| Barron's just came out with its annual listing of the "Best 50 Hedge Funds." Topping the list was RAB Special Situations with a 3-year cumulative average return of 47.69%. Of the top 50, only 24 of them have an average return over 30%, while the bottom 11 didn't even break 25%.
So why am I telling you this? I'm hoping to help you set your expectations for your own returns in the realm of reality.
These numbers are incredibly impressive. The managers that run these funds are well-educated professionals that employ tremendous amounts of leverage and have a team of traders executing their trades for them. You and I, on the other hand, are relatively well educated hobbyists that also have some leverage at our disposal who must place all of our trades on our own when we are not at work or tending to things in our personal lives.
Do you see the difference? Professional hedge-fund managers have many advantages over us, and the best hedge fund out there doesn't have an annualized return higher than 50%. Yet, I hear novice forex investors tell me almost daily that they plan on achieving returns of greater than 100%. Granted, individual investors (like us) do have some advantages over large institutional investors because we can be a little more nimble, but those advantages will not enable us to more than double the returns of the top professionals.
Hopefully, you are investing in the forex market to diversify your total portfolio and to beat the Dow Jones and the S&P 500 (which return somewhere in the range of 12% to 13% per year, on average). If you can double the average returns you would see in the stock market by earning 25% per year in your forex account, you are a superstar.
Naturally, you will have some years when you do much better than this, but you are also going to have years when you don't do quite as well. But if you're practicing proper risk management and position sizing, you should be able to outperform the stock market.
Keep dreaming big, but don't let your dreams cause you to make stupid trades. And at the end of the year, when you have made more than 20% in your account, know that you have made enough to make the Barron's top 50 list. That should be enough to make anyone smile.
by S. Wade Hansen
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