How Does The Typical Retail Trader Perform And How Do You Compare?

Futures Trading Benchmarks | How Does The Typical Retail Trader Perform — And Exactly Where Do You Rank In It?


This article on Futures Trading Benchmarks is the opinion of Optimus Futures.

How Does The Typical Retail Trader Perform

  • The purpose of a futures trading benchmark is to see how your performance compares to an alternative (and competitive) means of investment.
  • The underlying notion behind all trading is that you can outperform a given market benchmark; otherwise, you would invest in a given benchmark and not try to outperform it.
  • In the end, the bottom line is your “bottom line”: how much money you made or lost over time.
For most aspiring futures traders there’s nothing that revs up the appetite for success more than the stories about incredible trading successes. For instance, many traders are aware of Richard Dennis’ (one of the Turtle Trader founders) achievement in turning $1,600 into $350 million in six years.

These are the kinds of stories that excite traders. The fast track to big wins. These types of stories are also the ones responsible for 90% of all futures traders’ magnificent blowups, losses, and debits.

It’s time to be more realistic about your expectations. If you think about it, staying grounded and “realistic” is the first step toward attaining “real” success. Otherwise, you may be chasing pure luck, which has very little to do with good trading.

When it comes to assessing your own trading performance, the last thing you’ll want to do is compare your performance with that of another trader. You can’t see his or her overall wins or losses. You might not have the same capital resources, time, or trading knowledge.

And besides, you have to learn how to trade in a manner that best suits your goals, resources, and risk tolerance. Whatever you learn that someone else may also adopt, you have to “make it your own.”

So, how might you comparatively evaluate your trading performance? Think “benchmark”–a point of reference against which your performance can be compared or assessed. But first, to find your ideal benchmark, you should decide what the alternative options might be to your trading endeavors.

Sizing Up Your Trading Performance

Here’s a question you might want to ask yourself: If the purpose of your trading is to outperform another financial investment or trading strategy, what might that be?

  • Are you trying to outperform the broader stock market?
  • Are you trying to outperform a particular commodity class or all commodity classes combined?
  • Are you trying to outperform the average mutual fund return?
  • Are you trying to outperform an all-weather “permanent portfolio” fund strategy?
The reason for asking these questions is rather simple. If you’re not trying to outperform any of these indexes, then why are you trading instead of buying and holding a particular equities fund? So, in order to measure your performance over time, you might measure it against a benchmark of your choosing.

Aren’t My Returns the Ultimate Benchmark?

Practically, yes they are. Aspirationally, not at all.

You see, trading success may be defined by your starting capital–namely, whether you end, say, the year in a profit or loss. If you end the year with a gain, then you’ve succeeded.

But this isn’t necessarily accurate. There’s more to success than a mere positive return. And if you try to improve your trading performance, you’re eventually going to compare it with something reasonable, measurable, and objective.

Here’s a scenario to consider. What if you ended the year with a -10% return? A losing year, right? It depends.

If your benchmark ended the year down -30%, then you technically outperformed your market or benchmark of choice.

But was it a success? From an equity perspective, no; but from a benchmark perspective, yes, it was relatively successful. So, the idea of success can get fuzzy sometimes. Let’s get started.

Pick Your Benchmark Period

Your goal as a trader is to make more money over time than your benchmark of choice. Typically, fund managers would measure their performance either year to date, or annually. Another idea you might consider is measuring your performance on a quarterly basis.

S&P 500 – The Broader Market

A conservative investor might ask why you’re not adopting a “buy and hold” strategy? Beating a well-balanced and diversified market–consisting of the standard 11 market sectors including all of the sub-sectors and industries within it–is NOT an easy task (unless the market is undergoing a bear cycle and you have the option of going short, or going long a negatively-correlated asset).

Perhaps, the best measure of broader market performance is the S&P 500 Index (SPX). Currently, the SPX bull market is in its 11th year. It’s total return–that is, if you bought and held–would be an astounding 472.46%.

This translates to an average return of 46% per year. But the distribution of those returns differ per year as you can see below:

Futures Trading Benchmarks Macrotrends

Source: Macrotrends

If your aim is to beat the broader market, then it’s best to measure your performance against the S&P 500. Otherwise, you might make more money buying an S&P 500 ETF, dollar cost averaging, and simply holding.

Commodity Classes

If you’re looking to outperform the broader commodities market, then look to the Bloomberg Commodity Index as your benchmark. The weighting is as follows:

Futures Trading Benchmarks Bloomberg Commodity Index

Source: Wikipedia

To find commodity sector benchmarks, you might consider looking at exchange-traded funds (ETFs) that focus on particular commodity groupings:

  • The Invesco DB Agriculture Fund (DBA) includes grains, livestock, and softs.
  • The Invesco DB Energy Fund (DBE) participates in commodities across the entire energy sector including crude oil, gas, heating oil, and gasoline.
  • The Invesco DB Precious Metals Fund (DBP) is heavily weighted toward gold which is why its correlation to gold (GC) below is greater than that of silver (SI).
  • There are plenty more to look at; you just have to find them depending on the commodity class(es) against which you want to size up your performance.
Ultimately, the index you choose as your benchmark is the commodity or group of commodities you expect to match or beat. Again, if you can’t match or beat your benchmark over time, then there’s no purpose in trading. Improve your performance or get used to the opportunity cost (which, in the long run, may cost you sizable gains).

Average Mutual Fund Performance

The notion surrounding your typical well-diversified mutual fund is that it’s a “long-only” instrument that’s often on the more conservative side, well-diversified, managed by an investment professional, and produces returns that are far smaller than strategies that are more aggressive and concentrated. They also charge you trading and management fees.

Not all mutual funds are conservative. Not all are diversified. And as small as the average mutual fund return might be, it’s NOT easy to beat.

In 2020, the mean performance of mutual funds stood around 10%. The three-year average stands at 6.65. The five-year average stands at 8.17%. Ten years, you’re looking at an average of 7.16%.

If you were to break it down by asset class and size, it would look like this:

Futures Trading Benchmarks vs Average Mutual Fund Returns

Source: Morningstar as of Dec. 22, 2020

There are plenty of benchmarks to look at when it comes to mutual funds. But overall, you might want to look at the mean, which gives you a flattened-out and diversified figure against which to compare your futures trading performance.

The All-Weather “Permanent Portfolio” Strategy

Last but not least, here’s a portfolio strategy that’s designed to take advantage while at the same time hedge against every business cycle and inflationary flare-up that the economy can throw at you.

Developed by investment advisor Harry Browne, this is called the Permanent Portfolio. The original portfolio consists of four allocations.

  1. 25% stocks
  2. 25% bonds
  3. 25% cash
  4. 25% gold

The overall portfolio has produced a three, five, and 10 year performance of 9.99%, 7.82%, and 6.15% respectively.

Here’s what the performance looks like if you were to track the ES (S&P 500 futures), ZB (US 30-Year Bond futures), BIL (SPDR Blmbg Barclays 1-3 Mth T-Bill ETF), and GC (Gold futures) from the beginning of 2020 to June 2, 2021.

Futures Trading Performance 2020 to 2021

Image source: Tradingview

What’s tricky about this benchmark is that you’ll have to average the four components yourself as there’s no index that tracks it. But if you want to compare your trading performance with something that’s supposed to hedge and take advantage of almost every market opportunity–sacrificing oversized gains to prevent massive losses and accumulate wealth slowly–then this is one index you might want to consider.

Now, if your trading underperforms this index over time–yielding lesser gains and greater losses–then perhaps you might want to reassess your strategy, for you would have made more buying and re-balancing this portfolio every year than risking your money trading futures.

The Bottom Line Is Your “Bottom Line”

Ultimately, what defines your success is whether you have more than you started with. Trading is about making money. You either made money or you lost money, It’s as simple as that. But when it comes to “improving” your strategy, it really helps to see how your trading compares with a benchmark.

Again, you are competing with alternative portfolio strategies. Why trade if you can make more using another strategy. Perhaps (and hopefully) you do have a portfolio outside of your short-term trading activities. If so, then your trading needs to enhance and not hinder your portfolio’s returns. In short, the bottom line, figuratively speaking, is your “bottom line.”

Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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