The aggressive investment strategy is focused on gaining maximum returns from selecting a highly risky group of assets, and the objective of capital preservation is secondary. This is only possible when the risk appetite of the investor is high. Such a portfolio would have the majority of its holdings in stocks and other risky assets such as futures, options, commodities, and even new asset classes such as crypto-currencies.
The aggressive investment strategy entails stretching your risk appetite and taking high-risk, high–reward securities for investment. The goal is to earn significantly higher returns compared to the benchmark index. Usually, this is achieved by giving high weightage to equities in the portfolio.
How much Aggressive is Really Aggressive?
It is easy to mistake a more equity-focused portfolio as aggressive. While it might be true in most cases. In cases where usually 70% or more of the investment is in these risk-bearing assets, the portfolio might be termed as “aggressive.”
Another way to check for an aggressive portfolio is the composition of the stocks – if the stocks are mostly in large-caps, the portfolio is still safe. If the equity side is heavily invested in small-caps and mid-caps, it can be called an aggressive portfolio.
Also Read: Active vs Passive Portfolio Management
Does Aggressive mean Reckless?
To achieve returns that are several times higher than the benchmark, portfolios need to take on a certain level of risk. This risk can be in terms of exotic assets as outlined above or going for risky trading strategies such as futures and options. Managing these assets requires constant monitoring, active decision-making, and frequent adjustments to the portfolio. However, all this will contribute to being more vigilant and increase returns. A passive strategy would bring a downfall with such securities, which are volatile in nature. Thus being aggressive is calculated risk-taking but not necessarily a reckless step.
Who should look at Aggressive Strategy?
Only investors with a high capacity to bear losses and who can bear capital depletion should go for an aggressive strategy. Thus, people up to the age group of 40 years can mostly bear to have an aggressive strategy along with people who have a strong corpus, and the corpus is not a part of their financial goals. This is because aggressive strategies involve higher risks, and individuals must have the financial capacity and risk tolerance to withstand potential losses.
Types of Aggressive Investment Strategies
These strategies typically involve a proactive and dynamic investment approach. Here are some common types of aggressive investment strategies:
Growth Investing
This strategy focuses on investing in stocks or other assets with high growth potential. Aggressive growth investors seek companies that are expected to experience significant earnings growth, often investing in emerging industries or companies with innovative products or services. The aim is to capture substantial capital appreciation over the long term.
Sector Rotation
Sector rotation involves actively shifting investments among different sectors based on market conditions and trends. Aggressive investors closely monitor sector performance and adjust their portfolio allocations accordingly. By capitalizing on sectors poised for rapid growth and avoiding underperforming sectors, they seek to maximize returns.
Small-Cap and Mid-Cap Investing
Aggressive investors may allocate a significant portion of their portfolio to small-cap and mid-cap stocks. These companies, with smaller market capitalizations, have higher growth potential but also come with increased volatility. Aggressive investors aim to identify promising small and mid-sized companies that could experience rapid expansion and generate substantial returns.
Momentum Investing
Momentum investors seek to capitalize on the momentum of stocks or assets that have demonstrated strong price appreciation in the recent past. They believe that trends persist and that assets with upward price momentum will continue to outperform. This strategy requires vigilant monitoring and timely buying and selling to capture the potential gains.
Derivatives Trading
Aggressive investors may engage in trading derivatives such as futures and options to amplify their potential returns. Derivatives can provide leveraged exposure to underlying assets, allowing investors to magnify their gains (but also their losses). This approach requires careful risk management, as derivatives can be highly volatile and complex instruments.
International and Emerging Market Investing
Aggressive investors may diversify their portfolios by investing in international markets or emerging economies. These markets can offer higher growth opportunities but also come with increased risks, including currency fluctuations, political instability, and regulatory challenges. Aggressive investors carefully analyze global trends and select markets or regions with the potential for significant returns.
Drawbacks & Risks of Aggressive Investment Strategies
While aggressive investment strategies offer the potential for high returns, they also come with certain drawbacks and risks that investors should carefully consider:
Increased Volatility
Aggressive strategies typically involve investments in high-risk assets, such as small-cap stocks or emerging markets. These assets tend to be more volatile, experiencing significant price fluctuations. Investors must be prepared for heightened market volatility, which can lead to larger gains or losses in a short period.
Higher Potential for Losses
Aggressive strategies expose investors to a higher risk of significant losses. The pursuit of high returns often involves taking on greater risks, and if investments underperform or the market experiences downturns, losses can be substantial. Aggressive investors need to have the financial capacity and risk tolerance to absorb potential losses.
Active Management and Monitoring
Aggressive strategies require active management and continuous monitoring of investments. Investors need to stay abreast of market trends, company news, and economic developments to make timely decisions. This level of involvement demands time, effort, and expertise, which may not be suitable for all investors.
Psychological and Emotional Challenges
Aggressive strategies can subject investors to heightened psychological and emotional pressures. The increased volatility and potential for significant losses can lead to anxiety, stress, and impulsive decision-making. Investors must have the emotional discipline to withstand market fluctuations and stick to their long-term investment plans.
Lack of Diversification
Aggressive strategies often focus on concentrated positions in specific assets or sectors. While this concentrated approach can amplify returns when successful, it also increases exposure to idiosyncratic risks. Lack of diversification leaves investors vulnerable to the performance of a limited number of investments, potentially magnifying losses if those investments underperform.
Timing and Execution Risks
Aggressive strategies often involve market timing and active trading. Successfully timing market entry and exit points is challenging and can be subject to error. Mistimed trades or poor execution can lead to missed opportunities or losses, particularly in fast-moving markets.
It is important for investors to carefully evaluate these risks and drawbacks before implementing aggressive investment strategies. They should consider their risk tolerance, financial goals, time commitment, and access to expert advice. Diversification, risk management, and a long-term perspective are crucial to mitigate potential downsides and enhance the likelihood of success.
Conclusion
It’s important to understand the nuances of each new and risky asset before investing. While constant monitoring and rebalancing can give high returns, these costs should be considered as well.
