An aggressive strategy is one of the ways to maximize investment returns. When following it, you should not forget about the risks. In our article, we will tell you how an experienced investor should approach the formation and management of an aggressive portfolio.
An aggressive investment strategy is one of the types of strategies that differ in risk level. In addition to aggressive, a portfolio can be conservative and balanced.
The goal of an aggressive investor is to get a return higher than the market average. For example, if the stock market has grown by 150% in a year, then an aggressive portfolio can grow by 300-600%.
High returns are accompanied by high risks: an aggressive portfolio can also bring losses. High-risk instruments are often characterized by high volatility. Their price can change frequently and sharply, so it is not always possible to quickly sell them at a high price. In other words, aggressive portfolio instruments can have low liquidity.
To follow an aggressive investment strategy, it is important to calculate risks and compare them with expectations. Such an investor must combine a willingness to take risks with a low level of excitement.
The structure of an aggressive portfolio depends on the investor's attitude to risks. Some investors who adhere to an aggressive strategy include only high-risk instruments in their portfolio. These are high-yield bonds, stocks with growth potential, derivatives, futures, options, credit funds ETFs on indices and precious metals.
Experienced investors do not recommend directing all funds to high-risk instruments. It is better to direct an amount to aggressive investing, the loss of which will not affect the financial and psychological state of the investor. This allows you to stay in the market longer.
One of the portfolio structure options that allows you to balance risks is the "barbell" strategy. It involves investing 90% of funds in highly reliable instruments that bring in a stable income. The remaining 10% is directed to high-risk investments.
Low-risk instruments
High-risk instruments
Portfolio structure in accordance with the "barbell" strategy
Another strategy is to form a portfolio of three parts: income, accumulation, and stabilization. High-risk instruments make up the income part. The investor directs 15 to 30% of funds to the accumulation (protective) part - instruments that bring in minimal income with minimal risks. The stabilization part makes up the same amount. It includes highly liquid assets that can be quickly sold. Sometimes this is necessary to compensate for losses in the income part.
High-risk instruments
Low-risk instruments
Highly liquid instruments
High-risk instruments
Low-risk instruments
Highly liquid instruments
Portfolio structure options from income, accumulation and stabilization parts
When forming and managing an aggressive portfolio, an investor must go through the following steps:
Determine goals. The investor determines what income he wants to receive and in what time frame. These conditions determine the level of risk he is willing to take.
1. Analyze the market as a whole and individual instruments. Fundamental and technical analysis methods are used for this. The investor analyzes market factors, stock prices, and company performance to decide whether to include an asset in the portfolio. Information and analytics can be taken from special resources and blogs for investors.
2. Form a portfolio. This is the selection and purchase of market instruments in accordance with the strategy and analysis results. At this stage, it is worth paying attention to diversification - to include different instruments, shares of companies from different industries and regions in the portfolio.
3. Manage the portfolio. This is an ongoing process of analyzing the market and instruments after the formation of the main portfolio. It is needed to get rid of unprofitable assets in time or balance risks.
During consolidation periods, when market participants direct profits from speculative transactions into reliable instruments, the volume of transactions and the number of high-risk assets in the portfolio should be reduced.
It is also better to reduce high-risk investments during periods of high uncertainty. At this time, the market may behave contrary to expectations.
The decision to include a security in an investment portfolio can be made based on the results of fundamental or technical analysis.
Fundamental analysis is used when you need to choose one company from several in the industry. The initial data for it are the company's performance in the past period. They are compared with each other and conclusions are made about the company's development using induction and deduction methods.
Fundamental analysis is based on three assumptions:
The current share price may not reflect the real value of the company.
The real value of the company can be calculated based on the results of its activities.
In the long term, market value tends to real value.
An example of fundamental analysis is calculating multipliers. They allow you to assume the real value of the company based on profit, revenue, asset value and liability amounts. By comparing it with market capitalization, you can conclude whether it is profitable for an investor to buy shares of the company.
Investors use technical analysis to determine the entry point to the market, and traders use it to predict earnings. This requires asset prices and indicators calculated based on prices. They are analyzed using mathematical and graphical methods.
Technical analysis is based on the following assumptions:
Price is an indicator that reflects all the factors that affect it;
Price changes are subject to trends;
History repeats itself.
Based on these, it is possible to predict how the asset price will change in the future by determining what trend or tendency is currently on the market. Understanding the trend leads to a decrease in volatility and risks.
An aggressive investment portfolio allows you to receive income above the market average, but is associated with high risk.
An aggressive portfolio can consist of high-risk instruments by 40% or more. Experienced investors do not recommend risking all your savings.
An aggressive portfolio requires constant attention from an investor who will manage the risk level and reduce losses.
When forming an aggressive portfolio, it is necessary to adhere to the principle of diversification. The results of fundamental and technical analysis help to make decisions.
Thank you for the informative and useful article. There were many answers to long-standing questions. Thanks to the authors for some details and explanations on finances.
The article helped me a lot in developing my business. The authors tried to reveal the very essence of the issue of financial activity. More information could have been added.
Thank you for the explanations on finances and strengthening the business. Much in this area remained unclear, but I hope that the authors will continue to delight us with useful articles.