Unless you’re willing to take unnecessary risks, follow these tips to find the best aggressive growth stock funds
Our favorite aggressive growth stock funds (mutual funds or lower-cost ETFs) are the sort that invest in well-established companies that dominate their markets.
You should avoid aggressive growth funds that hold a lot of concept stocks, or that do a lot of trading, or that delve into options or futures trading.
In general, there are three big mistakes that investors can make when investing in aggressive growth stock funds are:
1. Investing more than, say, 1/3 of your portfolio in aggressive stocks
2. Picking a stock based on a high dividend yield without confirming its dividend sustainability
3. Not looking for stocks with hidden assets
Here’s more on how to profit with aggressive growth stock funds.
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The basics of investing in aggressive growth stock funds
It’s hard to come up with a one-size-fits-all answer when looking at aggressive growth funds. Partly that’s because a great deal depends on the individual’s investment objectives and financial circumstances. It also depends on the market outlook.
We generally feel that most investors should hold the bulk of their investment portfolios in securities from well-established companies. For stock-market investors, this means holding a total of 10 to 20 mainly well established, dividend-paying stocks, chosen mainly from our average or higher ratings and spreading their holdings out across most if not all of the five main economic sectors.
Look for aggressive growth stock funds that contain hidden value
We also recommend looking for value in a fund with individual stocks that attract far less investor attention than they deserve and give buyers a bargain. They may also attract takeover bids.
Hidden assets can consist of real estate or underused brand names. For example, companies often carry their real-estate assets on the corporate books at their purchase price, even though their value may have multiplied many times over the years. The purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet.
In some cases, a company’s real estate can come to exceed the market value of its stock. This type of hidden asset may only become apparent to investors when the company upgrades the use of the real estate. For example, a developer might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.
One of today’s best-hidden assets in aggressive investing is research and development spending by technology stocks. High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones.
Looking for hidden value can produce huge profits—and when you lose, you generally don’t lose that much.
Where aggressive growth stock funds fit in your diversified portfolio
Our aggressive selections tend to be more highly leveraged and more volatile than our conservative recommendations, and they can give you bigger gains and bigger losses. This may be due to financial leverage, or to the risk in their industry or particular situation, or our estimation of upcoming changes in that risk. Keep in mind, though, that these or any aggressive investments should make up no more than, say, a third of most investor portfolios.
There is no set rule for the best holding period in growth funds. It depends on the fund and on the market outlook. Sometimes it pays to get out of an aggressive growth fund after it has a great year. But some growth funds turn out to be good investments for decades.
Dividend growth stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.
However, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).
That’s because high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could simply be the result of a sharp drop in its share price (since you use a company’s share price to calculate yield). That drop may signal investor anticipation of coming bad news.
As well, you should always remember that while growth stocks hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.
That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and have at least some history of building revenue and cash flow.
Aggressive investors will often look at short-term trends before buying stocks. Has this worked for you, or has short-term investing meant disaster for your aggressive investments?
Growth stocks come with more potential than conservative stocks do, but also with higher risk. What would you tell a new investor about risk?
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