Aggressive Investment Strategy: Definition, Benefits, and Risks
Portfolio management that takes more risk to maximize returns is called an aggressive investment approach. Higher-than-average returns strategies focus on capital appreciation rather than income or principal safety. This strategy would have a heavy stock allocation and little or no bond or cash exposure.
Youth with smaller portfolios are usually suited to aggressive investment tactics. Investment advisors recommend this strategy only for young adults unless it is used to invest only a small portion of one’s nest egg savings. A long investment horizon allows them to ride out market fluctuations, and losses early in one’s career have less impact. An aggressive investment strategy requires a high-risk tolerance regardless of age.
Knowing Aggressive Investment Strategy
The portfolio’s weight of high-reward, high-risk asset groups like equities and commodities determines its aggressiveness.
Portfolio A, with 75% equities, 15% fixed income, and 10% commodities, is aggressive because 85% of its assets are equities and commodities. It would still be less aggressive than Portfolio B, which is 85% equities and 15% commodities.
Stock composition can affect risk even within an aggressive portfolio’s equity component. Having only blue-chip stocks in the equity component is less hazardous than having only small-capitalization stocks. In the prior example, Portfolio B may be less aggressive than Portfolio A despite having 100% aggressive assets. Allocation is another facet of aggressive investing. Simply dividing all available money into 20 stocks could be aggressive, but dividing it into five would be much more.
Aggressive investment methods may also chase stocks with high relative performance in a short time. High turnover may boost returns but also raise transaction costs, raising the risk of poor performance.
Active management and aggressive investment strategy
Since aggressive strategies are more volatile and may require frequent modifications depending on market conditions, they demand more active management than conservative “buy-and-hold” strategies. To restore portfolio allocations to target, more rebalancing is needed. Asset volatility could cause allocations to change considerably. The portfolio manager may need more people to manage all these investments, which raises fees.
In recent years, active investment has faced tremendous resistance. Due to hedge fund managers’ underperformance, several investors have pulled their assets out. Instead, some invest in passive managers. These managers tend to use index funds for strategic rotation. Portfolios generally match market indices like the S&P 500.
Conclusion
- For higher returns, aggressive investors take more risk.
- Asset selection and allocation are two ways aggressive portfolio management might achieve its goals.
- After 2012, investors preferred passive index investing over aggressive tactics and active management.
