In most cases, if you want to see aggressive growth in your portfolio, you’ll need to take on a bit of risk. After all, risk and return are intimately entangled in the investment world. If this style of investing is something you’re keen on, you may be an aggressive investor. However, before you begin putting your hard-earned cash in the market, you’ll want to understand the various investment strategies aggressive investors use. A financial advisor can help you put an investment plan together that’s based on risk tolerance and goals.
Aggressive Investor Defined
An aggressive investor wants to maximize returns by taking on a relatively high exposure to risk. As a result, an aggressive investor focuses on capital appreciation instead of creating a stream of income or a financial safety net. Therefore, a portfolio using this model would have a higher weight of stocks and equities. Meanwhile, a minimal percentage of the portfolio may contain bonds, cash or other fixed-income assets.
Usually, an aggressive investor works with longer time horizons and a high level of risk tolerance. For example, a young investor with small portfolios and longer time horizons is typically an aggressive investor. A longer time horizon allows the portfolio to recover from potential fluctuations within the market.
Financial professionals usually don’t recommend aggressive investing for anything but a small portion of a nest egg. And regardless of an investor’s age, their risk tolerance will determine if they become an aggressive investor.
Five Types of Aggressive Investment Strategies
Not everyone is an aggressive investor. However, it’s still wise to understand aggressive strategies and how you might apply them. Here are some strategies for an aggressive investor with a higher risk tolerance than most.
Small- and Micro-Cap Stock Investing
A portfolio’s weight of high-risk asset classes such as stocks and equities tend to determine if it’s an aggressive portfolio. Even within the equity element of a portfolio, the composition of stocks can have a substantial impact on the amount of risk exposure. For example, a portfolio with an equity component solely made up of blue-chip stocks might have less risk than one made up of small-cap and micro-cap stocks.
Small-cap stocks are companies below the $1 billion market value. Small-cap stock funds are made up of companies that investment managers predict will yield significant returns. Usually, these companies haven’t proven themselves and are relatively new. For example, they might be developing a new product or taking on a new growing market sector. Investment managers may also seek out companies with low market value or share prices due to a dip in the market.
Micro-cap stocks are companies that are smaller than small-cap stocks, ranging from $250 million to $500 million below market value. While micro-cap stocks tend to be viewed as riskier investments than small-cap stocks, they are cheaper and may have an unlimited payout if investors select the right one. It’s important to point out that if a micro-cap stock outgrows these parameters, it might move up to a small-cap stock. This means that the fund manager would have to sell the share of the micro-cap stock.
Options are contracts that allow investors to buy or sell a security for a certain price during a set period. These contracts are often used to hedge against a decline in the stock market, to minimize the losses of the downside of the drop, create recurring income or for speculative purposes.
Due to its leverage component, options may have a higher risk level. Therefore, when investors purchase these contracts, they must be sure of the direction the security will go. Essentially, investors need to properly predict if the security will go up or down, how much the price will vary and the timeframe in which it will happen.
Futures trading is a fast-paced, risky and sometimes lucrative strategy that is most often used for hedging and speculation. Futures contracts are the trading vehicle. They call for the purchase or sale of an asset at some future date but at a price that is fixed today. Unlike options, a futures contract must be executed – sometimes to the speculator’s serious financial damage. The world’s largest marketplace for futures trading is the CME Group, composed of the Chicago Board of Trade and the Chicago Mercantile Exchange, among others. There is also the New York Mercantile Exchange.
Futures are derivative securities because they derive their value from an underlying asset. They’re similar to options, but whereas options are, as the name suggests, optional, a futures contract is obligatory. When an options contract expires you can decide whether to follow through with it or just walk away. If you walk, you’re only out the money you spent to arrange the contract. A futures contract obliges both parties in the contract to fulfill their end of the bargain.
Foreign Stocks and Global Funds
Although developing countries and emerging economies may offer higher returns they can also come with higher risk due to political turmoil. It’s possible to choose countries with stable financial systems but investors may still face the risk of currency fluctuations.
For example, let’s say you purchase German stock and the Euro increases in value against the dollar, your investment will then increase in value as well. Conversely, if it dips relative to the dollar, your investment will decrease in value.
Private Equity Investments
For high-net-worth investors who want to gamble with a high percentage of their portfolio, say $250,000 or more, they may consider private equity investments. This aggressive investment strategy allows investors to invest directly in start-ups or growing companies.
Usually, private equity investors take a more long-term approach to this strategy. They do this by investing while they financially stabilize, bring a new product to market or launch new technology. If the business endeavor fails, so will the investment. However, sometimes investors can negotiate favorable terms which may put them in a good position to reap high cash returns.
Aggressive Growth Funds
Aggressive growth funds are mutual funds that fund managers professionally manage. These funds invest in multiple stocks as well as a variety of other assets that tend to deliver high returns.
Like other investments, the goal of this fund is to yield high returns. However, its returns can vary from year to year. For instance, a growth fund may yield a 21% return one year, it may lose 5% the next year and then yield a 7% return the next year. Usually, the performance of these funds is determined by a 5-year or 10-year analysis. Therefore, investors who invest in these funds must have more of a long-term investment plan.
It’s important to note that aggressive growth funds may not have as much risk as some other aggressive investments. This is because these funds tend to be well-diversified, which means they invest in a variety of assets in different industries. Therefore, if one asset drops in value the other may make up for the losses.
Whether you’re a DIY investor or want to work with an investment manager, aggressive investing strategies require a more hands-on approach. These strategies require more active management than conservative buy-hold investment methods. Because these investments are more likely to be volatile, investors need to make more adjustments depending on the market condition. Additionally, investors will need to rebalance more often to bring asset allocation back to the targets.
If you work with an investment manager, they may require higher fees for their services since they are more hands-on with the portfolio as a whole. So, when you’re considering if these investments are right for you, you’ll not only need to factor in the risk you’re taking on but the cost as well.
Being an aggressive investor isn’t for everyone. Aggressive strategies require investors to have a high risk tolerance and potentially a longer time horizon. But, if you’re willing to take on additional risk with the prospect of getting a higher payoff, you may consider an aggressive investment strategy.
- Looking for a financial advisor to help you select an aggressive investment strategy but not sure where to start your search? SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider capital gains taxes when you’re thinking about how much money you’ll make off your investments. SmartAsset’s capital gains tax calculator can help you figure out how taxes will impact the money you make from selling stocks.
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