Aggressive investment strategies are found on the higher end of the risk-reward spectrum, with a direct correlation between risk and reward. They are best suited for individuals with a propensity to take risks, and who are therefore willing to accept a higher degree of uncertainty in pursuit of more lucrative investment opportunities.
What are Aggressive Investments?
Aggressive investments are those that can have a significant amount of volatility, such as stocks, commodities, and real estate. The returns on these types of investments can only be anticipated and not locked-in, in contrast with investments such as bonds, Certificates of Deposits, or high-yield savings accounts.
A portfolio which is heavily invested in stocks is likely following a more aggressive strategy, but even here there are various degrees of risk.
For instance, there is a world of difference between purchasing shares in an established company versus investing in one that has yet to prove its profitability. This is a key distinction between dividend stocks and growth stocks, whereby growth stocks are generally considered a riskier venture than those that have been around for decades.
This is where mutual funds and ETFs can serve those seeking more aggressive returns. Some of these funds are designed to invest in riskier small cap companies and global markets, whereas others have a more conservative approach and only invest in larger companies. Both of these types of funds can help you diversify your holdings, since by definition they are comprised of a mixture of assorted assets.
The Advantages of an Aggressive Approach
The advantages of a risky investment approach are fairly straightforward: the more you are willing to risk, the greater your rewards can be.
For those with longer investment timeframes–especially those who are in the early stages of their careers–placing a portion of their portfolio in riskier assets is usually advisable. Thanks to the magic of compound interest, differences in rates of return can make a significant difference in the size of your investment account over time.
Take, for example, two different investors with different risk profiles.
Jon initially places $10,000 in his investment account, into which he contributes $250 a month for 30 years. He is conservative by nature, deciding to invest in savings accounts and bonds that bring in a return of 5% a year.
After 30 years, he has contributed a total of $100,000 to his account, and gained around $142,500 in total interest for a total balance of $242,500.
Jen, on the other hand, is slightly more aggressive. She makes the same exact contributions as Jon, but invests in a combination of stocks and bonds aimed at returns of 10%, which is the historical returns of the S&P 500 (SPX). After 30 years, her total earnings are slightly less than $568,000, and her account balance is $668,000.
Because she was willing to accept higher levels of risk, Jen’s total savings is leaps and bounds ahead of where Jon ended up. You can use the TipRanks compound interest calculator to explore different savings and investing options, experimenting with different values, timeframes, and levels of risk.
The Downsides of an Aggressive Strategy
The disadvantage of an aggressive strategy is that it opens you up to more risk, and the potential that your investments will lose in value. There are ways to mitigate and minimize risk, but it cannot be avoided entirely.
This inherent risk of aggressive investments is the greatest pitfall of of pursuing this strategy.
While it is true that an aggressive approach can outgain more conservative portfolios, this is not always the case. Short-term fluctuations in the market can cause volatile assets to drop precipitously, while those resting in safer harbors may inch upwards at consistent, predictable intervals.
In addition, not everyone has the desire to make aggressive decisions with their monies. For this reason, certain types of riskier investments might experience lower levels of liquidity, as there may be fewer potential buyers for these assets.
There are always opportunity costs, and investing in a riskier investment means that you are forgoing more secure, stable sources of income such as dividend-paying companies. This is another factor to include in your considerations.
Conclusion: Becoming Comfortable With Risk
At the end of the day, an aggressive approach is best suited for those who are comfortable taking on higher degrees of risk. This is a highly personal matter, and everyone needs to define for themselves how much they want to risk when making investments.
This can be dynamic as well, and it makes sense to regularly evaluate whether you are taking on too much risk, or not enough. Managing risk versus reward is a constant balancing act, especially for those seeking aggressive returns.
After all, the purpose of investing is to make sure that your money earns revenue. The path for doing so–whether it is full of curves and steep climbs or plods along slowly and consistently–is your decision to make.
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