Top 10 percent investment ideas – 2014

This is the 2014 list of alternative investment or savings methods to try and make more than 10% annualised return on capital. They are either trading strategies or investment techniques or even money-saving ideas which can have a significant impact on your financial aims.

Strategies Scores 

Strategies are compared across categories of management effort, stock correlation and risk/reward (return on capital) and more the subjective emotional turmoil and internal visibility index. A score of 1..10 is assigned to each category, then totaled to give a comparable total index score for each strategy. A higher total score means that is a more desirable strategy.

The ultimate strategy would be very hands off, with very low correlation to general stock markets, with say a 10% plus return and a low drawdown risk, be highly transparent and require little emotional turmoil to execute! This is an idealized perfect strategy which does not currently exist, but this system can help assess which strategies come the closest. Obviously this scoring is somewhat subjective but does allow comparing strategies with each other relatively quickly.

Categories

Management effort varies from hands-off checking each quarter (10), to very active daily involvement (1).

Correlation is measured by against the stock market S&P 500 index, from no correlation (10) to highly correlated (1). Zero market correlation scores higher, because most people will run these alternative strategies so with an existing stock portfolio, so non correlation is more valuable.

Risk/Reward is measured by likely downside volatility that will be encountered to achieve the required return. Low volatility with a very high historical probability of achieving the required return is scored as 10, but high volatility with a greater than 10 percent historical probability of a 10 percent drawdown is scored as 1.

Emotional turmoil index attempts to quantify the psychological difficulty of executing the strategy with a large amount of money (typically a 10% portfolio allocation). the main issue is to understand the consistent daily emotional effort to maintain running the strategy if the downside (or indeed upside) volatility is too high. Scores range from high emotional stress/cannot sleep at night (1) to zen like inner tranquility (10).

Internal Visibility is a measure of the internal strategy components, so that it’s is clear to understand exactly where performance is coming from. Or put another way, do I really understand what is going on here? For example an ETF such as etj which has multiple stock holdings, insurance protection with put options and/or hedged with covered call options. Here it isn’t clear exactly what what monthly rolling strategy is being used as they get close to expiration, and have to rely on some woolly wording in the ETF prospectus such as “the fund seeks to…” or “the funds endeavors to …”.
however if you utilize a similar process using your own stock positions and your own spreads you can easily mark to market your own portfolio directly in your brokerage account. DIY approach makes it very clear where the split between stock performance and hedging performance occurs.

Scability is a measure of how much portfolio allocation you can realistically assign to this. Typically any capital market product (FX, stock, options) will easily be liquid enough to scale to any required size, and would score 10. However strategies that rely on credit cards can only scale up open credit lines (e.g. 10 cards with a max credit 100k) would score significantly less.

Excess Return score is a measure of whether the strategy has the potentially to make excess return significantly above the expected return. Crptyo currencies such as bitcoin and monero have the potential to go expondentil and return > 10,000%, so would score 10. Lending Club has a defined range of returns between say 5% and 15%, but they is hardly any scenario that would allow returns greater than that, so would score closer to 1.

Strategy Scores

Strategy
YTD Return
Annualised Return
Management Effort Score
Correlation Score
Risk/Reward Score
Emotional Turmoil Score
Internal Visability
Scalability Score
Excess Return Score
Total Score
Peer to Peer Lending10.4788889250
Alternative and Crypto currencies26935671046
Long only ETFs with build in hedges 12.39366310441
Structural Arbitage137633510741
FX Trading-33833710640
Option Spread Trading-33543810639
Hedged ETF portfolio (IRA)-18488810349
High Yield dividend stocks157556710545
Float My Mortgage3.56109883145
Credit cards airmiles for travel36109884146

Time management

As a time compromise we will attempt to run strategies which have low correlation with stockmarkets and some strategies which relatively hands-off. we have time to dedicate to a few strategies which are very hands on, however it is not possible to be hands-on all the time with all dedicated strategies.

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