InvestorQ : Is it also possible to apply the concept of payback to my trading activity?
Arya Nanda made post

Is it also possible to apply the concept of payback to my trading activity?

Niti Shenoi answered.
3 years ago

You may wonder how can payback concept be applied to trading. After all, trading is about churning your portfolio rapidly in search of returns. There is a way out, here too. Interestingly, the concept of payback can be applied to your trading activity too. Remember, your trading activity carries a higher risk and therefore the reward should be relatively higher than your investing activity. How do you calculate the payback period for your trading activity? Obviously, you will have to consider the average returns on your trading account over the last 3-4 years. Let us say you have earned a return of 30% on your trading account annually in the last 3 years. That implies a payback period of a little over 3 years. That is still understandable. But if you consider the taxes on your trading activity at around 30% then your effective returns net of taxes will only be 21% and your payback period will be nearly 5 years. Having done this analysis, you need to also see how much you have actually earned vis-à-vis the brokerage that you have paid. If half of your profits are going away because of brokerage and statutory charges then you need to rethink your trading strategy. Payback helps you put your trading activity in the right perspective. If you can earn 21% on passive investing in mutual funds, then you are really wasting your time trying to trade and time the market. Payback in trading is important because it tells you how fast your trading capital is being churned. Also it tells if in the process of churning you are adding value to your capital or you are depleting value. You are taking on a higher risk in trading so you need to be dead sure that it is worth the risk.