Principles from physics, applied to human behavior prove that correct action flows from accurate perceptions. To repeat, scientific teachings conclude that how we perceive at any given time determines what we do.
Your professional futures investment should be understood from comfort, and wisdom rather than fear. We believe teaching through a paradigm of strength and wisdom can only cause you to take stronger actions. Using fear distorts decisions, weakens and depletes energy, whereas creating trust and comfort strengthens. Managing your capital with reverence is a team effort between you and the money managers. They will not effectively function on your behalf without ease between you.
1) Relative to what I know about stocks and bonds how do you make money?
Volatility and change that investors usually fear that allow profits to be taken from markets. Without promises or guarantees managed futures work best in dynamically changing markets. Futures trading benefits from falling prices by short selling, rising prices by going long (buying) and maybe even price differentials between commodities by using spreads. (Buying one market and selling another in hopes that price changes between markets go in our favor.) If prices appear too volatile positions may be hedged with options. If you own stocks or bonds under unfavorable or emotionally unsettling market conditions, you can partially offset some of your investment risk with managed futures. By using 15% or less of your total portfolio you can use the leverage of professional management to offset potential losses from stocks or bonds.
For example: Hypothetically speaking assume you have a total portfolio of $300,000, including your retirement fund earning 5% annually. Take 10% or $30,000 and allocate that capital to managed futures. Assume all money is lost and the portfolio is left with $270,000 still earning 5% annually. Without incurring any more risk, the portfolio earns back the capital in less than 24 months. Assuming your worst fears have been dealt with, let's move to the upward potential of managed futures.
Assume $30,000 allocated to futures averages 20% annually for the next decade. Cumulated it becomes $222,895, a 64.29% average annual return. Your $270,000 investment base, cumulated for 10 years at 5% becomes $439.802. Total investment value (taxes not included) now $662,697. After 10 years, a 10% allocation to futures now represents 33.63% of total portfolio value, with futures contributing a return on original investment of over of 743% for the decade. That's the gift in leverage! All examples are used for educational purposes. We do not claim or guarantee that returns cited have or can be attained.
2) How do managed futures accounts protect my capital?
Use $45,000 as a hypothetical example and remember that every account size has different parameters. Only $4500 to $11,250 (10% to 25%) of capital is used as original margin, the balance is excess. Assume that 1% to 3% of capital risked on each trade is built into a strategy. Medium and long-term strategies are designed whereas at least 53% of trades should be successful during testing. This does not guarantee that 53% will be successful during trading. We believe that shorter term strategies should have a much higher percentage of profitable trades with lower risk/reward ratio. Awareness to changing market conditions before excessive losses occur differentiates good money management from mediocrity. Diversifying through time values, strategies, markets traded and market sectors all have to be considered. Having proper floor facilities for order execution and trade allocation saves money on slippage and errors. The tip of an iceberg was touched concerning possible methods of risk control. Reading investment profiles and disclosure documents of different traders can bring more detail to your attention. Investment strategies are only as good as the consciousness of the mind designing them and discipline of the personality implementing them. Bottom line …somebody can or cannot trade!
Tradition methods of risk disclosure, leaves you with an impression that markets are dangerous with no method of managing risk. Fire is also dangerous when not managed. Most intelligent professionals successfully manage market risk on a daily basis. Our job is to show you what intelligent is, and how to seek it out!
3) Why do draw downs appear larger in some accounts?
Draw down and account volatility needs to be related to a percentage of account value. For example if a $15,000 account has a draw down of $5000 that's 33.3%. Yet $5000 of $30,000 is only 15%. People can say that 33% is high and 15% is low. Neither statement is accurate. Most independent research companies do not consider comparative account sizes when using draw down analysis, as a measure of risk. Within that context, information you receive will be inaccurate. Traditional money managers require larger account sizes relative to the amount of capital actually used for trading. Statistically speaking this reduces perceived level of risk. Draw downs and account volatility should always be evaluated relative to potential returns and account size.
4) What is notional funding?
With client knowledge and consent, an account is traded as $100,000 while funded with $50,000. Clients are responsible for the entire $100,000 commitment. When using notional funding understand added risk and volatility associated with the account. Opening a $25,000 notional funded account gives you four times the leverage that a $100,000 account would have. Understanding the leverage, costs and volatility of notional funding before the account is opened can create long term stability. Like all new relationships, we believe it takes about a year into the marriage with futures to get comfortable.
5) What is your perception of good judgment in deciding how long to keep my account open when it’s not making money?
There are two types of non profitability. Break even and large draw downs. A large consideration is non profitability after profits were realized and again when no money was made. The trading strategy and your comfort zone need to be evaluated. For example: a short term trading strategy should take less time to be profitable. I have an account that earned 40% in year one and 7% in year 2. I’ll keep the account opened even if it earns nothing or has slight losses for 12 -18 months because I am comfortable with the trader. It took me 18 months to get comfortable with this trader. There are 10 questions to ask yourself before an account starts trading. They are listed below and included in the SafeMoneyMetrics® Client Risk Management demo report. Read the site content for CRM.
- Maximum % loss from starting value to close
- Maximum # of months to close
- If maximum is reached, change advisors or close account
- What % below the benchmark closes account
- What time frame beyond benchmark closes account
- After one year, time frame of flat performance tolerated.
- Profit distribution - what % distributed
- When are profits distributed
- When the advisor is paid an incentive fee
- Assnually
- reinvest all profits
- What degree (%) of profitability would prompt a new account
- How many months to diversify into another account?
6) Our opinion of why risk is healthy!
Life without some degree of risk becomes stale and we become fearful beyond what is considered healthy fear that protects us. Boundaries for living become a function of fear causing a contraction of life, rather than calculated risk which expands the boundaries of life with strength, courage and love. We're not suggesting reckless abandon with your capital or yourself, what we are suggesting is the simple ability to transform your perception of risk, from one of fear and loss to a perception of opportunity for gaining strength, courage and growth. Remember fear contracts and lowers energy, where strength and love expand energy. Living in a conscious state of expansion is healing to the body and spirit because life is lived through us and simply flows. Take time to walk in nature, do you ever see a tree fearing the risk of nature’s elements, or a flower fearing to become more of itself. Nothing is trying to live it just lives! Life expands by itself when we get out of the way. Calculated risk is parallel to a caterpillar becoming a butterfly. If it doesn't become the butterfly it dies, people are no different. When we listen to the silence within, nature knows when it is time to move on.
7) How can I determine if costs to my account are fair?
Rather than comparing securities to futures or managed accounts to limited partnerships, each industry and market sector has its own merits and should be independently assessed. A few ideas to contemplate are: Accurate cost evaluation must be done using a relative thinking process. For example it is impossible to assess whether $35.00 is too high or low without considering other factors.
One must also consider number of trades, profit to loss ratio and percentage of profitable trades. For example, in crude oil each point is worth $10.00. If cost is $35.00 and the strategy encompasses 25 point potentials or $250.00; your cost represents 14% of each trade. If 50 point potentials are used, cost comes down to 7%. Now consider the percentage of profitable trades with the profit to loss ratio. If profitable trades are only 45% with a profit to loss ratio on each trade of 3.1 you may still have a good strategy.
Considering these factors, you can NOW look at total account value, number of trades annually as a percentage of account equity. Just looking at commission as a percentage of account equity is meaningless unless it relates to the total strategy.
One industry trader used to earn well over 100% annually. His costs were 30% commission to equity ratio. Being an ex floor trader, he had high turnover and low commission rates. Considering that only 30% of total capital was used for trading, his profit on actual capital at risk was over 300%. Now the 30 % cost factor looks low! Traditional analysis would claim that his cost was high. We believe his clients were lucky to have his services. SafeMoneyMetrics CTA-Reports is a free service. It provides cost analysis on three funding levels for any advisor in our data base. SafeMoneyMetrics Analysis is $45.00 for a single advisor report and $65.00 for a multi-advisor. That service calculates costs on custom analysis.
8) How can I determine how much capital to commit to an account?
Good question, start with the least amount possible for what you expect to accomplish and say "prove it." For example, a retirement portfolio has $750,000 and a regular stock and bond portfolio is $350,000 for a total of $1,100,000. 10% of the total is $110,000. Start with as little as 50% of your 10% if possible. If after one year the investment performed according to pre determined standards, maybe consider adding capital if it increased an ability to make money. Another alternative is notional funding with different accounts. Every time the advisor took an incentive fee, take your profits above the original capital contribution until all original capital was returned. (100% return on equity). Thereafter consider leaving 75% for reinvestment and remove 25% from the account annually, or maybe 50%- 50%.
9) How can I compare one professionally managed account to another?
Be comfortable with the people first then look at numbers. Rather than seeking to compare maybe consider correlating two investments. If only one account is possible, a longer term consistent perspective with complete attention to risk. Find out what risk was taken to achieve the rewards, rather than looking at just rewards. You need comfort and trust to live through periods of inherent draw downs in managed futures. Deal open and honestly with the risk. Talk about it, feel it, live it. Use your imagination to visualize at least five or seven months of loss annually. Trust us, training yourself to live through discomfort only creates heaven on earth, because imagination is much more vivid than reality and you get thoroughly prepared. Looking at only returns is usually time wasted because you deny the reality of a process integral to the investment. If two different investments have the same numbers, even if one has slightly higher costs, go with people you are most comfortable.
10) Why did you include investment profiles?
We believe profiles offer additional preparation for the realities of professional management. At times, profiles can be based on individual trade data, other times on capital management procedures built into a trading strategy. When based on strategies built into a trading program, profiles are labeled as hypothetical with a hypothetical disclaimer.
We believe an inherent focus on past performance and a composite track record leaves imbalances regarding future performance of your account. Profiles are supplemental information offered to fill the void. They quantify a process your account lives through so potential rewards can be achieved. You can get comfortable with how your account works, no matter when it opens. Your expectations should be aligned with realities of the investment. Past performance has its place however it doesn't offer tomorrow's reality. Proper risk analysis also includes individual trade analysis, current market conditions, and time "windows." Time windows show monthly returns during various time frames ranging from 1 to 36 months, rather than annual. Annual returns may be 50%, however June to June could be losses.
Deception by omission is possible using annual returns, as it relates to your account performance. Time windows and investment profiles reduce the problem of omission. Look at the demo report at SafeMoneyMetrics Analysis.
We perceive that bringing weakness to the surface is more important than talking about past returns. Staying with the investment under adverse circumstances is a process that increases your success potential.
11) I'm over 65 are your services good for me?
If you are in reasonably good health, look at the worst possible outcome of the decision. If the potential loss does not affect your life style, we cheerfully invite you into our very special world of managed futures. We believe our philosophy, learning process is invigorating. It has been our experience that when your new perceptions of reality and risk are applied to other areas of life, little surprises and improvements are endless. Our client communications bring investment strategies and a transformative philosophy from fear to strength that brings pleasure and endures throughout your lifetime.
12) Why is comfort so important before I invest?
How many times have you caught yourself emotionally acting on something you perceived to be true, yet time revealed that the perceived truth was only illusion. Actions taken on inaccurate or incomplete information caused unnecessary grief for you and other people involved. Unresolved issues can cause unnecessary losses to your managed account.
Sometimes we act or react to beliefs based on fear or hearsay that have no connection to current reality of a situation. Sometimes we react or make decisions based on someone else's experience of a situation when their experience was caused by their beliefs and actions. I have relationships whereas there is a 180% degree difference in the experiences we have with the same person. Their perceptions of situations or beliefs of people dramatically differ from mine, causing different experiences for each of us.
To repeat, beliefs cause perception.
Perception causes our actions and reactions to people and events around us. Consciously or unconsciously we always create our own experience.
Comfortable beliefs and perceptions about futures and the people you work with can only cause positive experience. Unanswered questions or conflicting beliefs will manifest as unnecessary losses to your account. Conflicts and issues can be easily resolved by following uncomfortable feelings into the beliefs or causes of them. Asking yourself questions related to your feelings usually uncovers the belief causing the uncomfortable feeling. With work, there is no perception or belief that cannot be altered. With insight and reflection, you have the power to dramatically and permanently alter your reality. Nine out of ten times you'll find that it is not the investment that bothers you, but your perception and fears of what could happen. As negative or fear based issues resolve themselves, your awareness level will rise along with your energy. Freedom from fear and conflict automatically increases energy and the quality of our decisions. If you feel good about where you are headed rather than tense, you have successfully completed the task of internal conflict resolution.
13). How can I easily evaluate performance information?
Always work with advisors registered with the National Futures Association. Use the NFA registration section to check the background of any advisor before you get involved. CFTC and NFA regulations require that performance be equally presented for each program offered. They also require order in the presentation; current program, other programs and supplemental information. Under normal circumstances, supplemental information usually contains proprietary trading accounts.
Subjective analysis is also important
Flexibility and wisdom can bring more truth to the surface than current regulations allow. Although well intended, regulatory guidelines can distort truth by omission and negating the value of proprietary trading. For example, we used to offer a CTA’s Discretionary 1 Program. (There were two!). Accounts we had with the program had only been trading five months and were down 5.4%. Proprietary trading went from up 81.% to up 74% during the same time frame. Although not the circumstance, if proprietary trading was up, while client accounts were down, we have reason to ask why?
History of the program: Two years before the advisor started taking client account, he traded his own money building a foundation for the business. Although he was new to trading client funds, with a little time, the emotional adjustments could easily be overcome for this person.
With all due respect, the regulatory agencies don’t have any qualitative knowledge of the trader and don’t want any. They look at “the formal client track record.” From their point of view, you see six months trading down 5.4%. We perceive a total picture is fundamentally important for making a balanced decision.
Remember Thomas Edison and Albert Einstein!
Developmental stages of any invention bring us one step closer to success.
Also remember, emerging CTA’s may have short formal track records. Industry experience has to be really long but formal tracks can be short. For example, with 30 years in futures and experience ranging from floor trading to hedging, my formal track record only ran from 1986 through about 1991. I was managing money at 22 from the trading floor. I left futures from 1992 through 1996 because of health reasons. My formal track is useless. My experience is priceless.
Point: Look behind the bottom line for gray areas…there are pearls found in clam shells covered with sand.
For us, supplemental information would include investment profiles on each program. Investment profiles define trade analysis. Profiles provide a micro view of an account, rather than total composite past performance. The trade analysis can easily be used as a future indication of what you account may look like trade by trade.
ALL MATHEMATICAL EXAMPLES USED IN THE PREVIOUS 13 QUESTIONS FOR EDUCATIONAL PURPOSES ARE HYPOTHETICAL. THEY ARE NOT RELATED TO ANY INVESTMENT OR TRADING STRATEGY OFFERED BY SAFEMONEYMETRICS. OUR INTENT IS TO INCREASE YOUR KNOWLEDGE BY CREATING COMFORT. THE INFORMATION IS NOT TO BE TAKEN AS A SOLICITATION FOR INVESTMENT. INVESTMENT CAN ONLY BE MADE WITH DISCLOSURE DOCUMENTS.