Anyone who uses the term "income generating strategy" should not be taken seriously. OP -> trade good r/r signals and stay away from selling the high probability OTM junk. Only way to earn 5% a month consistently would be to develop superior delta/vol pattern recognition skills. The key isnt the strategy but the signal. âProbability is like gravity. You cannot negotiate with gravity.â
I have an income generating strategy. I trade for you. You pay me 20% of proceeds. I live off those proceeds. LOL. In reality I don't think there is a difference between income generating strategies and growth strategies. What seperates the two is whether the trader compounds the growth and scales the system, or removes all gains and keeps size constant. The strategy is the same either way, with the exception of maybe holding period differences. So it then follows, if a certain strategy is not a good growth strategy, then it also isn't a good income strategy.
I think there is a difference. When people are looking for an income generating strategy they typically want month-to-month growth with minimal drawdowns, and preferably positive cash flow. Growth strategies tend to be more risk-tolerant and tolerant of short-term drawdowns on the way to long-term gains, and they tend to be more fully invested.
I used to think the same thing until I gained a lot more experience. If trading skill isn't considered, there is a direct relation between risk and reward. It doesn't matter whether you consider a particular strategy a growth strategy, or an income strategy. Under the strictest guidelines, an income strat should guarantee income. This can only be accomplished via bonds, CDs, annuities, etc... This would make the OPs question pointless as these aren't strategies, but rather the only instruments that qualify. Which leads to the next point. These instruments require one to be fully invested. So under the strict income strat guidelines, the income strat requires greater capital allocation than your proposed growth strats. If we are talking about assuming risk other than purchasing power risk, growth strats shouldn't be any more tolerant than income strats to drawdown. The reason is that additional tolerance to risk means greater potential for gains, by definition. If the person is targeting the same gains, he shouldn't tolerate additional risk simply because his objective is longer term. Consider the following: A certain strat requires 1 trade/day and 9 out of 10 months gains 3% Another strat makes 1 trade/month that returns 3% and wins 9 out of 10 months. Still another has an average holding period of 3 months, but still gains 3% 9 out of 10 months. Which one is the income strat and which is the growth strat? It is impossible to know. The only way to tell the difference is whether the trader removes gains or compounds them. If the gains are re-invested it is a growth strat. If they are withdrawn, it is an income strat. Regardless, neither is by definition more/less risky than the other.
If one is slightly less pedantic, an income strategy generates more consistent gains than a growth strategy. Most people who are looking for income have a certain desired income level, and do not want to assume greater risk in order to generate a higher average/expected reward. In addition, an income investor might tolerate capital drawdowns as long as cash flow is stable, for example owning dividend-paying stocks or bonds that decrease in face value while continuing to pay the same amount of interest or dividends. That's okay for an income investor, since all he wants is safe cash from month to month. He does not want his portfolio to be optimally invested or highly leveraged, as long as he has enough capital to generate the desired level of income. That's why holding T-bonds might be a valid income investment at any price for someone with more cash than he needs, but would never be a valid growth investment unless you had an outlook on interest rates. Here is where I disagree with you the most. Longer-term portfolio strategies (as opposed to longer-term holding periods for individual securities) can and should tolerate greater drawdowns. Warren Buffett buys stock in a company and waits as long as it takes for it to go up. An 80 year old retiree wants his bingo money for the week, every week, and if he doesn't get it he gets no comfort from owning a stock that will do well in a couple years. If your income strategy is growth-style, by generating regular capital gains, a big drawdown will be quite painful. If you're trading for growth, you can wait out that same market fluctuation.