Why do I need a PAMM portfolio?
As you know, you can earn much more on Forex than when opening a Bank account. But the risk of losing your savings here is much higher. This applies not only to traders, but also to investors of PAMM accounts. A logical question arises: can the investor significantly reduce the risk by maintaining the profitability at an acceptable level. The answer is Yes, you can. To do this, the investor must correctly create an investment portfolio of several PAMM accounts.
One PAMM account, no matter how profitable and reliable it is, in any case carries significant risks. After all, individual PAMM accounts, like any business, have the property of being born, developing, and then dying. And no one knows when the usual drawdown of a PAMM account will be replaced by its death. Even the account Manager, not to mention the investor, who may not be told the whole truth about, for example, changing their trading system. Therefore, to minimize risks, a PAMM portfolio is created, consisting of several PAMM accounts. This minimization is also called diversification. And also-laying eggs in different baskets. Of course, the probability that one of the baskets will fall and the eggs in it will break increases, but the rest will remain intact.
The same is true with a portfolio: if you invest in one PAMM account, you will be left with nothing when it is “drained”. If you create a portfolio of several PAMM accounts, then one or more of them will be merged, and you will lose this money. But the profit received from investing in other accounts, in theory, should more than cover this loss. In this regard, there is, perhaps, the most interesting question.
How to create a PAMM portfolio
You can, of course, open the rating of PAMM portfolios and take advantage of a ready-made investment offer, without going into the study of the criteria for selecting PAMM accounts for investment. At the same time, however, you need to consider two things:
- In addition to remuneration for PAMM account managers, you will also need to pay remuneration to the PAMM portfolio Manager.
- You can’t be completely sure how well its Manager has formed his investment portfolio.
- And you can spend a little time and learn how to choose PAMM accounts for investment. Select multiple accounts based on criteria such as potential returns, drawdowns, risks, and account age. At the very least, you will be sure that the accounts in your portfolio were included according to the specified criteria, and not because someone just wanted to include them in your portfolio. Well, you will save on the Commission for the PAMM portfolio Manager, of course.
- Let’s say you have selected several PAMM accounts that are potentially attractive for investment. Now it remains to understand how many of them should be in the portfolio, and in what proportions the shares are distributed. It is assumed that there should be 5-10 accounts in the PAMM portfolio. If less than 5, the diversification will be insufficient. If it is more than 10, then it will be quite difficult to keep track of this number of accounts. In addition, according to popular opinion, the share of conservative accounts with a high degree of reliability and, consequently, with not the highest potential return, in the portfolio should be 70-80%.
- Accordingly, the share of aggressive-20-30%. With this ratio, the profit received from investments in aggressive accounts may be even greater than from investments in conservative accounts, despite their higher share in the portfolio. And if one of the aggressive accounts makes a loss, it will not critically affect your financial well-being due to the low share of funds invested in this account in the PAMM portfolio. Moreover, in any case, you have a good chance to get a total profit from the PAMM portfolio, since conservative accounts should bring in a little bit of income.
In conclusion, we should focus on one more aspect. Often, when selecting PAMM accounts, it turns out that several of the most successful accounts are managed by the same Manager. So, it makes sense to invest only in one of them, since usually all these accounts are trading on approximately the same system. The difference between one PAMM account and another is only in the level of risks and, accordingly, profitability. In case of any failure in the system, you will get a loss on several accounts at once, if you invest more than one PAMM account of one Manager.