Using a multi-product strategy

Common multi-product strategy structures

When you’re building your portfolio, you can follow the structure of a pyramid. At the bottom, you may choose to include various investment products as they’re typically lower risk.

As your structure narrows towards the middle, you could purchase individual shares, slowly increasing your liability.

Then, right at the top of your pyramid, you might include leveraged trading. This is generally considered the highest risk.

If your leveraged positions experience a downturn, you could only be losing the smallest piece of your overall portfolio, while the rest might be safe and can continue growing over time.

The key to a successful pyramid is to build on a solid financial foundation and limit exposure to more risky investments at the top.

Adopting this approach can give you power over exactly how much risk you’re willing to take on, and how much time you want to spend managing your portfolio.

In the sections below, we’re going to illustrate different versions of the pyramid you might adopt, starting from the bottom.

Pyramid 1: combining different investment products

This low-risk structure for a portfolio would be classified as a long-term strategy. You might invest your capital in bonds or a savings account, or choose ETFs and managed portfolios comprised of stocks and perhaps some bonds for stability.

The shape here may resemble a rectangle more than a pyramid, but it’s still a multi-stock and multi-asset strategy.

Having numerous stocks mixed with some bonds reduces investment risk and creates a strategy that’s relatively simple to manage.

While it can take more time, this approach has the potential to produce returns ahead of inflation and create real wealth.

Pyramid 2: adding individual shares to your strategy

In this instance, the pyramid might have a base of collective investments, with individual shares making up the top part.

You can use multiple investment products with different levels of risk. However, you’re still able to avoid the increased volatility of leveraged trading.

Within the individual stocks part of the strategy, you can allocate funds to some dividend-paying value stocks in the middle and to growth stocks right at the top. While they can add to returns, they may also add to your overall risk.

You could split your investments in several ways to form the pyramid. But remember, the bottom section should ideally have a larger percentage. The passive, diversified base could form 60% and the rest can be split between individual stocks.

Pyramid 3: combining investment and trading products

Adding on from the previous option, you may want to include a trading portfolio right at the top of your pyramid. While this will add more risk, it’s less likely to destabilise the structure because of its sturdy base. It also has the potential to add to your overall returns.

The trading products used can also further diversify your portfolio. Plus, they could be used to add some security if you choose a hedging approach.

Another way to ensure your portfolio can weather volatile markets is by using a derivative product to take a short position, like CFDs, ETPs or options. Let’s see how using a put option would work.

If you anticipate that the market will fall, these will rise in value as the underlying asset depreciates, providing you with a potential profit to offset your losses.

If your positions have a strike price that’s lower than the current market price of the underlying, they’re known as ‘out-the-money’. The strike price is the level at which you can exercise the option. In the case of a put option, this means selling at that price.

When a put option is ‘out-the-money’ it’s likely to be cheaper because it doesn’t have any intrinsic value yet.

You could also choose put options that are long-dated, meaning you can hold them for longer.

Let’s look at how it works.

Using options can be a complex strategy, but it might be worth considering as they can help you mitigate some of the risk. They can offer short-term protection if you’re risk-averse and worried about a market selloff.

In this strategy, you may keep the base made up of passive products, and managed portfolios could remain higher than 50%. You can allocate 30-40% to shares (split to favour more of the value stocks), while your trading activity at the top would sit at 15% or less.

Pyramid 4: a trading-only strategy

Entering the markets using trading alone could be a risky option because the base of your pyramid might lack the stability you could get from long-term investments. However, you can still structure your pyramid to manage your overall risk.

Your base could include exchange-traded products (ETPs) that can diversify your portfolio, but with a lower level of leverage.

Options, with their limited downside, might also work for you at the lower end of the risk pyramid. While they do use leverage, it’s often lower, and the downside is capped at your initial outlay. Just note that when you sell a put option, your losses are potentially limitless.

With a barrier option, you can limit your potential loss even more. You’re able to set the level at which it expires, thus reducing risk.

With this strategy, your base of leveraged ETPs would cover between 50% and 75%. Right at the top, you could allocate 10% of your funds to fully leveraged individual assets. The remainder might include options, which limit your downside risk.

Pyramid 5: using an options trading strategy

Another way to structure the trading part of your portfolio is by using vanilla and barrier options.

Remember that call options increase in value when the underlying asset is rising, while put options increase as the underlying’s value falls.

A blend of call and put options on different assets could reduce overall risk in your pyramid because you’d profit from both rising and falling markets.

In this instance, you’re hoping that the profit from one might offset the losses from the other. Choosing uncorrelated assets can help you optimize this strategy.

If you’re using options as the trading part of a diversified pyramid portfolio, they can offer insurance as detailed earlier in this lesson.

The methods we’ve outlined in this lesson aren’t the only options available to you. The general idea is to structure your pyramid according to your own needs and risk profile.

You can choose whichever low-, medium- or high-risk solutions fit within your financial goals.