Like most, I started trading to create wealth and change the trajectory of my life. I started in 2007 with options and learned a really important lesson - consistency is far more important than huge returns. I strongly believe encouraging traders to focus more on consistency would lead to far more collective wealth creation than trying to have large singe or even several year returns. The goal of this post is to share the thought process to focusing on consistency over maximum returns. With this approach (AND aggressive savings early), I've gone from a <$5K portfolio to a 7 figure one with, good but non-record breaking returns.
Something to consider is how many forces impact options: time, direction, volatility, interest rates, etc. To truly create consistency in returns, identifying how these market forces impact our strategies is essential. Even if you try to just trade directionally by purchasing options - you still are trading volatility. By understanding what impacts our strategies, we can optimize our approach.
This process of optimization is important not just to squeeze returns out but to RELIABLY obtain them. Which portfolio would you rather have?
**Portfolio 1 returns:**
Year 1 - 10%
Y2 - 10%
Y3 - 2%
Y4 - 10%
Y5 - 5%
Average return: 7.4% with a 0.033 standard deviation
**Portfolio 2 returns:**
Year 1 - 30%
Y2 - 12%
Y3 - (-25%)
Y4 - 14%
Y5 - 12%
Average return: 8.6% with a 0.20 standard deviation
I hope you'd take portfolio 1, even though it has a 1.2% LOWER average return, it actually has a BETTER CAGR, 7.35% vs 6.87% and a MUCH better standard deviation. This is the concept of consistency in a nutshell. Once you have that, you can add capital (including leverage) with a much higher success rate. In my mid-20's I spent considerable time leveraged to accelerate my returns after refining my strategies which has enabled strong returns.
Consistency is an incredible tool, especially when we have positive expectancy and the ability to leverage.