If you want to hold speculative investments, think carefully. Speculative stocks may offer significant returns to investors—but they will also carry considerable risk.

Speculative investments are higher-risk stocks with uncertain prospects. They are far riskier than what we call aggressive stocks—stocks with sound prospects, but that have added risk in their industry or particular situation. They also typically don’t have the secure hold on the growing or at least stable clientele that conservative stocks have.

Speculative stocks may offer significant returns to investors—but they will also have risk to match. High-risk, high-reward investors are typically drawn to speculative stocks.

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Penny stocks are speculative investments that some aggressive investors look for  

Some investors looking to add to the aggressive portion of their portfolios turn to the higher-risk strategy of buying speculative penny stocks.

However, the odds are against you when you invest in speculative stocks and companies that have yet to make money. Some, if not most, of these companies will never make any money.

There are several potential risks when investors venture into penny stocks.

Buying low-quality penny stocks is one of those things that can appear to be successful before it goes badly wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.

Penny stocks tend to be engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software.

If you lose money in speculative or other low-quality stocks (or ETFs that invest in low-quality stocks), you may think your main mistake was bad timing. That’s a misconception. You can get lucky in penny stocks, just as in lotteries. But if you play long enough, the “house odds” eventually triumph over any run of luck. In penny stocks or games of chance, the odds are against you. The longer or more often you play, the likelier you are to lose.

Holding aggressive—but not speculative—investments in your portfolio

Overall, you should hold your aggressive investments within a portfolio that reflects our three-pronged Successful Investor 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 and Utilities); and downplay stocks that are in the broker/media limelight.

As an aggressive investor, you may stretch these rules a little, while still sticking to the general idea.

You may invest in more companies that are less well-established, compared to choices that would appeal to a conservative investor. But you’ll want to stay away from the most highly speculative types of aggressive investments. For instance, you’ll want to avoid loading up on “penny mines” (speculative mining stocks that have not yet proven they have a mineral deposit that can be mined at a profit). You’ll also want to stay away from “concept stocks.” Those are junior companies that have a business plan but have yet to actually establish a business, much less make a profit or pay any dividends. Stocks like these expose you to a serious risk of total loss. You find a lot of these kinds of concept stocks in the technology industry.

What to look for with aggressive—but again, not speculative—investments

A further key factor we look for in our aggressive investments is hidden assets. By hidden assets, we mean assets that are getting less investor attention than they deserve. When assets are wholly or partly hidden or ignored, a stock can trade for less than it’s worth. So Successful Investor buyers get a bargain. These stocks are also more likely to attract takeover bids from corporate acquirers, who are usually looking to buy asset bargains, just like these.

For example, hidden assets can include real estate. When a company buys real estate, 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. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

Some assets stay hidden indefinitely. But most of the aggressive investments we recommend have other pluses that give them above-average value—rising sales, good balance sheets and a strong hold on a growing market.

Aggressive investments expose you to a greater risk of loss. That means we recommend limiting your investments in this area to a smaller part of your overall portfolio. Ultimately, this percentage depends on your personal circumstances and risk tolerance. An investor with a longer investment timeline or without the need for current income from a portfolio can invest somewhat more money in aggressive investments.

All in all, by following our conservative Successful Investor philosophy, you can attain what we’d call the best of all possible investment worlds in your aggressive investing: a heads-you-win, tails-you-break-even situation. When times are good, it can be extraordinarily profitable. But during the inevitable market downturns, it cuts your losses and leaves you well-positioned to profit again with the inevitable recovery.

Marijuana stocks are a popular form of speculative investments these days. Are you investing in them or do you think they will go bust?

What is your opinion on speculative investments? What in the past has made them worth the risk for you?