One of the best ways to build wealth is to invest. Putting a small chunk of your money towards investments today can help you build an extensive portfolio and even gain financial independence in the future.
However, within investing itself, there are many different strategies you can employ. One such strategy is aggressive investing. If you're unfamiliar with aggressive investing or generally shy away from it (for fear of volatility), this post could help change your mind.
You'll soon see that aggressive investing if done right, can seriously benefit your finances in the long run. Let's get right into it.
What is Aggressive Investing?
Before getting into the various aggressive investing strategies and discussing the benefits of aggressive investing, it's essential first to understand what it entails.
An investment portfolio typically consists of many financial instruments, not just stocks. One portfolio could have a blend of bonds, money market funds, CDs, and equities. On the risk spectrum, money market funds are considered the most “safe,” and stocks are considered the most “risky.”
A conservative investing approach would advocate for a heavy allocation towards bonds and money market funds. With this approach, you are exposing yourself to less risk but also leaving very little room for upside (a typical money market fund pays around 0.5% interest per year.)
Aggressive investing is the opposite, favoring a portfolio that weighs more heavily on stocks. Generally speaking, the volatility is much greater in the stock market, but the returns are potentially very high.
Even within stocks themselves, different companies offer different risk levels. An “aggressive investing” strategy for one person may be considered relatively tame for another. It's all a matter of your circumstances.
What Are Some Aggressive Investing Strategies?
Even within investing in equities, you can employ many different strategies. Here are some of the most popular aggressive investing strategies.
Small-Cap and Micro-Cap Investing
When investing in the stock market, large companies are usually considered “safer” as they are more established and have proven themselves to be market leaders. These companies are sometimes called blue chip stocks and offer great security but potentially capped returns.
Small-cap and micro-cap companies are the opposite of blue chip stocks. These companies are relatively small and have not proven themselves in the market. If they succeed, they could snowball in size and valuation, but they also risk losing their full valuation.
One way to perform aggressive investing is to weigh your portfolio heavily toward small-cap and micro-cap stocks. This allows you to partake in the upside if the companies take off. However, remember that almost always, a greater reward equals a more significant risk.
Private Equity Investments
For accredited investors who want to try and grow their wealth even more, private equity could be an aggressive strategy worth employing.
Private equity firms collect investor capital to acquire businesses, grow them, and exit them many years down the line. Investing in private equity is more of a long-term approach but can pay off very well if you pick the right private equity firm to give your money to.
Of course, there is the genuine possibility that a private equity firm will not succeed with its acquisitions, in which case investors can lose a lot of money. If you have the money and are willing to grow it long-term through an aggressive investing strategy, private equity could be the way to go.
If you're interested in supporting the development of foreign countries but also want to potentially partake in some massive growth, consider investing in emerging market countries.
In a similar philosophy to investing in micro-cap stocks, investing in an emerging market gives you the chance to partake in some serious upside.
However, not every emerging market will successfully develop its economy, so you risk losing all of your investments.
Emerging markets include China, Brazil, India, Malaysia, Mexico, and many more. To participate in these markets, you just invest in a broad index fund that covers the country or directly buy stocks of companies with operations in emerging economies.
Even if you decide to invest within the United States stock market, there are ways to expose your portfolio to more risk. For example, you could buy stocks of tech companies or healthcare companies (two “risky” industries).
If you don't feel comfortable picking stocks, you could choose ETFs that cover “risky” industries. Though sectors like technology and healthcare have performed exceptionally well in the past couple of years, it's worth noting that these industries get hit the hardest when a market downturn happens.
Some of the most “aggressive” sectors to consider adding to your portfolio are:
- Energy – oil, gas, coal, and renewable energy investments all react sharply to market movements.
- Technology – with breakthroughs coming out every day in tech, it's no surprise that it has the highest potential for growth out of all the sectors (but also carries the most significant risk).
- Consumer Discretionary – When everything is going well, people spend more on discretionary items, but when times are rough, people cut back spending in this sector the hardest.
- Healthcare – many people believe that biotech and pharmaceuticals will change the world. If so, you can bet that this sector will experience a lot of volatility.
- Communications Services – telecom, media, and entertainment businesses all have the chance to grow a lot but also suffer heavily during downturns.
Venture capital firms provide funding for startups and early-stage companies. The hope is that these companies will take off and become the next Google or Facebook, and the VC firm (along with its investors) can make some serious returns.
Some venture capital firms are hugely successful and have identified many “winning” companies. However, it's tough to find promising startups to back, and many VC funds fail and return little (if any) money to their investors.
If providing early-stage entrepreneurs and founders with capital sounds appealing, investing in venture capital could be an excellent way to expose yourself to aggressive investing. Just make sure to do extensive due diligence, as VC investments are known to lack transparency.
Benefits of Aggressive Investing
The main benefit of aggressive investing is that you can experience much higher growth rates than if you were to own a more conservative portfolio. If you can withstand the volatility, the returns on your investment are significantly more significant when you invest aggressively.
If you were to invest in bonds ten years ago (a very conservative investment), you would have realized around a 3% annual return on your investment. Given that inflation historically hovers around 2-3%, this means that you didn't realize any real return at all.
If, on the other hand, you invested in the broad stock market ten years ago, you would have realized around an 11% annual return. Even considering inflation, this return is equivalent to doubling your money in a decade!
This difference becomes more and more pronounced the longer you stay in the market for. That's why if you're still in your 20s or 30s and investing for your retirement, you should highly consider an aggressive investing strategy. Not only will you be able to withstand the volatility of the markets, but you'll also (very likely) realize a higher return and grow your portfolio significantly faster.
Drawbacks of Aggressive Investing
The main drawback to a volatile investing strategy is a lack of liquidity. If you employ an aggressive investing strategy and experience the worse of the stick for a year or two, you won't be able to withdraw from your portfolios (without selling at a loss).
For those nearing retirement (or who need liquidity soon), aggressive investing may not be the best strategy. Many financial planners recommend shifting your portfolio towards bonds and away from equities the closer you reach retirement age.
However, if you can stay invested and don't need to withdraw from your portfolio soon, there is little downside to an aggressive investing strategy.
Is Aggressive Investing Right For You?
In my personal opinion, if you're young and have cash left over to invest with, you should adopt a more aggressive investing strategy.
Of course, there is a balance to everything, but studies show that most young people are too conservative. When I refer to “aggressively investing” in this context, I don't mean to gamble your money through options trading or to invest in highly speculative stocks but rather to favor equities over bonds and maybe even weight your portfolio towards sectors you're interested in.
A single percentage point per year can significantly affect how large your portfolio grows in the long term. Imagine how much difference 3% or 4% annualized could be for your investments.
Recap: Aggressive Investing for the Future
If you're looking to build up a substantial nest egg for your future, you might want to consider an aggressive investing strategy over a conservative one.
Of course, high-risk investments are not for everyone; some people just can't stomach volatility. The first step to partaking in aggressive investments is to understand yourself. If you're someone who can tough it out and is willing to take some risk in return for higher returns, aggressive investing could bring many benefits for your future.
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.