What is an Aggressive Investment Strategy?
Every investor knows that risk and reward operate in tandem. So, what is an aggressive investment strategy and why is it worth pursuing? If you’re up for taking on more risk, it tends to mean a higher reward. The more aggressive your portfolio allocation, the more opportunity to maximize your ROI.
There are different types of aggressive investment strategies, with varying degrees of risk. Sometimes, it means embracing an all-equity portfolio allocation. Other times, it might mean using leverage to capitalize on market volatility. The core sentiment is always the same: aggressive investors aren’t afraid to take risks.
Are You a Gunslinger?
One of the most common terms for aggressive investors is “gunslinger,” alluding to a Wild West mentality. Whereas institutional and traditional investors trend toward balancing risk, gunslingers welcome it. Unfortunately, the implication is that they don’t always embrace the risks with the same consideration as the rewards. They could see major ROI, but they could just as easily see huge losses.
An example of something a gunslinger might do involves aggressive position-taking on expected price movement. They might try to capitalize on market sentiment with a big bet that’s more aggressive than expected—such as shorting a stock 4% when expected losses may only indicate a 2-3% pullback. The issue is, this type of aggressive trading trends into speculation, which introduces even more risk.
Gunslinger has a negative connotation to it, but being one isn’t always a bad thing. For example, making riskier plays during a cautious period of market sentiment can generate huge returns. Look at what happened to aggressive investments at the peak of the COVID-19 pandemic!
Aggressive Investment Tendencies
How do you know if you’re an aggressive investor with an appetite for risk? Gauge your sentiment on these common, aggressive strategies employed by many gunslingers:
- Seeking out volatility to capitalize on price fluctuations
- Using leverage and margin to accelerate buying power and returns
- Favoring short-term price momentum vs. long-term value
- Preference toward more frequent trading, as opposed to long-term investing
- Belief in technical trading patterns more so than traditional valuation metrics
Another way to evaluate aggressive tendencies is through your portfolio. How much of your total capital are you comfortable allocating as “risk capital?” This is capital you would feel comfortable losing at the same rate as you would gain. For example, everyone would be fine with earning 20% ROI on their investment… but could you stomach losing 20%? If so, that’s money you’re willing to risk.
Aggressive Trading vs. Aggressive Investing
Traders, by nature, are more aggressive. But this doesn’t mean that every trader is a gunslinger. Moreover, long-term investors tend to be more passive, but that doesn’t mean there’s no such thing as long-term investment risk. It’s important to understand where the balance lies for each of them, and what dictates an aggressive investment strategy.
For traders, aggressive strategies include day trading and even swing trading—especially on margin. Naked positions are the ultimate form of aggressive investing, and something like naked shorting is downright banned. Aggressive trading typically follows the rule of not holding a position any longer than necessary to realize a profit. As a result, aggressive traders need to be fast and loose with their trades, increasing the margin for error.
Aggressive investment strategies tend to focus less on buying and selling, and more on allocation. This is where an all-stock portfolio comes into play. Whereas a typical portfolio may see an allocation of 68% equities, 10% fixed-income, 10% commodities and 12% bonds, an aggressive portfolio will trend more toward equities. A 100% stock portfolio is the epitome of an aggressive strategy, and it carries more and more risk the closer you get to retirement.
There are levels of aggressiveness. Trading on margin is aggressive; trading volatile stocks on margin trends into gunslinger territory. Likewise, an all-stock portfolio is aggressive; an all-equity portfolio of small cap growth stocks takes the risk up a notch. Aggressive investors need to find the balance they’re comfortable with.
Aggressive Strategies Aren’t Always Active Strategies
Time horizon plays a big role in risk, which affects investor aggressiveness. The closer you get to retirement, the more conservative you’ll need to be to hedge against risk. Conversely, the earlier you are in your investment timeline, the more aggressive you can afford to be. A long time horizon also gives you the opportunity to pursue a passive-aggressive strategy: passive investing, aggressive allocation.
A passive-aggressive strategy offers the best of both worlds. It allows you to kickstart portfolio growth through aggressive compounding right from the get-go. And, because your time horizon is long, you won’t need to rebalance often. The result is an aggressive portfolio that benefits from that natural growth of the market. This can continue for decades, until the time comes to pivot to a more conservative approach.
Is an Aggressive Investment Strategy Right for You?
What is an investment strategy? For some gunslingers, it’s the best way to make a quick buck and beat the market. For investors with a long accumulation phase ahead of them, it’s the key to compounding quicker. But for soon-to-be retirees or cautious investors, it could represent dangerous risk. It all depends on where you’re at in your investing timeline and your appetite for risk.
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If you can stomach risk or have a good tolerance for risk capital in your portfolio, an aggressive strategy will likely benefit you. If the thought of losing more than you bargained for on a bad bet makes your heart sink, it might be best to stick with a traditional allocation.