What Is Aggressive Investment?
The term aggressive investment refers to an investment strategy carrying a high degree of risk but having the potential to generate significant returns. Individuals with a long-term investment horizon and a high risk appetite can consider choosing this strategy to achieve their financial goals.
Generally, this kind of investing is associated with mutual funds, stocks, exchange-traded funds (ETFs), options, futures, alternative investments, and real estate. It emphasizes capital appreciation, not capital preservation or regular income generation, as the main investment goal. Hence, an aggressive investment portfolio primarily comprises equity instead of debt securities like bonds, debentures, and certificates of deposit (CD).
Table of contents
- Aggressive investment refers to an investment method used by investors with a high-risk appetite to maximize portfolio returns. That said, it cannot generate stable returns, unlike a conservative investment strategy.
- Some aggressive investment techniques are sector-specific, momentum, value, and growth investing.
- Multiple investment options are available for individuals who want to use this strategy. Some of them are stocks, ETFs, alternative investments, and mutual funds.
- An aggressive investment portfolio typically has a high equity exposure. As a result, the returns are subject to high volatility.
Aggressive Investment Strategy Explained
Aggressive investment refers to a portfolio management strategy that involves aiming to maximize financial gains by taking high risks. Such a strategy is generally suitable for young investors with a long-term investment horizon. This is because a long investment duration allows them to mitigate the impact of price fluctuations in the market. Moreover, the losses incurred early in an individual’s investing career have a lower effect than those suffered later.
That said, one must remember that irrespective of an investor’s age, having a high risk appetite is imperative for individuals looking to utilize this strategy. Also, individuals must assess their risk profile before deciding to allocate their savings to aggressive investment funds, as such investment vehicles adopt a similar approach regarding buying and selling securities.
An investment strategy’s aggressiveness depends on the type of asset classes, for example, equity and commodity, constituting a portfolio. For example, a portfolio comprising 75% equity and 25% debt instruments is less aggressive than a portfolio with asset allocation percentages of 51% equity, 40% commodity, and 9% debt.
Within a portfolio’s equity portion, the stocks’ composition can impact the risk profile. For example, if the equity portfolio consists of small cap stocks only, the portfolio will be considered high-risk. However, if the equity component includes only blue chip stocks, analysts and investors view it as less risky.
Another key aspect of this strategy is allocation. For instance, if an aggressive investment fund divided its corpus equally into 30 stocks, it could be a high-risk strategy. However, diving the entire corpus into 5 stocks would make the strategy even more aggressive.
This type of strategy may also involve a high turnover approach in an attempt to go after the stocks that have delivered a high relative performance over a short duration. Although the high turnover can generate high returns, the risk of unsatisfactory performance can increase because of the higher transaction costs that result from higher turnover.
A few types of aggressive investment methods are as follows:
- Value Investing: This involves allocating funds to stocks undervalued by the market. In other words, these stocks’ intrinsic value is higher than the market value. A low price-to-earnings or P/E ratio is an indicator of a value stock. An undervalued company can potentially deliver significant returns to shareholders if it succeeds in the future.
- Momentum Investing: This type of investing involves allocating funds to stocks that recently delivered an impressive price performance. Such companies are often those that disclose some positive news or belong to industries that are expanding. High trading volume is a key indicator for momentum investors.
- Growth Investing: This strategy involves investing in stocks likely to experience substantial future growth. Such companies have a high P/E ratio and may not have a track record of profitability. However, such organizations can generate significant returns in the future if they succeed.
- Sector-Specific Investing: A sector-specific investment involves allocating funds to a specific sector of an economy. An investor following this approach invests in stocks expected to reap the benefits of industry-specific trends events or trends. For example, an investor may decide to invest in organizations belonging to the infrastructure sector to maximize their returns.
Let us look at some investment options for individuals who adopt a high-risk, high-reward investment approach.
#1 – Stocks
Stocks, especially small-cap stocks, are popular among aggressive investors owing to the potential to deliver high financial gains. That said, one must remember that these financial instruments are highly volatile and thus carry significant risk. Therefore, individuals might consider conducting thorough fundamental and technical analysis and market research before allocating funds to stocks.
#2 – Futures And Options
These are derivative instruments that experienced investors often use to achieve their financial goals. These financial instruments can generate significant returns. However, they are associated with a high degree of financial risk. Both futures and options enable investors to speculate on the underlying asset‘s price movements without owing it.
#3 – Mutual Funds
Mutual funds are investment vehicles that collect funds from various investors and allocate the corpus to different financial instruments based on the fund’s investment objective. These funds can provide investors with exposure to many financial instruments through a diversified portfolio. This diversification mitigates portfolio risk. That said, one must note that mutual funds primarily investing in equity are highly risky. However, they can offer significant returns.
Also, one must note that fund managers manage a mutual fund’s portfolio. Hence, investors cannot decide which stock or any other financial instrument to buy or sell.
Let us look at a few aggressive investment examples to understand the concept better.
Suppose Jim Ross is an investor seeking capital appreciation. He invested in an equity mutual fund. The mutual fund’s portfolio manager invested the corpus based on an aggressive strategy to fulfill the fund’s investment objective of maximizing the investors’ returns. Accordingly, the fund primarily invested in stocks of different companies across multiple sectors.
Over a period of 3 years, the fund offered returns at a CAGR (Compound Annual Growth Rating) of 26%, which was more than any other fund in the category. This helped fulfill Jim’s investment objective.
On April 13, Gochin, a Chinese company, disclosed that it would invest a sum of $10 billion in lithium mines in Afghanistan. Hence, in response to Europe and the United States limiting the electric vehicle or EV battery material exports, China is making an aggressive investment in the supply chain across multiple regions, including Latin America and Australia, irrespective of the materials’ prices.
For instance, lithium carbonate’s price is decreasing now because of the fall in EV demand in China owing to subsidies and oversupply resulting from the aggressive facility expansion of the EV battery manufacturers. This oversupply may result in dumping prices. Per sources, it is likely that LFP battery prices will decrease with Volkswagen, Ford, Tesla, etc., considering the use of ore LFP batteries.
Advantages And Disadvantages
The benefits and limitations of this type of investment strategy are as follows:
- This strategy can help investors make significant financial gains.
- It can help individuals who seek capital appreciation.
- Such an approach allows investors to use multiple investing techniques like value and growth investing to maximize their portfolio returns.
- It allows individuals to benefit from the power of compounding.
- This strategy carries high risk. Hence, it is suitable for aggressive investors only.
- When using this strategy, efficiently managing the investment portfolio can be daunting as it requires investors or portfolio managers to conduct extensive research and analysis.
- Growth and value stocks may take a significant duration to generate high returns for investors.
Aggressive Investment vs Conservative Investment
Knowing the differences between aggressive and conservative investment is crucial for individuals as it allows them to identify the strategy suitable for them. So let us look at the critical differences between the two:
|It is suitable for investors with a high risk appetite
|This investment strategy is ideal for investors with a low-risk appetite.
|Some investment options for this strategy are stocks, ETFs, equity-oriented mutual funds, hedge funds, etc.
|A few investment options for this strategy are bonds, certificates of deposit, debentures, debt funds, etc.
|In this case, the investment portfolio has high equity exposure.
|The investment portfolio has little to no equity exposure.
|It aims to maximize investors’ returns.
|This strategy aims to deliver stable returns.
Frequently Asked Questions (FAQs)
One can follow these steps to build such an investment portfolio:
– Set investment goals.
– Conduct thorough market research and analysis.
– Identify the type of aggressive investment technique that will be primarily used, for example, value or growth investing.
– Determine the right asset allocation.
– Monitor the portfolio’s performance and strategically rebalance the portfolio when necessary.
Such an investment strategy can be highly effective as it can maximize the portfolio returns if an investor can execute it properly. That said, individuals must assess their risk appetite before using this strategy as it carries high risk.
This type of strategy is a high-risk, high-reward approach that aims to achieve high portfolio returns. A portfolio built using this strategy primarily comprises equity. As a result, it is considered highly risky for investors.
A certificate of deposit or CD is a debt instrument or fixed-income security. Hence, it is not an aggressive investment.
This article has been a guide to what is Aggressive Investment. We explain its examples, investment options, strategies, advantages, & comparison with conservative investing. You may also find some useful articles here –