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Calculating required monthly return

Convert an annual return target into a realistic monthly compounded return and reality-check it.

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Options, Risk Math, and Psychology

Risk Math Deep Dive

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Lesson 44 of 75Options, Risk Math, and PsychologyRisk Math Deep Dive

Today's tiny win: make one idea click.

Convert an annual return target into a realistic monthly compounded return and reality-check it.

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Annual targets shrink when you compound monthly

Most new traders set a target like 'I want to make 100% in a year' and then divide by 12: 'so I need 8.3% a month'. That's wrong. It's wrong because compounding does math in your favor — but in this case, it means your required monthly return is SMALLER than 8.3%. The formula: required monthly rate = (1 + annual target)^(1/12) − 1. For 100% annual, that's (2.0)^(1/12) − 1 = 0.0595 = about 5.95% a month.

Wick shows a calculator reading 5.95% under the compounding formula for a 100% yearly goal, showing that monthly targets are not just the yearly goal divided by 12.2.0 ^ (1/12) - 1 = 5.95%a month5.95%
Wick saysHitting 100% in a year takes about 5.95% every month, not 8.3%, because gains compound.

Worked table with the $500 account. 20% annual = 1.53% monthly (account grows from $500 to $600). 50% annual = 3.44% monthly (to $750). 100% annual = 5.95% monthly (to $1,000). 200% annual = 9.59% monthly (to $1,500). 500% annual = 16.07% monthly (to $3,000). Notice how aggressive the monthly target gets when the annual goal gets ambitious. Doubling your money requires a steady 5.95% per month — that's not 'just' eight bucks a week, that's a consistently high return that almost no one in real life manages without huge drawdowns.

Wick frowns at a meter whose needle sits in the coral Guessing zone for a plan that needs 100% a year, while the low zone reads 2% to 4%, showing honest monthly targets.2% to 4%GuessingNeeds 100% a year?
Wick saysA plan that needs 100% a year is a guess. 2% to 4% a month is more honest.

Reality check. A Sharpe-1 retail strategy on a $500 account usually returns 1-3% per month with 1-2% monthly volatility. That's a 12-40% annual return — which is fantastic by professional standards, but it doesn't get you rich quickly. If your goal is to build a real account, the honest monthly target is more like 2-4%, with realistic patience. The traders who survive are the ones who set boring monthly targets and hit them consistently. The ones who set 100% annual targets blow up trying.

Wick shows three cards: hedge funds at 12% to 15% a year, the S&P 500 near 10% a year and a Sharpe 1 trader often at 1% to 3% a month, giving real yardsticks.FundsCelebrate12% to15% a yearS&P 500Averagesabout 10%a yearSharpe 1Often 1%to 3% amonth
Wick saysHedge funds celebrate 12% to 15% a year, so measure your goal against that.

Recap: required monthly = (1 + annual)^(1/12) − 1. Compounding makes monthly targets SMALLER than naive division. 100% annual = ~6% monthly, not 8.3%. Most retail traders should aim for 2-4% monthly, not 100% annual.

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0 / 2 answered

1. You want to grow your $500 account by 50% in a year. What monthly compounded return do you need?

2. What's a realistic monthly compound target for a Sharpe-1 retail trader?

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