Aggressive investing : Is it a good strategy? – that will be the topic of today’s article.
Understand if aggressive investing is a good strategy for your financial goals and risk management.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).
Introduction
Investment strategies can be classified into types depending on the level of risk involved. They are conservative investing and aggressive investing.
A Conservative investment strategy is when an investor minimizes the risk involved while opting for lower yet stable returns.
A moderate investment strategy allows an individual to keep the risk and profits at a balanced level.
On the other hand, an aggressive investment strategy is when an investor tries to maximize profits even when the level of risk is higher.
To understand the subject in detail, let us know a few other things related to an aggressive investment strategy.
Following that, we will discuss certain important aspects of aggressive investing, and by the end, you will know whether or not aggressive investing is the right choice for you.
First, let us begin by talking about a few things about risk tolerance.
Risk Tolerance
Risk tolerance is a term that evaluates the level of loss an investor is willing to endure within their portfolio.
As you might already know, every type of investment opportunity comes with its own level of risk.
Why would a person generally be prone to risk?
Well, there are various factors that contribute to this aspect, and some of them include:
— Stock market volatility
— Financial market swings
— Economic events
— Political events
— Regulatory changes (when certain regulations are modified for securities)
— Interest rate changes
In simple words, the factors mentioned above would have a significant impact on the financial markets, which are responsible for the behavior of investment assets.
For example, when the stock markets are volatile, the stocks are affected depending on the price fluctuations.
When the market becomes bearish, investors are likely to experience a significant decline in the value of their stock portfolios.
This would result in a situation that becomes extremely risky for the people who want to buy stocks.
Similarly, when the markets are bullish, the investors are likely to experience a significant increase in the value of their stock portfolio.
As mentioned in the above examples, such situations would interfere with the risk involved with the investments.
Whether or not a person can withstand such risks would be determined by risk tolerance.
For example, even in a bearish market, a person with a higher risk tolerance can withstand the losses involved.
On other hand, a person who does not have a significant risk tolerance would generally have to face financial hardship because of the financial losses that have arisen.
The major aspects that evaluate a person’s risk tolerance have been listed below.
— Age
— Wealth
— Investment goals
All these factors are essential while determining a person’s risk tolerance and let me explain how.
Age
When a person is young, they generally have a lot of time ahead of them to make more money.
Such people can withstand losses in their investment portfolios and still be able to get on with their lives. This is because they earn back the money they’ve lost because of the investments.
However, people with lower wealth, even when they are young, might not be able to recoup from such losses.
It is not impossible, but they would have to face financial hardships because of such circumstances.
This is not suggested to be good for a person’s financial health and does not allow them to grow their wealth quickly.
Similarly, an old person nearing retirement should also avoid risky investment scenarios.
This is because such people would have to save up for their retirement and a significant loss to their investment can eat into their savings.
Unless they have a significant amount of wealth, people of retirement age or those who are nearing retirement should avoid taking risks.
From the above examples, you can understand that young people have a higher risk tolerance and old people have a lower risk tolerance.
Wealth
By wealth, I refer to both the financial stability and the regular income of a person (not net worth).
This is also a contributing factor while determining risk and let us see how.
Imagine that a person gets involved with a risky investment and had to experience severe losses.
Such a person would be able to offset the losses if he/she had access to a significant amount of wealth.
When the person does not have a significant amount of wealth, they must face financial problems due to the losses experienced.
Therefore, people with more wealth can be said as people with higher risk tolerance, and vice versa.
Investment goals
The investment goals of an investor should be reasonable and for a longer term.
If not, they will have to opt for risky investment assets in order to get more profits within a short time span.
When this happens, as you already know, the chances of losses incurring within the investment increase.
But at the same time, what is the investor was able to hedge off the losses through other assets in his portfolio.
Even if things go south, the investor would still be able to deal with losses without having to experience extreme losses.
Hence, proper investment goals are also a key factor to determine a person’s risk tolerance.
Types of aggressive investments
Having learned about risk tolerance, let us now have a look at some of the types of financial instruments that fall under the category of aggressive investments.
Small-Cap and Micro-Cap Stocks
In general, most people assume that investing in stocks might be taken into consideration as an aggressive form of investing.
But that’s just a misconception because even when the portfolio is made up of stocks and equities, it would not be considered a risky one.
For instance, if your stock portfolio is solely comprised of blue chip stocks, then it is said to be less risky.
Your portfolio would only be following an aggressive investment strategy when it consists of micro-cap stocks or small-cap stocks.
For those who are not aware, small-cap stocks are companies that have a market value below $1 billion.
Talking about funds, small-cap funds or small-cap stock funds have portfolios of small-scale companies.
Such companies are predicted by investment managers to yield significant returns.
In general, these companies don’t have a guarantee on how they can perform because they are relatively new.
For instance, they might be involved in the development of a new endeavor or present in a new growing market sector.
Small-cap fund managers may also concentrate on companies with low market value or share prices, which may have been a result of a dip in the market.
So, what’s the difference between a micro-cap stock and a small-cap stock?
Micro-cap stocks are companies that have a market value less than small-cap stocks. It ranges from $250 million to $500 million.
While micro-cap stocks are extremely risky compared to small-cap stocks, they come with cost-efficiency.
On the bright side, they offer a very high payout if you are able to choose the right one.
You should consider the fact that a micro-cap stock with better performance might even become a small-cap stock.
When that happens, the fund manager sells the share of the micro-cap stock in the fund as it is no longer a micro-cap stock.
Finally, micro-cap stocks and small-cap stocks may not be suitable for investors who are looking for better returns.
Because of the reason they offer maximized returns, they are considered to be aggressive investments.
Options Trading
Options are derivative contracts that provide access to the investors to purchase or sell an asset for an agreed-upon price within a certain period.
Options contracts are used to hedge against the losses that may result after a decline in the stock market.
These help in minimizing the losses of the downside of the drop. They also help in creating recurring income or for speculative purposes.
Because of the leverage involved, options are said to possess a higher risk level.
Hence, when these contracts are purchased, investors must predict the right direction of the security.
In simple words, investors need to predict whether the security will go up or down.
At the same time, they should also be sure of the price variation as well as the timeframe for it to happen.
When the options contract ends, you’ll be left with a choice on whether or not you can continue with your contract.
Because options trading involves a high amount of risk and comes with a chance for maximized profits, these are also aggressive investments.
Futures
Futures are also derivative contracts, which also carry a high level of risk. It can be considered to be highly rewarding when it comes to speculation and hedging.
When someone invests in futures contracts, they are essentially entering the position of buying or selling an asset in the future. However, this process is done with the asset price as of the present day.
Unlike options, futures are required to be executed, which may cause extreme financial losses to the investor.
As the name itself suggests, options are optional, whereas futures are mandatory. When the futures contract ends, both the seller and the buyer are required to make sure that they fulfill their agreement.
Global Stocks and Funds
Developing countries and emerging economies tend to offer greater profits, yet they come with the possibility of higher risk.
Mostly, this risk is a by-product of the political turmoil that takes place within that country.
Investors might be successful in finding the right type of stocks or funds from the countries. This would still be considered risky because there’s always a possibility for currency fluctuations.
For instance, let us assume that you are in the US and you invested in a German stock. When the price of the EURO was able to move up compared to the US dollar, then the value of your investment also tends to increase.
Yet, you must also remember that when the value of the Euro decreases the value of your investment would also decrease.
Private Equity
People who are considered to have a significant amount of wealth may opt for private equity investments.
In general, private equity investments require a minimum investment amount of as much as $250,000 to participate.
Because the companies that usually opt for private equity are start-ups or growing companies, they do not have enough reputation and may or may not have the efficiency.
People who invest in private equity opportunities would generally lock their investments for the long term. This is done with the hope that the company, having received the funds it needed, will perform well in the future.
There is, however, no guarantee that a company’s business activity might become better just because it received more funds.
You should remember that there are a wide range of factors that influence the performance of a business and having additional capital is not the only one.
Yes, the company can do something such as improve the business activity or hire more staff, yet success is not predictable.
Therefore, such an investment, which is made with the hope that it would perform better is considered an aggressive investment.
Venture capital investments are also considered an aggressive investment opportunity. This is because they too operate in the same way as private equity investments.
Aggressive Growth Funds
Aggressive growth funds are growth mutual funds that focus on having underlying securities that offer greater returns.
The year-on-year performance of these investments is usually not stable, where it might increase to as much as 25% in one year and experience a loss of 10% in the next year.
Because of that reason, no one would generally want to invest in them for a short period. Therefore, they usually go ahead with a timeframe of as long as 10 years while investing in such funds.
As my example itself states the scenario, the returns or losses can be night unpredictable making them an aggressive investment.
One key point to remember about aggressive growth funds is that they may not experience losses as much as those occurring in other aggressive investments.
This is only because they are invested in a wide array of assets, which provides them with a great deal of diversity.
High-Yield Bonds
Yes, bonds are generally safe and considered the stable mode of generating income from an investment.
On the contrary, some people may not have heard of high-yield bonds, which are known as junk bonds.
Generally, a bond is issued by a corporate entity or a municipality for an interest rate.
Whereas high-yield bonds offer higher interest rates and come with higher risk as they are issued by entities having a poor credit history.
This generally means they often fail in paying back the issued debt or make late payments, which affected their credit score.
Instead of opting directly for high-risk investments such as a high-yield bond, you can invest in a mutual fund that diversifies the underlying securities.
REITs
Real Estate Investment Trusts (REITs) are companies that offer common shares to the public.
Such companies invest in real estate on behalf of the shareholders and offer profits to shareholders as dividends.
Dissimilar to buying a stock in a single company, REIT investors purchase a part of a managed pool of real estate.
The underlying properties start getting profits in the form of property sales, rentals, or leases.
These returns are distributed by the REIT to its shareholders. In general, most REITs, especially the ones invested in commercial real estate properties tend to be risky.
Therefore, REITs are also considered aggressive investment assets.
Aggressive Investing
An aggressive investment portfolio concentrates more on stocks where 50% or more of a person’s nest egg is invested in stocks.
Not just stocks, instead they can be weighted in the mix of some or all of the investment assets that we described earlier.
An aggressive portfolio will only be ideal for investors who feel they can handle risky financial markets. They do so with the hope of increasing their possibility of gaining higher returns.
Aggressive portfolios also seem convincing to investors who feel comfortable holding onto their investments.
Why would anyone want to become an aggressive investor and create an aggressive portfolio?
There are varied reasons why an investor would generally want to opt for an aggressive portfolio.
Let us have a look at some of the common reasons why people want to go ahead with an aggressive investment strategy.
— When a person is young and has a lot of time to save or invest toward their retirement.
— To contribute to your retirement or nest egg, a person gets decided to make more profits from other assets.
— When the person has a powerful portfolio that can take care of their financial goals regardless of the investment choices they make.
— When a person has significant wealth and such investments do not make an impact that will lead to financial problems.
Given below are some key points regarding aggressive investments, which have been depicted by Rob Isbitts, which is a senior contributor to Forbes.
You should remember the fact most people do want to get into an aggressive investment pattern so as to get more profits.
Even those who think they are investing aggressively are actually doing it with an intention of getting into something that’ll increase faster in value.
In such cases, people usually tend to disregard the high amount of risk involved with such an investment strategy.
In other cases, when something is in the hype, people do not want to miss their window of making it profitable for them.
But most people don’t know that instead of getting higher returns, they are getting a volatile asset.
Investment decisions go wrong, and it does happen to most confident investors who are absolutely sure of their strategy’s effectiveness.
Whether or not you can get offset the losses will solely depend on your investment strategy and your risk tolerance.
Not everything you see on google or hear on social media is true, especially when somebody provokes you into an aggressive investment opportunity.
Bottom Line
I personally think that investment is a major aspect of our lives and everyone should be able to contribute to it so that they can secure their last few days.
Through aggressive investing, most people ignore this and just go ahead with the trend and face difficulties.
If you want to make the most of your investments then try to have a balanced portfolio or a conservative portfolio.
Remember that the main objective of making an investment is to make money from your money.
When you invest based on an aggressive investment strategy, you are defeating the whole purpose of investing by putting yourself at risk.
Most people get into aggressive investing while thinking of it as an option for get rich quick scheme.
However, there is no such thing as getting rich quickly, and even if it does, an individual may become a victim of greed and lose their hard-earned money.
I personally think you should always opt for a balanced portfolio where aggressive investment vehicles are limited to an extent.
Yeah, most people do get rich through some of the aggressive investments that I’ve mentioned in this article.
However, that does not apply to everyone as each person has different investment goals and financial situations.
Therefore, before devising a robust investment portfolio, it is better to contact your financial planner or investment advisor.
Some people have a significant amount, which they want to invest, yet they may not have sufficient time or money needed.
Are you a high-net-worth looking for a wealth manager that would assist you in the process of growing your wealth?
(Or)
Are you a person involved in a high-paying job who doesn’t have the necessary time to take care of your investment goals?
Well, you have come to the right place because I offer the best-in-class financial solutions to my clients that help them achieve their goals.
Feel free to get in touch with me to know whether you can benefit from the services I offer.
I have helped and am helping numerous clients achieve financial freedom through my top-notch services and you could be the next one.
Having said that, I strongly hope that the information provided in this article regarding aggressive investing was helpful for you.
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
