How to make big profits as an aggressive investor, but at the same time cut way back on your risk .
When we say that someone is an aggressive investor, we’re referring to those who actively seek investment opportunities with higher risk and higher reward. And often, the most volatile sectors that aggressive investors seek out are the Resources and Manufacturing sectors.
An aggressive investor puts a large part of their portfolios in stocks (or ETFs) of less well-established companies often without a long history of earnings or dividends.
However, aggressive stocks typically don’t have a secure hold on the growing or at least stable clientele that conservative stocks have. When something goes wrong with aggressive investments, there is great risk of serious if not total loss.
When we single out our aggressive favorites, 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, for conservative and aggressive investors alike.
Find the True Blue Chips
Blue chip stocks give investors an extra measure of safety in today’s volatile markets. But not all stocks with a blue chip “reputation” deserve that label.
Pat McKeough shows you how to identify the true blue chips—the real long-term winners—in “Finding the Real Blue Chips Stocks: The Power and Security of Canada’s Best Dividend Stocks.”
Our stock selections for the aggressive investor 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 that these or any aggressive investments should make up only part of most investor portfolios.
If you want to diversify your portfolio with aggressive stocks, first you must understand the chances you’ll take. They’re 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.
Zeroing in on a handful of small to medium sized companies can pay off nicely when it works, but it can be extremely costly when you pick too few winners and/or too many duds.
But that doesn’t mean you should avoid aggressive stocks altogether. We recommend limiting your aggressive holdings to no more than about 30% of your overall portfolio. This is because aggressive stocks expose you to a greater risk of loss.
But that number can vary. Ultimately, the percentage of your portfolio that you should hold in either conservative or aggressive investments depends on your personal circumstances and risk tolerance. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks. But we think 30% is a good rule of thumb.
At the same time, as with your more conservative holdings, we recommend that you cut your risk by spreading your aggressive holdings across the five main economic sectors:
Manufacturing & Industry
In the search for aggressive investments, you may choose to invest more heavily in Manufacturing and Resources, the two riskiest sectors. If so, take care to spread your money out across the many industries within each of these sectors. That way, you protect yourself from an unforeseeable industry downturn.
Also, 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 its purchase price, even though its value had multiplied many times over the years. Balance sheets often failed to assign any value to brand names, even those household names that had built up multitudes of loyal customers over the years.
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.
Do you consider yourself an aggressive investor? Was there a period in your life where you invested more aggressively? Share your experience with us in the comments.
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