this year without requiring a minute of my time.
I always maintain the viewpoint to treat yourself like a business. This decision to exit active trading for the time being can be considered a business decision — reallocating resources to their best use.
Which now brings us to the question we all have to answer:
What is the best use of my time?