I have read a fairy good article about investing for beginners recently. The text was a synopsis of Bill Ackman's lecture, the person who dropped Herbalife's shares by 21% after revealing their pyramid nature. Therefore, in his lecture, Ackman introduces an approximate investment model and draws a few basic rules for beginner investors. I have decided to examine his lecture from the point of view of PAMM investing as I think that what works out in the stock market will work out in the currency market as well.
Imagine you have $1000.
You are a lucky owner of $1000 American dollars, which actually is not really much. So, what can you do with this money?
• Go on holiday
• Pay for your meals for 1 or 1.5 months, depending on where you live.
• Buy a laptop
• Make a bank deposit at 4 – 6.35% per annum.
• Invest in PAMM accounts with 20-40% profitability per annum.
Let us assume you have opted for the latter option because, for example, you have been attracted by the high interest rate. Alternatively, because you think that money should be multiplied, not splurged. Anyway, you now have to choose a trader who will be in charge of your investments. What do you need to know about him/her?
• how old his/her account is
• which profitability has been achieved over the whole period
• which his/her relative losses are.
Based on these numbers, you will be able to work out your investment strategy skilfully and will not lose your money. Moreover, that is the main rule: "never lose money", because otherwise it is not investing but spending. There are a few clues here too:
• Firstly, an account's lifetime should be over 6 months, otherwise it will be hard to see the trader's dynamics and understand if it is a real professional or a lucky beginner.
• Secondly, do not invest more than you can afford to lose. I.e., the imaginable $1000 you can spend on your monthly meals must be your second thousand, at least, not the only one.
• Thirdly, basing on the indicator of relative loss, make sure you have some free money in reserve in case you need to top up the account for enduring drawdowns.
In addition, finally, think of investing in several accounts as competent distribution of funds implies lower risks. Moreover, this distribution is called... Portfolio Investment I wrote about in one of the latest articles. Refresh the material should you need it.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.