Swing Trading for 20 Percent Returns is a Waste of Time

Recently I received a comment on our popular How to Get Started Swing Trading Stocks video that hit on a lot of important topics other traders could benefit from reading.

The comment read “[swing trading for] 20% is [a] waist [sic] of time. Many stocks give you 100% or more a year passive income. Swing trade made right, make[s] you a lot more [money] though.”


20% is a waste of time - image of youtube comment screenshot


Before we start to break this down, I’m going to make the assumption that this person and others who might agree with the statement are new to trading.

By the way we love new traders! It’s just that a new trader doesn’t have the historical context of trading through a lot of market history. It also doesn’t help that we’ve only had extremely favorable market environments (2019 – 2020), where companies like Tesla are up over 600% in a single year in the face of a pandemic.

It makes sense that a new trader’s perspective might be a bit more ambitious than history might suggest is probable — I know that certainly was the case for me when I was getting started.

I recorded this response in video format first, which goes more in-depth than this article, so if you prefer to sit back, relax, and watch instead of reading, hit play on the following video. We also have timestamps in the description of the video in case you want to jump around.


Swing trading for 20% a year is a waste of time

To know if 20% a year is a waste of time, we need to first ask ourselves what does the stock market return as a risk premium for owning stocks over the long haul?

We’ll simplify the math and round just a bit, but going back over 100 years, measured by the S&P500 or Dow Jones, the market has returned 10% annual gross returns. In other words, with no active trading whatsoever, an investor could theoretically expect a 10% return on average for owning (at virtually little cost) the S&P 500 index.

swing trading for 20 percent is a waste of time - Image of dow jones historical performance

Now to earn 20% and beat the benchmark, an investor is going to have to engage in active trading. This is no easy task. Time after time again we see countless articles stating it is almost impossible to outperform the market, such as Active Fund Managers Trail the S&P500 for the Ninth Year in a Row from CNBC and Almost No One Can Beat the Market from Marketwatch.

While the Trade Risk itself is in the business of building trading systems to beat the market either from a return perspective or risk-adjusted returns, we acknowledge the fact that it’s extremely difficult to do, which is why we wrote this article, Do You Have What It Takes to be a Trader?.

If the far majority of traders lose money or trail the benchmark, then earning 20%, or double the S&P5000 index, is actually quite a rare and exceptional outcome (assuming this can be repeated consistently over time).

The second half of the sentence discusses opportunity cost which implies that active trading might be a waste of time. This is going to vary greatly based on everyone’s personal situation and goals, so we’ll share some examples below. I also recommend reading this article we wrote on this topic, How to Maximize Your Screen-Time Adjusted Returns.

For a lot of traders, it can be a waste of time.

Take an investor who spends 40 hours a week following markets and trading every day. They spend another 10 hours a day journaling, and another 5 hours researching and reading books. If this investor has a $10,000 account and earns 20% a year (great outcome by the way) but whose goal is to earn a living and pay their bills, then this pursuit is a waste of time. Numerous entry-level jobs will reward an  investor far more than their $2,000 per annum on $10,000.

However, if the goal of that investor was to simply trade as a hobby, sharpen their skills, while growing their account and earning supplemental income, then this pursuit is not a waste of time at all. Alternatively, if they had a $3,000,000 trading account, earning 20% a year versus 10% from indexing, then this is also clearly generating a big ROI.

Simply put, time is money, and the goals you have combined with your account size, certainly play a big role in determining how you may want to consider spending that time.


Many stocks give you 100% or more a year in passive income

2020 turned out to be a very strong year for the stock market, so while many individual stocks did outperform historical averages, it is naïve to think that this will happen consistently year after year. It’s also extremely difficult to successfully pick those specific stocks ahead of time.

If we take a look at all the stocks in the S&P500 throughout 2020, you’ll notice there are only 6 out of 500 stocks that had a 100% or greater return on the year. That means, to capture the 100% or greater return an investor must have been able to identify those specific 6 stocks beforehand.

20% is a waste of time - Image of 100% SP500 Stocks

Said another way, an investor had a 98.8% chance of picking the wrong stock. Meanwhile 207 stocks had a negative return on the year, which equates to a 40% chance of picking a losing stock.

According to a study conducted by ValueWalk, 80 percent of stocks have a lifetime return of zero. All this evidence illustrates the fact that stock picking and passively holding 100% or more winners is extremely hard and unlikely to happen on a consistent basis.


Swing trading made right makes you a lot more though

Can an investor make more than 100% swing trading in one single year? Yes, certainly, it is possible to achieve. An investor could use leverage, options, or futures to get those kinds of returns.

However, using leverage is a double-edged sword. It creates even more risks and friction to pull off big consistent returns. It’s also very important that an investor measures their trading performance appropriately and understands the risks involved to achieve big triple-digit returns.

Generally speaking, if a trading system has an expectancy of producing 100% or more in gains per year, it comes at the expense of extreme volatility, drawdowns, and risk of ruin.

An investor could achieve those types of returns by picking the right stocks, and having great market timing, but it will be very hard to repeat consistently year after year. If an investor could compound at 100% or more for 10 or more years they would quickly rise to become one of the richest persons on earth.


Swing trading for 20 percent returns is a waste of time

I understand this article might feel very gloomy — that stock picking or active trading isn’t worthwhile — but that isn’t the intended takeaway. Actively investing in the stock market can absolutely lead to greater returns over the averages, and it can certainly lead to better risk management over buying and holding stocks indefinitely.

However, in doing so, it is very important to have realistic expectations, so you can endure and sustain for the long haul and not try to strike it rich all in one year. Active investing is filled with opportunity so long as you approach it responsibly and with reasonable goals.

I do believe 20% returns per year, done consistently, and without huge drawdowns, is a big success.

I’m glad this comment came through to give me the excuse to talk about these important topics and I hope it helped calibrate some expectations for you. I would also love to know your thoughts on everyone discussed in this article, leave a comment below to share your perspective.

If you would like to read more articles from us, check out the learning center.

Enjoy what you read? Share it below and be sure to tag @thetraderisk.

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Evan Medeiros

Evan is the founder of the Trade Risk. With 25 years of coding experience and a B.S. in computer science, Evan brings a systematic discipline to investing in the stock market.

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  1. Todd Katz on 6:23 pm March 19, 2021 at 6:23 pm

    On target, thanks!

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