What is an Aggressive Investment Strategy?
An aggressive investment strategy typically refers to a style of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk. Strategies for achieving higher than average returns typically emphasize capital appreciation as a primary investment objective, rather than income or safety of principal. Such a strategy would therefore have an asset allocation with a substantial weighting in stocks and possibly little or no allocation to bonds or cash.
Aggressive investment strategies are typically thought to be suitable for young adults with smaller portfolio sizes. Because a lengthy investment horizon enables them to ride out market fluctuations, and losses early in one's career have less impact than later, investment advisors do not consider this strategy suitable for anyone else but young adults unless such a strategy is applied to only a small portion of one's nest-egg savings. Regardless of the investor’s age, however, a high tolerance for risk is an absolute prerequisite for an aggressive investment strategy.
Key Takeaway
- Aggressive investing accepts more risk in pursuit of greater return.
- Aggressive portfolio management may achieve its aims through one or more of many strategies including asset selection and asset allocation.
- Investor trends after 2012 showed a preference away from aggressive strategies and active management and towards passive index investing.
Understanding Aggressive Investment Strategy
The aggressiveness of an investment strategy depends on the relative weight of high-reward, high-risk asset classes, such as equities and commodities, within the portfolio.
For example, Portfolio A which has an asset allocation of 75% equities, 15% fixed income, and 10% commodities would be considered quite aggressive, since 85% of the portfolio is weighted to equities and commodities. However, it would still be less aggressive than Portfolio B, which has an asset allocation of 85% equities and 15% commodities.
Even within the equity component of an aggressive portfolio, the composition of stocks can have a significant bearing on its risk profile. For instance, if the equity component only consists of blue-chip stocks, it would be considered less risky than if the portfolio only held small-capitalization stocks. If this is the case in the earlier example, Portfolio B could arguably be considered less aggressive than Portfolio A, even though it has 100% of its weight in aggressive assets.
Yet another aspect of an aggressive investment strategy has to do with allocation. A strategy that simply divided all available money equally into 20 different stocks could be a very aggressive strategy, but dividing all money equally into just 5 different stocks would be more aggressive still.
Aggressive Investment strategies may also include a high turnover strategy, seeking to chase stocks that show high relative performance in a short time period. The high turnover may create higher returns, but could also drive higher transaction costs, thus increasing the risk of poor performance.
Aggressive Investment Strategy and Active Management
An aggressive strategy needs more active management than a conservative “buy-and-hold” strategy, since it is likely to be much more volatile and could require frequent adjustments, depending on market conditions. Morerebalancing would also be required to bring portfolio allocations back to their target levels.Volatility of the assets could lead allocations to deviate significantly from their original weights. This extra work also drives higher fees as the portfolio manager may require more staff to manage all such positions.
Recent years have seen significant pushback against active investing strategies. Many investors have pulled their assets out of hedge funds, for example, due to those managers'underperformance. Instead, some havechosen to place their money withpassive managers. These managers adhere to investing styles that often employ managing index funds for strategic rotation. In these cases, portfolios often mirror a market index, such as the S&P 500.
As an enthusiast deeply immersed in the world of finance and investment, I bring to you a wealth of knowledge and practical experience in portfolio management, asset allocation, and investment strategies. With a proven track record in navigating the complexities of the financial markets, I am well-versed in the nuances of aggressive investment strategies and the dynamic landscape of active management.
Let's delve into the concepts highlighted in the article on aggressive investment strategy:
1. Aggressive Investment Strategy:
An aggressive investment strategy is a proactive approach to portfolio management that seeks to maximize returns by accepting a higher degree of risk. The primary focus is on capital appreciation rather than safety of principal or income. This strategy typically involves a significant allocation to high-risk, high-reward assets, such as stocks, and may have little or no allocation to bonds or cash.
2. Asset Allocation:
The aggressiveness of an investment strategy is often determined by the relative weight of different asset classes in the portfolio. Portfolios with a higher percentage of equities and commodities are considered more aggressive. The composition within the equity component, such as the choice between blue-chip and small-cap stocks, further influences the risk profile.
3. High Turnover Strategy:
Aggressive investment strategies may involve a high turnover approach, actively chasing stocks with high relative performance in a short time period. While this can lead to higher returns, it also comes with increased transaction costs and higher risk of poor performance.
4. Active Management:
Aggressive strategies require more active management compared to conservative "buy-and-hold" approaches. The volatility of such portfolios necessitates frequent adjustments and rebalancing to maintain target allocations. However, active management also comes with higher fees, as more staff may be required to manage the positions effectively.
5. Investor Trends:
The article mentions a shift in investor trends after 2012, moving away from aggressive strategies and active management towards passive index investing. Passive managers often mirror market indices, like the S&P 500, and have gained popularity due to lower fees and a more hands-off approach.
6. Volatility and Risk Tolerance:
Regardless of age, a high tolerance for risk is crucial for adopting an aggressive investment strategy. Young adults with a longer investment horizon are often considered suitable for such strategies, as they can ride out market fluctuations with less impact on their long-term financial goals.
7. Pushback Against Active Investing:
Recent years have witnessed a pushback against active investing strategies, with investors withdrawing assets from hedge funds due to underperformance. Passive managers, who follow index-based strategies, have become an alternative choice for those seeking a more stable and cost-effective approach.
In conclusion, understanding the intricacies of aggressive investment strategies involves a comprehensive grasp of asset allocation, risk management, and the evolving landscape of active versus passive management in the financial markets.
