You can cut your aggressive investing risk by applying these five key investing tips.
Aggressive investing stock picks can give you bigger gains than conservative selections. But they can also give you bigger losses. Aggressive stocks are only suitable for investors who can accept substantial risk. You can be wrong on any of your stock picks, of course. But when you’re wrong on a speculative stock, losses are likely to be larger than with a well-established company.
Here are four key ways to cut risk in your aggressive stock picks:
Aggressive investing tip #1
Limit aggressive investments to no more than, say, 30% of your portfolio. Ultimately of course, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive investing stocks. But we think 30% is a good rule of thumb.
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For instance, you should hold your aggressive investments within a portfolio that reflects our three-pronged Successful Investor wealth-building philosophy. That is, invest mainly in well-established companies; spread your money out across most if not all of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); downplay stocks that are in the broker/media limelight. That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar—a stock that does much better than average.
You may stretch these rules a little in aggressive investing, while still sticking to the general principles. You may invest in more companies that are less well-established, compared to a conservative investor. But avoid loading up on penny stocks, recent new issues or any stocks that expose you to a serious risk of total loss.
Aggressive investing tip #3
Downplay stocks in the broker/media limelight—that limelight fosters bloated investor expectations. Stocks that are talked up like this may seem like ideal candidates for big gains, with lots of investors getting on board. But when stocks fail to live up to those expectations, brutal downturns follow. Applying that aspect of our conservative philosophy to an aggressive portfolio leads us to stay out of most new issues. That’s because most new issues come to market when it’s a good time for the company or insiders to sell. That’s rarely a good time for you to buy. Skip the hype and don’t buy shares for your aggressive investing portfolio that come with huge broker sales campaigns.
Aggressive investing tip #4
Look for aggressive investing stocks with hidden value—value that attracts far less investor attention than it deserves. That gives buyers a bargain. It may also attract takeover bids.
Hidden assets can consist of real estate or underused brand names. For example, companies often carried 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.
For example, a company’s real estate can come to exceed the market value of its stock. These types of hidden assets may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might re-purpose 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.
Aggressive investing tip #5
Keep brand loyalty in mind. Balance sheets often fail to assign any value to brand names, even those household names that had built up multitudes of loyal customers over the years. One example of customer loyalty taking a company to new heights is Apple. Their customer base was fiercely loyal to its brand and carried it through the first two turbulent decades of its life. It was this customer base that quickly adopted the iPod and pushed Apple to dominate the personal music device market and later redefine personal computing forever.
Most of our aggressive investing buys are in our Stock Pickers Digest newsletter. We look at many stocks before singling out our aggressive favorites, and we try to choose those with as much underlying value and as many hidden assets as possible. This is the best way to cut risk in aggressive investing.
Do you have a separate portfolio for your investments? Have they been profitable? Share your experience with us in the comments.
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