What Does It Take to Make 10% Per Year? (Part 2)

Today I continue with presentation of an e-mail correspondence I had with a coach for a nationally-recognized options education company from a few years ago.

I wrote:

> You mentioned 2% rather than 1% so I’d rewrite that paragraph something like
> this: five 20% ROI trades would be required to make 1% on your total account.
> To make 10% you would need 25 trades. To make “far more” you would need 37-50
> trades. This assumes all trades win, however. Some trades will hit secondary
> exits and some trades will lose: some significant amounts. Remember too that
> if you budget for adjustments then your initial risk will be less than 2% so
> many of your winners will actually make less than 0.4% of your total net
> worth. Furthermore, in order to average “far more than 10% per year,” this
> needs to be achieved year after year.
>
> Does that sound realistic?
>
> When I think about books I’ve read on stock portfolios, I know some people
> talk about holding 30-100 stocks for diversification but others think that’s
> bunk. William O’Neil, if I recall correctly, recommends 5-10 stocks.
>
> I think a key question has to address what we’re allocating. Does that mean
> 5-10 stocks divided evenly into one’s total net worth? Should one’s total net
> worth be invested in stocks? There’s the rule of thumb “take 100 minus your
> age” to calculate what percentage of your net worth should be invested in
> stocks. The older you get, the more diluted your portfolio becomes.
>
> This plays into my question about your stated “much more than 10%.” How
> are you going to get much more than 10% if your portfolio is getting
> more diluted over time? If you’re 50% invested in stocks then you need
> to make at least 28% per year on stocks to get 14% on the total account.
> If the rest is cash/bonds making 4% then you’re up to 16% on the total
> account. While 16% is “far more than 10% per year,” only Warren
> Buffett [supposedly] makes 28% per year on stocks.

I will continue with her response in the next post.