Aggressive investing refers to the creation of long-term investment portfolios composed of high-risk assets. It merely focuses on these high-risk assets that can increase the probability of loss of capital but can have a big impact on the portfolio’s returns.
Some of these high-risk assets can come in the form of equities, however, an increase in the allocation of equities does not necessarily mean an increase a portfolio’s risk.
Relationship between aggressive investing and active management
Since aggressive investing exposes an investor to more risk and increases the probability of losing their capital, an actively managed their portfolio ensures that investors can soften the impact of loss and risk on their portfolio.
Active management is also necessary because a buy-and-hold or any passive investment strategy would only expose the investor to more risk as time passes.
This active management does not necessarily mean that investors need to change underlying assets whenever some risks increase, but they will have to stay sharp and rebalance their portfolio allocation as necessary, in order to avoid loss.
Advantages of aggressive investing
Despite greater susceptibility to risk, investors can still take advantage of the two attractive benefits that aggressive investing brings: the quick growth of underlying assets and the power of compound interest.
Quick growth of underlying assets
Investors can take advantage of growth spurts or increases in the value of their investment’s underlying businesses.
For instance, an investor has 30 per cent of their portfolio allocated to venture capitals, 50 per cent in high growth stocks and 20 per cent in junk bonds. If the start-ups they invested in succeeds in their businesses, their value would shoot up.
This means the investor also benefits from the increase in value once they trade or sell their stake in the underlying investment.
Power of compound interest
Most experts point out that the investor’s time in the market is more important than timing the market: investors can benefit from the power of compound interest.
This means that investors can receive interest on both the principal investment and the interest on it— if it gets reinvested as part of the next year’s principal.
For instance, a 10-year investment with a $10,000 principal can earn 10 per cent annually. If the investor reinvests the $1,000 they earn after a year, they will earn interest on $11,000 on the second year—or $1,100. They can reinvest this so that their principal for the third year is $12,100, which will earn $1,210.
By the end of 10 years, the investor’s investment would be valued at $23,579.48.
Three types of aggressive investors
There are three types of investors that try to take advantage of the aggressive investing strategy.
- people who are true aggressive investors (inherently aggressive);
- those who try to be one (imitate aggressive investing behaviour); and,
- those who are desperate to remain as one (aggressive by necessity).
Inherently aggressive investors
These are investors who truly have a high tolerance for risk and have an idea of how the investment market works. Since they are knowledgeable enough about market risks and have an idea of how to manage them in their portfolio, these people are less often bothered by losses in their long-term portfolios.
Inherently aggressive investors are usually young, but their tendency to be risk takers does not stem from their age. Rather, they accept risks because they have enough knowledge about the market and can employ risk mitigation strategies to minimise losses.
Imitate aggressive investing behaviour
Then there are investors who try to be aggressive because experts, family, peers or the media market the idea that people at their age or financial situation should be more aggressive with their investments.
They don’t necessarily have the tolerance for risk nor vital knowledge that truly aggressive investors possess, but they favour the strategy because it’s what they’re supposed to do to maximise their portfolio.
It is recommended that investors understand their risk tolerance first before actually trying aggressive investing because this could determine the success of their strategy.
Aggressive by necessity
Investors who are aggressive by necessity are those who employ high risk strategies because they feel the need to do it to achieve a financial goal. Most of the time, however, the reason is to gain back the money they lost from a previous aggressive strategy that didn’t work out in their favour.
These may also be investors who are pressured to try to emulate their peers who earn high by using aggressive investing strategies.
As with investors who try to imitate aggressive investors, it’s best to understand one’s risk tolerance first before adding high risk investments to their portfolio.
Aggressive investing is not for everyone
As with any type of investment and investing strategy, it’s best to speak to a licensed professional who can help investors create an appropriate portfolio based on their objectives and current personal circumstance.
This information has been sourced from the Australian Investors Association and Investopedia.