A Guide to Aggressive Investment Strategy
An aggressive investment strategy is one that involves taking on more risk in order to achieve potentially higher returns. This may include investing a larger percentage of your portfolio in stocks, compared to bonds or cash equivalents.
It can also mean being more aggressive in your buying and selling decisions, sometimes buying stocks on margin or selling them short.
Why Should I Invest Aggressively?
While aggressive investing may give you higher returns than more conservative strategies, there are also more risks involved.
Because aggressive investors put more of their money into riskier assets like stocks and stock derivatives (such as options), they will generally see larger fluctuations in the value of their investments. If you dread market volatility or are prone to panicking in a crisis, aggressive investing is unlikely to be the right choice for you.
How Do I Invest Aggressively?
One way aggressive investors may increase their returns is by taking out loans against their investments. For example, they can take out margin loans that allow them to buy more shares than the cash they have on hand. This can magnify profits if the stock goes up, but it also increases losses if the stock declines.
Another tactic aggressive investors may use is short-selling. This involves borrowing shares of a stock you believe will go down and selling them, with the hope of buying them back at a lower price and returning them to the lender. Because of the risks involved, short-selling is subject to borrowing fees.
When Should I Stop Investing Aggressively?
Invest aggressive only if you are able to handle fluctuations in the value of your investments and are comfortable with additional risk. Otherwise, aggressive investing can lead to substantial losses.
Even aggressive investors who experience large gains can eventually see those gains reverse if the market turns sour. It’s important to have a plan for what you will do if this happens, and to know when it’s time to reduce your exposure to stocks.
What Are the Risks of Investing Too Much in Stocks?
There are a few key risks aggressive investors need to be aware of.
First, stocks are much more volatile than other asset classes, such as bonds or cash. This means they can go up or down in value a lot more, which can lead to large losses if you’re not prepared for it.
Second, stocks are not as liquid as other assets. This means you may not be able to sell them as quickly as you need to, or at a price that makes sense.
Ways to Mitigate Risk for Aggressive Investors
There are a number of options aggressive investors have for mitigating risk.
The first is diversification. This can include investing in different asset classes, such as stocks and bonds, as well as different companies in different industries.
Finally, you can use stop-loss orders to sell your stocks if they fall below a certain price. This can help protect your profits when the market dips, while limiting your losses in a crash.
No matter how aggressive you choose to be in your investing, it’s important to remember these risk-mitigation strategies.
The Bottom Line
Aggressive investing can be a great way to increase your returns, but it comes with more risk than more conservative strategies.
Make sure you understand the risks involved and have a plan for what you will do if things go south before investing aggressively. There are a few things aggressive investors can do to mitigate risk, including diversifying their portfolio and investing in index funds.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.