Many investors who open managed accounts think that positive results should immediately follow. This ultra-short term mentality might prevent investors from remaining in good programs long enough to benefit from them.
Every professional money manager has both winning and losing trades, as well as profitable and unprofitable months. No portfolio manager is immune to drawdowns (DD) either. Drawdowns are the natural byproduct of trading a market that no one can predict with 100% certainty.
Because of this, there's always a chance that an investor may join a managed account program in the middle of a drawdown or "down" period. This is true even for great programs that have good risk-adjusted returns. That is why it is so important that an investor give a managed program some "wiggle" room to perform. "How much room?", some may logically ask. The amount of time will vary from manager to manager, but in general, an investor should give a managed program from 3 to 6 months before making an ultimate decision to pull the plug.
Please note that we are NOT recommending investors take the laid-back approach to investing that mutual fund investors know so well. This would be a grave mistake too, since a bad manager should be removed from an investment portfolio as quickly as possible. What investors should do is keep a close tab on their managed investment at least once a month. What is really important is that they learn to tell the difference between a bad portfolio manager and a "normal" down period for the program they're invested in. Sometimes, this takes time, but the key is to analyze the program's historical performance and drawdown figures and see if the current performance is in line with that.
For example, if an FX money manager has had a maximum historical drawdown of 25% and the investor experiences a 4% drop in value in one month, that may be perfectly normal. Pulling out of a program at that time may cause the investor to miss out on a potentially profitable period that may be just around the corner.
Investors that are seeking instant gratification from managed accounts and constantly switch from one program to the next, are playing money managers themselves; and poor ones at that. It is almost better for those impatient investors to simply learn how to day trade and forget managed accounts altogether (visit our training section for more info on this).
Waiting for a Good Performance While Grounded on Reality
It is also important for investors to have a good grasp of reality when it comes to returns versus risk before they jump into a managed FX program. Keep in mind that just because a program has averaged a maximum drawdown of X% in the past, doesn't mean that it won't exceed that drawdown in the future. It is not a guarantee. As the saying goes in the trading world, "Your biggest draw down is always ahead of you!"
That's why investors should always assess their ability to withstand risk before they invest.
If an investor cannot stomach a maximum fluctuation to the downside (or drawdown) of at least half the annual return the managed forex program has generated historically, they shouldn't be investing in the first place (and please note, a max DD of only half of the annualized return is still considered very good. Most money managers and top-ranked CTA's don't achieve draw downs that low over time).
For more information on returns versus risk in managed accounts, read "this section."