Why Trade?

The performance of managed funds is abysmal over the last 5 years( or even 10, but I am only going to look at the last 5). From the Colonial First State website, I have found a representative sample of funds performance.

452 Capital Australian Shares 3.46%pa

Blackrock Australian Shares 7.01%pa

BT Core Australian Shares 6.07%pa

Can we easily beat these professionals? I ran two tests. Both randomly selected a portfolio of 20 shares. One simply held the portfolio for the whole 5 years. The other used some simple market timing to decide whether to be in the market or not. If we weren't invested in the market, excess funds were deemed to earn 4% cash interest.This filter is based on a simple 34 week moving average. I ran 100 monte carlo simulations of each and ran the results through an excel spreadsheet which was kindly given to me by another very successful trader ( who I won't name so he doesn't get flooded with requests) .

You can see that the first result gave about an average 1%pa. But if we added some dividends of maybe 3-4% we are getting very close to the performance of the managers.

The second result is much better with an average of about 12%pa. Because it was invested for only about 70% of the time, let's add just 1%pa for dividends. THIS IS TWICE THE PERFORMANCE OF THE FUNDS.

Before anyone mentions the tax effects of selling your portfolio a few times, it should be noted that the funds do this internally and you will always get a CGT bill at the end of the year(and you actually may have had a negative return for that year).

Note also, the draw down for the straight buy and hold system and the funds is atrocious - up to 50%

So, my goal is to better 13% pa - in fact my goal is 20% pa over any 3 year period. I wouldn't consider my self a success at this business if I couldn't value add at least a 50% better return than the most basic system I have just described.

Is 20% a lot for a trader? This depends on a myriad of factors - especially the size of your trading accounte and how much leverage you are using. During 2003 - 2007 this was very easy for my style of trading to achieve - maybe not so easy in the coming few years.