What is Vanilla Strategy?
A vanilla strategy refers broadly to one that is simple and straightforward, with little complexity. Vanilla strategies can be a common or popular approach to investing by ordinary investors or certain decisions made in business. Although the approach is relatively basic, many investors succeed by sticking with a simple, proven strategy such as passive investing through broad exchange-traded funds.
Similarly, businesses can succeed through plain vanilla strategies such as focusing business lines in areas where there is a clear competitive advantage. In business, however, a vanilla strategy must allow for some innovation as a competitive advantage can weaken over time for many products and services.
Rationale behind Vanilla Strategies
It is fairly common for investors to achieve by sticking to proven strategies such as passive investing. Passive investing includes strategies such as index-based investing. Here, the investor purchases and holds over long periods of time a representative benchmark, e.g., the S&P 500. Passive investing is also exercised using exchange traded funds.
With the same logic, a business can employ tried and tested strategies to achieve success. For example, they can focus their business line in an area that provides a clear competitive advantage for them. The most common elements of vanilla strategies in business include focusing resources only in areas with strong business advantage, using debt financing in order to fund growth but only at moderate levels, or avoiding dependency on a sole product or client.
In such situations, however, it is also important to ensure scope for innovation as competitive advantages tend to weaken over time as demand for the product or service increases or input prices decrease, etc.
As the name suggests, vanilla strategies are comparatively easy to explain, even to an individual who may be new to finance or business. For example, for an individual interested in building an income portfolio, it is recommended to buy and hold stocks with a steady history of dividend payments to shareholders for about ten years.
The future dividends for said stocks will provide a steady income stream for the investor. When compared to an iron condor options strategy, the latter is clearly hard to understand.
Example of Vanilla Strategies
Common examples of vanilla strategies include a number of situations, such as where an individual sets aside a given sum of money each year to fund the college education of their child in the future.
Another example is leveraging automatic payroll deductions in order to fund a 401(k) or other retirement accounts. A traditional approach towards mortgage repayment is directing additional funds annually towards the repayment of the principal amount of the loan.
For retirement savings, a vanilla strategy will include saving a given percentage of one’s annual income, e.g., at least 10%, and then investing that amount in a diversified portfolio of bonds, stocks, etc. Usually, it is done using tax-advantaged savings accounts, such as a Roth IRA and 401(k).