Investing strategies refer to the different methods and approaches investors use to allocate their money across various assets to achieve their financial goals. Embedded investing strategies are those that are incorporated within an investment product itself. For example, target date funds have a glide path strategy embedded in them where the asset allocation automatically becomes more conservative as the target date approaches. Other examples may include structured products that have options strategies embedded in them to provide downside protection or enhanced upside potential. Choosing the right investing strategy is crucial for an investor to maximize returns while managing risks appropriately. This article provides an overview of various investing strategies investors can utilize.
Core-satellite strategy balances stability and flexibility
The core-satellite approach is an investing strategy that combines stability with flexibility. Here, the ‘core’ portion refers to the larger allocation to broad market index funds that provide low-cost, diversified market exposure. The ‘satellite’ portion refers to a smaller allocation to actively managed funds or individual asset selections that aim to outperform the market. This strategy allows investors to gain most of the market’s return through the core funds, while also having the flexibility to take on some active risk through satellites for potential added returns.
Tactical asset allocation aims to time the markets
Tactical asset allocation aims to overweight and underweight asset classes based on market valuations and momentum. The goal is to time the markets by increasing exposure to asset classes when their valuations are attractive and expected returns are higher; and decreasing exposure when valuations are stretched and forward return expectations are lower. This dynamic strategy requires frequent monitoring and rebalancing.
Option overlay adds downside risk management
An option overlay strategy involves actively buying and selling options to manage the risk-return profile of an investment portfolio. For example, a put option overlay entails systematically buying put options on a portfolio to protect against significant market declines, while allowing participation in gains. This strategy aims to provide asymmetric payoffs – limiting losses in case of market crashes while benefiting from upside in rising markets.
Smart beta targets specific factors
Smart beta strategies track indexes designed to capture excess returns associated with certain factors like value, momentum, quality, low volatility etc. For example, a value index would tilt towards stocks with lower valuations based on measures like price-to-earnings, price-to-book value etc. Smart beta provides a rules-based, systematic approach to target specific factors compared to traditional active stock picking.
There are a wide variety of embedded as well as overlay investing strategies available. Investors need to assess their risk appetite, return objectives and portfolio constraints before choosing a suitable strategy. Combining strategies can also help balance various objectives. Staying disciplined in strategy execution is key.