Trading / Investing

How to Be Realistic with Your Money and Trading Expectations

8 Min Read

This article is going to give you an overview of some steps you can go through to take a more realistic approach with your trading and your money.We need to go through the process of looking at your current financial situation, how you want it to be in the future and how you’re going to get there.

Looking at Your Current Financial Situation

We need to get an overview of your financial situation. This is similar to something known as a ‘Wealth Balance Sheet’.You need to create an overview of all your assets including any income you currently receive and any liabilities or regular expenses you have to pay out. This should include everything, including any student loans, credit cards, overdrafts etc.This process on its own can be extremely helpful and eye-opening. For some of you, it may even be a bit of a painful experience. But that’s OK, pain is sometimes necessary on the journey to growth. We don’t want to bury our heads in the sand when it comes to our financial situation.By breaking down your finances in this way, you should be able to see what the overall situation looks like in terms of available money. You should be able to see if you have any disposable income. Later on, you may choose to put some of this into your trading or investments.On the other hand, if you’re living pay-cheque to pay-cheque or you’re in a financial deficit, you obviously need to do something about this and trading or investing is not likely to be the answer since you’re not in a position to be putting money at risk.There are a couple of important points you need to identify, which will help you to manage your finances in the most appropriate way for you to reach your future wealth goals.

  • Identify any of your assets that are already an investment. In other words, things that may go up or down in value over time depending on some sort of market valuation. If that’s the case, you need to keep that in mind when you consider your trading or investing since a portion of your wealth is already at risk, but also may be able to get you to your future wealth goals on its own.
  • The second thing is to identify which of your assets can easily be used to raise more cash. This will mean, that if you realise you need a certain amount of capital to reach your future wealth goals, you may want to sell items that aren’t so important to you if it will contribute to building the capital you need.
  • You need to identify which items have the potential to be a bigger drain on your cash in the future. It may be better to pay off these items immediately with the cash you have instead of that cash going into trading or investing.

Your Desired Future Situation

What do you want to achieve in the future and how is your financial situation linked to this?Be honest…In other words, what goals do you want to achieve that you’re hoping trading or investing is going to facilitate?Many people at this stage will give a blanket statement like, “I want to be a millionaire” or “I want to own a Ferrari”.That’s fine if those are your goals, but it’s important that we stick with goals that are going to push us, but are still going to be achievable and realistic.If a goal is way too far from our current situation, it’s something we can keep in mind, but if you set it as your primary goal, it will take a while to get there and may lead to one of two things happening:

  • You’re going to take ridiculous levels of risk to try to achieve that goal sooner. But we all know that means a higher chance of losing your money than actually achieving the goal.
  • Your goal will seem so far away and not real enough that you actually begin to get disheartened and overwhelmed.

I see both of those points from traders all the time. Whichever one happens first, it always leads to the same outcome — the trader gives up!Instead, I want you to stay on track with your progress. Let’s keep the goals as something that will push us, but we can reach it or at least see significant progress towards it constantly.I would suggest that you take your huge goal and start to break it down a bit. Think to yourself, why that is your goal in the first place? What thing inside you or in your life is going to be satisfied by achieving that goal? Is there something more achievable or realistic that would satisfy that same want or need?For most people, when they have some sort of goal linked with an amount of money, they soon realise that the amount that will make them happy is significantly less than the amount they have in mind. People tend to use arbitrary figures, but when they break it down, their real goals are a lot more simple.It can be quite difficult to think of specific goals, but it might be easier if you think about the overall thing you want to achieve. For example, when I was dealing with clients some common ones would be things like “to make sure my kids are financially secure until they start their own careers” or “to provide private schooling for my kids”. Some others might just be looking to be able to retire 5 years earlier than what they can right now.From that, you can then look into the specific things that will get you to that end goal.

Build the Bridge Between Your Current and Future Situations

In the next stage we want to look at how we can use our trading or investments as part of the bridge that will take us from our existing situation to what we want in the future.Not everyone’s bridge is going to be the same. That’s why it’s a bad idea to have other people making blanket statements about trading profits. Some people tell you to withdraw your profits and other people tell you to compound them.You need to do what’s right for you!In fact, it might even be that after completing the previous steps, you’ve discovered that you’re going to achieve your desired future goals simply by continuing to do what you’re already doing. If you’re able to do that within a reasonable time frame, you may choose not to do anything like trading.If you’re already going to achieve what you want to achieve, why put your money at risk and have the potential of holding yourself back? It’s not necessary.If that’s the case, you may prefer to take the wealth preservation route and put your money into some sort of investment that aims to beat inflation.However, if your existing situation is not going to get you there, you’ll need to take a wealth generation route. The three factors I want to focus on are:

  1. How much starting capital you have.
  2. Whether you need to generate an income or build capital.
  3. The amount of money you need.

Let’s start with that second one. Some of you will have goals that are linked to buying something in particular or having money saved up as a nest egg. In either case, you’re likely to be looking for capital growth, so you can allow your money to compound and generate exponentially larger returns.On the other hand, some of you may want to be increasing your monthly income by trading part-time so you can afford to do more things. Perhaps even substitute the income you would receive from a job so that you can trade full-time and enjoy the benefits of that type of lifestyle.In both of these cases, you’re looking for a situation where you can regularly receive some money. Whether that’s a monthly income from your market activity or an annual withdrawal that you then spread over the months.The next factor is to look at how much capital you need and how much you have right now.I see a lot of people that want to trade full-time, but only have a small amount of starting capital. This doesn’t mean it’s going to be impossible, but it will be difficult and it’s going to take time before you can rely on a full-time income from it.Wanting to be a full-time trader will mean you’re relying on the withdrawals from the account. Inevitably, any time you make a withdrawal, you’re going to be reducing the capital you have to trade with.In addition to that, you want to have some sort of safety net there. You don’t want to rely on withdrawing everything you make each month or year. You need a buffer, in case one year you don’t hit the same numbers and don’t have as much available to withdraw. You don’t want to be starving yourself one month just because you had a bad time in the markets.It’s possible to achieve any financial goal you have through trading and investing, but you need to be realistic and follow a plan that is most likely to get you there.If you set hugely ambitious goals over an unrealistic time frame, you’re likely to either lose motivation and give up or take huge risks that blow up in your face.Set a realistic time frame, set smaller financial goals along the way that make sense and make sure you’re clear on exactly what it is you’re trying to achieve and why.It’s this steady and realistic approach that will get you there. Start by looking at yourself and your finances and go from there.