Aggressive Investing: What It Is & How It Works
Do you want to know about aggressive investing and if this strategy is right for you?
Well, you came to the right place because in this post you will learn everything you need to know about aggressive investments to see if you want to use this strategy.
Without wasting any more time, let’s learn more about aggressive investing…
What Is Aggressive Investing?
Aggressive investing is the investment strategy of maximizing returns by having an asset allocation mostly in stocks with little to no allocation in cash or bonds.
This is common for many young adults in their early 20’s!
Think about it: you literally have 40+ working years ahead of you, if you so choose. With that timeframe, you can ride out the ups and downs of the market, given that you are patient of course.
Aggressive investing relies greatly on this patience since you have to wait out the downturns in the markets.
As we’ll get into later, it’s not a smart idea to aggressively invest if you need the cash in a few years since aggressive investments are more volatile.
Some examples of aggressive investments are growth stocks, small-cap stocks, micro-cap stocks, options, and foreign stocks.
Let’s dig deeper…
Basic Breakdown of Aggressive Investing
There is one simple principle of conventional aggressive investing. You should have the bulk of your portfolio allocated to stocks!
The rest of your portfolio can be allocated towards bonds and cash.
One widespread rule of thumb is this: Subtract your current age from 100, and that is what percent of equities you should own!
For example, a 20-year-old would have 80% equities (100-20), which is definitely on the aggressive side.
Using this rule, all young adults are aggressive investors. However, take it with a grain of salt since everyone’s tolerance to risk is different!
Obviously, everyone is different and there is truly no “one size fits all” solution to investing. But there is one thing that this rule of thumb gets right: as you get older (and closer to retirement), your risk tolerance tends to decrease.
This is because you have a shorter investing timeframe when you are close to retirement. You’d really be hurting if the market crashed 1 or 2 years before your retirement if you own mostly equities.
Personally, being in my 20’s at this time, I take a more aggressive approach with around 90% in equities. I am willing to take a greater risk because I don’t need the money I invest for many years.
Then as the years go on I will decrease my allocation to stocks and allocate more towards safer investments like bonds and cash.
Plus, if you are planning to invest for your retirement then you should definitely utilize a 401k, IRA, or Roth IRA to reap the tax benefits.
Not All Equities Are Equal
If you conclude that you want a set amount of your investments to be equities, you need to understand that not all equities are the same!
A $10k investment in blue-chip stocks is far different than a $10k investment in small-cap stocks.
Investing $5k in American equity is different than investing $5k in equity from developing nations.
This is called the risk-to-reward ratio. The more reward you can make on an investment, the riskier it most likely is.
For example, if you choose to invest in a company like Johnson & Johnson, they are a huge and well-established company but this means that their growth is limited.
On the other hand, if you invest in a small pharma company that is trying to develop a breakthrough drug, then you can potentially make a lot of money on this investment but it’s far riskier.
So, you have to figure out what your risk tolerance is to which investments are right for you!
Market cap refers to market capitalization. It is how much the company is worth, often measured in $ billions but also can be $ millions depending on the size of the company.
It is simply the share price multiplied by the number of shares.
Let’s keep it as simple as possible. Large-cap “blue chip” stocks are as “safe” as equity can get, including the most established companies out there. They tend to grow slowly but are also more stable.
This is different than small-cap stocks, commonly referred to as “growth” stocks. They have much more potential to grow like crazy but have much more volatility.
High volatility means their price swings are larger, giving lower lows and higher highs!
Small Cap Aggressive Investing
Small-cap stocks have a stigma against them; they are considered unreliable, risky, and pushed onto naive investors by sketchy brokers.
If you are really trying to get higher returns, you can include small-cap stocks as a portion of your portfolio.
These tend to be in rapidly growing industries: cannabis, biotech, blockchain, etc…
You can either buy an ETF that tracks a small-cap index (there are plenty), or you can pick and choose individual stocks.
I’d stick to the first option if I was a beginner. You really have to know what you’re looking at when it comes to trading small-cap stocks!
Geography can play a role in how you optimize your aggressive investing strategy. Just think about it!
Some nations have small but rapidly growing economies. Rapid growth is super rare to find in nations with large economies.
This is exactly like how small-cap stocks have potential growth you won’t often find in large-cap stocks.
For example, investing in U.S stocks is great but it doesn’t provide the benefit I am talking about here.
I am talking about nations seeing emerging long-term growth potential: Brazil, India, China, South Korea, and Taiwan.
These are just a few examples. If you want to boost your upside by adding more growth potential, perhaps look at ETF’s holding stocks from these nations!
Doing this also gives you a little diversity which is always great.
What About This “Fixed Income” Part?
The fixed income portion brings down your “risk” by giving you a small but guaranteed return on investment.
Even aggressive investors should have some fixed-income products. The easiest way is to just buy a fixed income ETF that holds bonds!
There are different kinds of bonds, and I will list them in terms of risk:
- Government Bonds – federal or provincial (least risk involved, almost non-existent risk)
- Government Bonds – municipal
- Corporate Bonds – (most risk relative to government bonds)
What is the point of investing in bonds?
Well, the near-certainty of bonds reduces your overall volatility; it smoothes out the ups and downs.
Your profits will be slightly lower, but your losses will be minimized as well!
For example, Let’s say your aggressive investment portfolio has 75% in equity and 25% in fixed income. The stock market crashes and the value of your equities fall by 40%.
However, since your equities are only 75% of your holdings, your overall portfolio only falls by 30%!
The Biggest Pitfall of Aggressive Investing
There is one huge pitfall of aggressive investing and you probably already know what it is because we mentioned it earlier…
It is bad for short-term savings goals!
Stocks are not a great investment for short-term goals like purchasing a house or getting a new car. In fact, stocks are pretty terrible for short-term goals.
Think about it for a second: What if the market crashes right before you achieve your savings goal?
Your goals (and your life) would be put on hold which really sucks!
With aggressive investing, you are investing mostly in equities which means it’s not a great investment strategy for short-term goals.
I myself wouldn’t use equities to invest for anything less than 5 years in the future. However, if you are in your early 20’s, this will be fine because a lot of your goals will have a timeframe of 5 years or more!
Here are some frequently asked questions about aggressive investing…
If you want to potentially make a lot of money fast and you have a high-risk tolerance then it can be a good idea to invest aggressively. It’s a method that can make you money quickly but it’s risky.
Some examples of aggressive investments include small-cap stocks, micro-cap stocks, options, foreign stocks, and growth stocks.
The most aggressive way to invest is to allocate your portfolio to growth stocks and options but this is a very risky way to invest.
Aggressive growth stocks are equities that can make you a high return on your investment but are risky and volatile in nature.
Now that you know everything about aggressive investing, is it right for you?
As you now know, aggressive investments are best suited for younger investors because the younger you are the more time you have to ride out volatile markets.
However, as mentioned earlier, it all depends on the amount of risk you are willing to take.
Just be smart with your investment decisions and take the appropriate amount of risk!
If you liked this post then I recommend checking out my posts on The Best Reasons To Invest In Index Funds and 9 Top Investing Apps For Beginners!
Are you an aggressive investor? What do you think about aggressive investing? Let me know in the comments below!