Whether you have been investing for a while or are new to it, you would have heard of aggressive investing strategies. What makes a strategy aggressive? How and why does one adopt an aggressive strategy?
In this article, we will answer these questions and look at the most common types of investments in this category. Armed with this info, you’ll be better positioned to modify your own investment portfolio or consult an investment advisor to make a plan that suits your risk profile.
What is an Aggressive Investment Strategy?
An aggressive investment strategy is one where the focus is on higher returns or capital appreciation instead of financial stability or regular income. These strategies are used to build up portfolios by investing funds in the right direction with the motive of maximizing returns.
Given the expectation of higher returns, the risk appetite also needs to be greater. Thus, an aggressive investment portfolio would typically have a higher proportion allocated to relatively more volatile assets.
With such assets, there is a substantial potential upside, but a crash can also wipe out a significant portion of your nest egg, at least over the short term. For example, an aggressive portfolio would have 50% or more allocated to stocks. In contrast, a conservative portfolio would allocate more funds to bonds or other fixed-income assets.
An aggressive investment strategy is not the same as a reckless strategy. Even when following an aggressive strategy, calculated risks are prudent.
Here listed are some crucial factors associated with this kind of strategy.
Due diligence and technical analysis remain critical. Some of the risks can be hedged through diversification or insurance contracts. Within the ambit of aggressive strategies, you can choose from different investment methods depending on your risk tolerance nature and other criteria.
Another critical factor is that aggressive investment strategy often require a more hands-on approach than conservative buy-and-hold strategies. The reason behind this active management is the volatile nature of these investments. It requires more adjustments to rebalance the portfolio based on how the market moves and involves setting limits on the funds allocated to each asset.
Reasons for Choosing Aggressive Investment Strategy
An aggressive investment strategy involves taking on higher risk with the expectation of greater returns. There are several reasons for opting for such aggressive strategies, including the following common ones:
No Immediate Monetary Needs
People close to retirement need safer investments to ensure growth in asset value and steady returns. On the other hand, if you are young and have a regular income, you probably don’t need funds to be available at short notice and can afford a longer-term horizon with your investments. The extended investment period lets you recover from market fluctuations where your assets may see losses. This allows you to invest in assets like stocks, which tend to deliver better annual returns despite fluctuating more than cash and bonds.
Limited Amount for Investment
For many salaried professionals, there isn’t much money left after the usual household expenses. Investing these small amounts in a conservative portfolio brings smaller returns even when the market does very well.
However, if you are comfortable with the slightly higher risk of an aggressive strategy, you can see more significant returns compounding over a period to grow into a substantial amount.
A Large Retirement Nest Egg
Today, many people retire earlier than previous generations did, necessitating higher contributions to the retirement nest egg during the shorter period of work life. In fact, even if a person is not retiring early, a larger nest egg ensures a more comfortable post-retirement life.
It’s no wonder that people are commonly adopting aggressive strategies by investing in growth vehicles like stocks and mutual funds, whether through their 401(k) plans or their own investment portfolios.
Counter Inflationary Effects on Income
In a high-inflation economy, one way to maintain the value of your savings is to invest in assets (such as certain commodities, inflation-indexed bonds, and Treasury Inflation-Protected Securities) that perform well in these conditions. . However, one of the best ways to outrun inflation is to invest in equities over the long term.
Types of Aggressive Investment Strategy
Whether you want to modify your existing portfolios or begin afresh using aggressive strategies, you can do with several options listed below. You will recognize that the inherent risk and the level of involvement can vary a lot across all these types of strategies.
Small- and Micro-Cap Stocks
A portfolio with high risk determines an aggressive portfolio. Small-cap stocks refer to companies with a market capitalization under $1 billion, while micro-cap stocks have a market value in the $250 million to $500 million range. The low market cap could be either because these companies are new and yet to prove themselves or because the share price has dipped from a higher value.
Micro-cap stocks are considered riskier investments since they are cheaper than small-cap stocks. However, if the investor chooses the right micro-cap stocks to invest in, then chances are high that these might outperform small-cap stocks.
The aggressive investment strategy could apply to stocks in both emerging and developed economies. In the former case, several high-potential stocks may be available at a cheap price, and the returns may compound as the economy grows rapidly. However, the stocks also come with risks owing to political turmoil, poor regulation, and other shocks. With developed economies that have stable financial systems, there are potential risks, such as currency fluctuations.
Options are contracts, which give aggressive investors the right to buy or sell an asset at a fixed price. These are typically used as a hedge against a dip in the stock market or for speculation and due to their leverage component, these have high risk. If you trade in options, you must understand the market well enough to predict if an asset will rise or fall in value by how much, and in what timeframe. If everything goes well, options trading can get you enormous returns if the market declines.
Similar to options, futures contracts are often used for speculation and hedging by selling or purchasing an asset at a future date but at a price fixed today. However, unlike options, futures are not optional but an obligation. Thus, the risk with futures trading is higher than options and so are the potential returns—depending on how you bet on the underlying asset.
Aggressive Growth Funds
Aggressive growth funds are mutual funds managed by fund managers. They select stocks and other assets that can deliver high growth. Despite being an aggressive investment strategy, such a growth-focused fund is relatively low-risk, as the investment portfolio is usually well-diversified.
It’s worth noticing that growth funds’ returns can vary a lot from one year to another. Their performance is determined over 5-year or 10-year horizons, making them better suited to investors with long-term investment plans.
In general, allocating a high proportion to bonds in one’s portfolio is considered a conservative strategy meant for steady returns. However, high-yield bonds offer potentially higher returns, a bit like small-cap stocks. These bonds are also known as junk bonds and have below-investment-grade ratings. Therefore, before investing in them, you must research well to minimize concerns like liquidity and solvency.
This is an aggressive strategy for high-net-worth investors who are looking for potentially high returns by investing in companies requiring an equity infusion. Fund managers often get involved with the firm they have invested in, helping it grow over a few years. In situations like the firm’s successful listing or acquisition by another firm, the upside can be huge. Of course, if the business doesn’t do well, much or all of the significant investment gets lost.
Venture Capital Pools
Venture capital pools are similar to private equity investments in which investors come together to invest funds into a firm or group of firms. However, these firms are startups requiring smaller amounts to flourish. This means that the contributions from each investor can also be smaller; consequently, any losses incurred if the firm doesn’t grow as expected are also lower.
Real estate investment trusts are companies that own a pool of real estate assets. The profits from operating, renting, leasing, and selling these assets are distributed among the REIT shareholders as dividends.
For investors outside the real estate market, REITs offer a particularly attractive opportunity to earn significant and long-term returns from the value appreciation seen in many real estate segments. However, the singular focus on real estate also leaves investors vulnerable to fluctuations in the sector.
Aggressive investment strategies are not for everyone, which is perfectly fine. Indentify all the above types of startegies and Invest according to your risk tolerance. Even if you do adopt an aggressive strategy, it is usually recommended to use only a small portion of your nest egg for such assets. Once you have invested, remember to think long-term and not be troubled too much by market fluctuations.