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Options For Diversification : The Importance of a Multiple Strategy Approach

Anyone who manages their own money should use a multiple strategy approach—a form of diversification, if you will. I personally maintain 4 strategies: buying & holding stocks, investing in real estate, index option credit spread trading, and directional option trading. I find these to be great options for diversification.

  • I typically hold stocks (and some bitcoin) for 18 months or more and enjoy dividend returns. I sell a stock when the upside story changes, though I have owned some stocks for years.

  • My real estate investments are mostly rental properties. After enhancing the properties with remodeling I typically hold them, collecting rent, until it make sense to sell.

  • Each week I make multiple index option credit spread trades, mostly using the SPY and the IWM. I like indexes because they require only a broad understanding of the market rather than intimate knowledge of a particular company—in other words, less risk and little effort. With each trade I aim to bring in a 10% return on capital and I shoot for a 92% (or more) win rate.

  • My directional option trades involve buying puts or calls depending on where I think a stock is going in the near term. I use fundamental analysis to pick my stocks and technical analysis to identify entry points. For each trade I seek a profit of 30% to 50% or a stop out no lower than a 10% loss.

options for diversification

Are You Just Bragging or Is There a Point Here?

Utilizing multiple strategies has two important benefits: you stay engaged and, typically, at all times you have at least one strategy that is performing really well. Engagement is key because when we are bored we check out. To be a good investor, however, you must always be engaged, so if you slack off when times are meh your investing and trading skills will suffer—with predictably dismal results. One failsafe of the multiple strategy approach is that when one strategy dogs it you can focus your attention and enthusiasm on the ones that are smoking.

Diversification is also essential because no one strategy returns consistent (high) returns over time. Most options for diversification have good years and bad years, but by designing your overall approach will perform well in various market conditions. In the recent real estate boom, for example, you could make tons of money flipping houses. During the bust that followed you could do well collecting dividends or selling volatility via options, and in our current bull market being a buy-and-hold investor is pretty exciting.

I am not suggesting that you shift strategies based on the vagaries of the market because you can’t predict exactly what will happen. Rather, you should maintain multiple strategies so that as the market changes different diversification options will emerge as your best performers. Strong personal engagement and consistent portfolio returns are integral to being a good investor and multiple strategies are the means to both.

Related Topics: diversification

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