DEFINITION of 'Vanilla Strategy'

A vanilla strategy is a common or popular approach to investing or decision making in business. Although the concept is relatively basic, some investors and businesses excel because they stick with an ordinary, "vanilla" strategy, while others succeed through innovation. For example, in derivatives trading, a vanilla strategy is the use of two different plain vanilla instruments, such as swaps, at the same time.

BREAKING DOWN 'Vanilla Strategy'

A second example of a vanilla strategy for retirement savings could include saving at least 10% of one's annual income, investing in diversified portfolio of stocks and bonds through tax-advantaged savings accounts like a 401(k) and Roth IRA, and buying a home with a plan to pay off the mortgage before reaching retirement. There is nothing interesting or unique about this strategy; it is "vanilla," because it is ordinary, yet many people find success with it.

A higher-risk portfolio approach – the opposite of a vanilla strategy – could include a focus on momentum, concentration, penny stocks, emerging countries or technologies, currencies, futures, and/or options.

Momentum investing revolves around taking positions in companies already showing strong price action. Due to above-average valuations, these stocks are often over-hyped and have the potential to fade easily. A concentrated portfolio invests more heavily into a single sector/industry. While this can amp up return potential, particularly in a hot sector such as technology stocks in the late 1990s, it also significantly increases risk if the sector tumbles. Another non-vanilla tactic is allocating to penny stocks. These stocks are often highly illiquid and require significant attention and commitment to understand.

In addition, they may introduce instances of fraud and corruption; yet, for those who do uncover gems that trade below $5/share, they can pay off handsomely. Emerging ideas can include new technologies and business models, as well as a focus on emerging market economies like Brazil, Chile, China, Colombia, Hungary, Indonesia, India, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Thailand and Turkey. Finally, investing in currencies and futures requires an uncommon mix of agility, patience and self-confidence, since an investor must not only get the direction right but also anticipate his or her move(s) prior to contracts expiring.

These tactics are the opposite of vanilla in that they generally require an above-average skill set, industry insight, and appetite and ability to withstand risk and losses.

Vanilla Strategy and Portfolio Management

With regard to portfolio management, vanilla strategy represents just one approach. Overall, portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management determines strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth versus safety, and many other trade-offs.

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