Unrealistic Returns and Benchmarks

Unrealistic returns and benchmarking in your trading

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-09-20 10:10.
Unrealistic returns and benchmarking in your trading

I was watching local Australian TV the other day and I cringed when I heard saw an advertisement for investment properties and this voice over stated:

xxx returned 109% over three years for their investors – try to match that with a bank.

We all know that "past performance is not a guarantee of future performance". Of course that was written with small print on the bottom of the screen. I have no qualms about that. The point is that the investment property and an investment in a long term deposit or a high interest bearing account in your bank are totally different investment classes. You can't realistically compare them because they have different risk profiles. It's like comparing apples with oranges.

How's this related to trading? Well, when I first began I used to benchmark my trading with returns from bank accounts – the interest rate. After a while I realised that it wasn't realistic to compare your returns (or losses) from trading as they massively exceed (or fail at) equitably comparing with the modest gains of an interest account at a bank. (In Australia, the typical high interest bearing account is at 5.85 percent per annum) So what do you benchmark with? You can make up your own (how much you want to earn) or benchmark with another trader with a similar risk profile and capital base.

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