Many investors have concerns about passive investing in stocks and bonds based on standard asset allocation models.
Or maybe they have seen that passive investing won’t get the results they need to reach their financial goals. Many investors turn to more advanced investment strategies in an effort to increase returns without increasing risk.
Popular advanced investment strategies include tactical factor based investing, investing in alternative assets such as gold, real estate, or small business, investing around market cycles with either fundamental or technical analysis, and using options to invest.
Advanced investment strategies are less common among individual investors than they are among wealth managers and high net worth individuals. They are typically how the wealthy invest.
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The Wealthy Use Advanced Investment Strategies
For example: Is tycoon Mark Cuban investing with a standard asset allocation into stocks and bonds?
Maybe with a portion of his assets, but Mark is known for investing in small businesses. He’s even recommended using puts to protect stock portfolio gains.
And what about Warren Buffett? While Warren has been known to suggest passive stock investing for others, he invests in undervalued businesses, but only when he can find them.
And legendary investor Ray Dalio invests around low valuations, economic and market cycles.
One must assume that even financial educator Dave Ramsey became wealthy by selling his investment programs to the masses, initially through churches, not by investing in mutual funds he now recommends. This means he was a small business investor in his own business.
Are any really brilliant investors or very wealthy individuals using passive stock and bonds investing based on standard asset allocation models?
It’s unlikely. Instead, they’re using advanced investment strategies that usually take a little more effort by themselves or their wealth managers. And individual investors, like us, can learn from them.
In this post, I’ll share 5 advanced investment strategies that I have either learned or done in the almost 40 years since I personally began investing.
There are many more advanced investment strategies than simply buy and hold investing based on asset allocation. While this passive investment strategy can work well for patient investors with decades to save and invest, investors over 50 don’t have decades to do so before retirement.
This could mean more advanced investment strategies warrant a look. Plus, more advanced investment strategies sometimes build wealth faster with less risk, than passive asset allocation investing. Not only this, but more advanced investment strategies can definitely result in higher investment income over typical stock and bond index portfolios.
None of the advanced investment strategies here are terribly complex. Most of these strategies are just the next step up from passive investing with a long term buy and hold asset allocation model for investors interested in investing more proactively.
Remember, I am not recommending anything here, just sharing what I’ve learned from personally investing for decades.
Factor Based Investing
Factor based investing is tactical whereas passive investing isn’t. Passive investing simply follows a predetermined model based on an investor’s profile.
On the other hand, factor based investing invests around perceived opportunities at any given time. Factor based investing has become increasingly popular over the past few years with the increase in timely financial information. With factor based investing, investors or fund managers buy assets based on certain factors, such as valuations or economic trends.
This makes a lot of sense. With the increased ability to gather and analyze data from past investment performance based on various factors, systems can be developed to capitalize on that data.
You may have already read here that math, logic, and past data (not emotions or herd following) are the best tools to evaluate investments. This is exactly what factor based investing does.
It’s sort of like old fashioned logical investing, the way investing was done before the days of passive index funds investing. Of course, factor based investing can be done with index funds or etfs. Factor based investing uses math, logic, and data to make it easy for individual investors to capitalize on all of the powerful information now available.
How can individual investors take advantage of factor based investing?
Investors can pay attention to the overall markets, valuations, and the economy before investing. Wealth managers or financial advisors with factor based investing as a high priority for selecting investments can be hired. Or investors can buy into funds that are based on factor based investing.
Read more about factor–based investing here.
Alternative Assets with Factor Based Investing
Factor based investing typically incorporates slightly alternative investments, such as emerging market investments or commodities than most standard asset allocation portfolios.
The goal of factor based investing, along with most advanced investment strategies, is to beat the performance of simple passive investing in index funds over time with comparable or less risk.
Making Investments Around Market Cycles
The next advanced investment strategy I’ll address is simply investing around market cycles. While factor based investing incorporates market cycles into investment selection criteria, there are also strategies that focus on market cycles alone.
Investing around cycles can be as simple as buying oil stocks because oil is at the low end of a long term cycle, or buying stocks just after a bear market has ended. At such times, fundamental business factors such as price to earnings or growth rates can be used to evaluate and choose investments.
Technical analysis, which uses charts to evaluate price movements is also used when investing around market cycles.
While this is considered a more advanced investment strategy when compared to passive investing, investing around market cycles is fairly simplistic and can even overlap with good old fashioned value investing since assets become cheap near the bottom of market cycles.
Many investors and more tactical financial advisors and wealth managers naturally invest with a natural consideration of market cycles.
Fortunately, investors can now use tools like Allocate Smartly to evaluate investment strategies from both a realistic risk and return perspective given their back testing data of up to 50 years.
Here is my video explaining beginner to advanced investment strategies, but keep reading as I explain several advanced strategies below that aren’t in the video.
More advanced alternative investment strategies often incorporate the use of alternative assets, such as commodities, or various forms of real estate. In fact, purchasing rental properties is often an individual’s first segway into more advanced investment strategies.
There are many different kinds of alternative investments that all fall within the realm of more advanced investment strategies simply because they are not considered traditional investing in stocks and bonds using a standard asset allocation model.
It’s worth noting that some alternative investments can be time consuming. For this reason, I suggest alternative investments should be chosen based on the investor’s desired lifestyle and financial goals as defined in a personal wealth plan.
Small Business Investing
Many advanced investment strategies are becoming more mainstream every day since the growth of the internet and resulting information availability.
Also, online platforms are now available allowing individual investors access to alternative investments that were once only available to institutions. One example is small business ownership.
The internet also is largely responsible for the huge trend in small business startups and related small business investing. There are many ways to invest in small businesses including:
- Starting an Online Business
- Buying an Online Business
- Investing in Startups
- Online Crowd Funding for Small Business
- Venture Capital Funds
It’s worth noting that the list above includes investments that require no capital, such as starting an online business, to investments that require a lot of capital, such as Venture Capital fund investing.
As far as required capital, buying an online small business falls somewhere in between high and low capital since small online businesses are now commonly selling for an earnings multiple of around 3, providing an incredible opportunity for investors interested in this investment strategy.
Note that some small business investments will be limited to Accredited Investors, but the regulations for individual investors have eased considerably in this arena since the dawn of online investing platforms.
Using options is one of the more common advanced investment strategies, even for stock investors.
There are several common option strategies for more advanced investors. For example, many stock investors buy puts to protect stock portfolio risk.
Some stock investors sell naked puts instead of buying stocks outright initially, with the plan to own the stock if the put gets exercised. If the put doesn’t get exercised and owning the stock is still desirable, puts can be sold repeatedly until the put is finally exercised or owning the stock is no longer desirable.
A third common option strategy more advanced investors use is selling covered calls. Covered call writing is a simple strategy that can easily double to quadruple dividend income without adding any risk to owning the stock.
Advanced Investment Strategies Summary
As you can see, advanced investment strategies don’t have to be overly complex for individual investors like us.
And with technology and availability of reliable data, it has become easier than ever to implement many of the more advanced investment strategies.
And if you don’t want to make the effort yourself, there are many proactive financial advisors, funds and wealth managers that can implement advanced investment strategies for you, often for reasonable fees.
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