Questions regarding returns or performance are probably the most common in the investment industry.
Unfortunately, investors primarily focused on performance when in search for a Managed Forex Product are bound to be disappointed.
Lies About Managed Account Returns
For some strange reason, the forex Industry seems to be oversaturated with unrealistic expectations. It appears as though investors are on an endless quest for the Holy Grail, while the traditional investment products around them can't even eek out a fraction of the returns they are looking for.
Why do they use a different yardstick to measure performance when it comes to managed forex?
What is "Normal" when it comes to Returns?
Before we delve into the reasons why investors' expectations in FX are so out of whack, let's see what the traditional investment industry offers.
Let's take the US stock market for example. The historical annualized return for stocks ranges somewhere between 8 to 10% a year (with dividends included), depending on who you ask and what stock index (Dow Jones Industrial Average, Standard & Poor's 500, etc) you use to compute the average. This may sound all fine and dandy, but not when you consider the fact that stocks exhibit a Maximum Historical Drawdown or percentage deviation from peak to trough in account equity (a very important measure of risk) of over 50%! Even when you compare professionally managed stock and bond investments (like mutual funds), the great majority of portfolio managers do worse historically than the market indices.
If stocks are giving investors a 10% return a year with the occasional 50% bloodbath, why is the herd demanding 10%+ a month in managed FX, with the same or less amount of risk?
It's insane! It's like refusing to believe Santa Claus doesn't exist, even at your deathbed!
No wonder some investors go from managed account provider to provider, getting disappointed time and time again.
So What's the Final Verdict when it comes to Returns?
Now that we played party pooper to the Santa-lovers crowd (and made a few enemies in the process), what is the truth? What can you expect when it comes to performance in the managed world?
Based on our extensive experience in managing risk and performing due diligence on a never-ending number of money managers, these are some simple performance-based guidelines or "rules of thumbs" we like to go by:
- Never look at returns in a vacuum. Returns must only be analyzed relative to risk (read, "How Risky is a Managed Account?" for more information).
- After observing number 1 above….If you expect a 3 to 5% return a month, make sure you are comfortable with potential drawdowns of at least 20% in the future. If you're not, your expectations are not aligned with reality. The risk tolerance must obviously be proportionately higher if the investor desires an even better performance.
For an even more in-depth look at return-versus-risk in managed products, read this blog post.