I do a great deal of reading and research. I have recently been reading Michael Covel's, "The Little Book of Trading", and the following really struck home:
"Above average returns really start with compounding.
You want to know the difference between being rich and poor..? Three percentage points - that's it. If you take a 12 percent annual return compounded monthly over the course of 30 years, basically the working career of the average person, every dollar* that you invested will be worth $35.94.
If you compound a 15 percent annual return compounded monthly over 30 years, can you take a guess of the return difference? Is it 10 percent better or 50 percent? No. Every dollar invested would be worth $87.54 a difference of 143 percent...
It is only three percentage points, but over 30 years that makes a tremendous difference. That is why you have to shoot for the higher return. Even if it is two percentage points more - it is a huge difference."
* Or pound, or euro, or..!
The message from the book is:
- Construct your strategy, but basically have a "winners stay, losers go" core.
- Make sure it is built around the one and only thing you have control of; your risk.
- Back test it to breaking point to build your confidence in it.
- When tested, follow it without deviation.
