Just about anyone that spends enough time around the world of forex investments can share their opinions on the ingredients needed for success, but not many have a winning signature recipe for creating a long lasting managed forex portfolio.
For example, many will immediately say you should diversify. But if that limited opinion doesn’t carry valid experience and proper “how to” knowledge, you could get left with a portfolio of false security.
We do agree that the first step in our recipe is to diversify your portfolio. But you first need to understand that diversification is not just adding a bunch of products together. You need to research and find a successful variety of products that accomplish different strategic goals. i.e. if you had five managers who all scalped the Asian session, then you’d not have much success when that market experiences an unusual volatility spike. Your portfolio of managers could all likely experience a drawdown of varying degrees at the same time and that should not be your objective within a diversified portfolio.
By contrast, a savvy investor will approach diversification by adding unique strategies that trade at various times and currencies, execute differing approaches and also might have a range of holding periods, etc.
The second step in our recipe is to apply the proper weight distribution for each program in your portfolio’s allocation.
What do we mean by applying the proper weight distribution? Well, by allocating across a diverse pool of managers, you might place only 5% of your allocation on a program that exercises a greater degree of leverage/risk. By only allocating a small portion of your overall allocation, you can essentially minimize the overall risk to your portfolio.
Example: A manager may establish a higher targeted maximum expected risk exposure of 30%. Let’s say that based on that variable, you allocated $5,000 of your $100,000 portfolio to their program. By allocating only 5% of your portfolio to the program, you have minimized your maximum expected exposure on this program to 1.5% or $1,500 (30% of $5,000). *Please read our full risk disclaimer. Past performance is not indicative of future results.
The third step is to approach your forex investment portfolio with patience and discipline, and allowing your investment plan to work. Too often in forex investments, we see investors fall and often fail, due to their emotions. Their portfolio’s transparency, liquidity and the control given, often backfire negatively.
We monitor investors everyday who have investments that might not go their way after a week or a month and immediately they want to get out. But investors need to look across the other asset classes they are vested in and exercise similar treatment.
It’s no different than buying real estate 6 years ago in 2005 at the market’s highs or investing in your 401k or IRA back then. In the fall of 2008, all these investments took a massive hit. Unfortunately, these investments are not as liquid and if you attempted to liquidate them right away, you’d have likely lost more to short sale, foreclosures, penalties, taxes, etc. In contrast, you do have the access to liquidate your forex portfolio in shorter order, however, you probably should subdue that urge.
In the same way that you approach your IRA, 401k and real estate portfolios for the long term, investors should also view their forex and futures portfolios in the same manner. If you’re down 7% in a year, it’s not the end of the world, it’s just a drawdown. Your IRA and real estate hasn’t always made you money year over year and neither will your forex portfolio.
The advantage with a forex investment is that the market is most often more liquid and you can be a slight bit more flexible with your choices to move or exit, but this doesn’t mean you jump around each time your emotions get the better of you and you over-react to every single drawdown that takes place.
Drawdowns happen. Having great patience, discipline and trusting in your portfolio blend will hopefully smooth out your overall exposure/risk and provide you an opportunity for more stable returns over the long term.