Many of us have heard financial advisers or 401(k) plan administrators describe an aggressive investment strategy as a good choice for young investors who have time to ride out the ups and downs of the market, while those closer to retirement are encouraged to choose safer, more conservative options. But what makes one investment more "aggressive" than another?
The term aggressive investments refers to investments selected for their potential to increase the value of an initial cash outlay; that is, their potential for growth, as opposed to their ability to provide financial stability or predictable dividend income. Along with the prospect of higher returns, aggressive investments also carry a higher-than-average risk of losing some -- or all -- of the money you invest.
The dot-com boom of the late 1990s and the subsequent crash in the early 2000s gave us an extreme example of the potential benefits and risks of aggressive investing, as investors rushed to capitalize on the market's fascination with new technology companies and make a quick return on their money. For every investor who made millions on the quick rise of AOL or Yahoo, there were many more who saw their investment portfolios decimated when the market bottomed out [source: Beattie].
Of course, not every aggressive investment is a reckless investment. Growth is a necessary element of any long-term investment strategy, and the level of risk varies from one aggressive investment to the next. Read on to learn about 10 aggressive investments for everyone from the beginning investor to the serious trader.
Aggressive Growth Funds
An aggressive growth fund is a mutual fund containing an assortment of stocks and other assets selected by a professional fund manager for their potential to deliver the highest possible growth.
While the goal of an aggressive growth fund is always to make money, the actual return on these funds can vary widely from year to year. For example, an aggressive growth fund might provide a 20 percent return one year, lose 4 percent the next and gain 8 percent the year after that. For this reason, the success of an aggressive growth fund is often judged by its five-year or 10-year performance, and these funds generally are recommended only for investors who are willing to withstand a few down years in exchange for the possibility of large returns over time.
Aggressive growth funds are among the least risky aggressive investments because they include stocks from dozens or even hundreds of different companies, usually across several different industries. This diversification means that if one stock or business sector goes down in value, the success of other assets in the fund can help to make up for any losses.
Have you ever dreamed of finding the next GE, Microsoft or Google? Some aggressive investors choose individual stocks instead of funds, hand picking one or more individual companies that they believe have the potential to grow.
Investors might search for new or unknown companies in the hopes of finding the next big thing before everyone else does, or they might look for bargains: established companies trading at a low stock price because of a slow market or other temporary factor. Another tactic is to seek out growth stocks: companies with the potential to increase their sales by at least 15 percent in the course of a year, regardless of their current stock price [source: Domash].
Investing in individual stocks means more risk and less predictable returns than investing in a mutual fund. If you are savvy enough -- or just plain lucky enough -- to find a sleeper stock before it takes off, the potential returns are exponential. But unlike mutual funds, if your individual stock pick tanks, the money you invest goes along with it.
Foreign Stocks/Global Funds
Perhaps you've exhausted every aggressive investment option here at home, or you simply want to diversify your portfolio. Global funds give you a world of choices, but they come with increased risks.
While developing countries and emerging economies offer the greatest potential for growth, they also bring a higher risk of political unrest. And even if you stick to countries with well-established financial systems, an investment in foreign stocks means the risk of currency fluctuations. If you buy a German stock, for example, and the Euro rises against the dollar, your investment will be worth more. But if the Euro sinks relative to the dollar, your investment return is decreased.
Many of us think of bonds as safe, conservative investment vehicles. But high-yield bonds, also called junk bonds, can be quite the opposite.
Like traditional bonds, high-yield bonds are loans from an investor to a company or a municipality. In exchange for the loan, the bond issuer agrees to pay the investor back with interest. But with high-yield bonds, the interest rate -- and the risk -- are higher because the bond issuers have been identified as poor credit risks.
The term junk bonds became a household phrase in the 1980s when Wall Street trader Michael Milken made a fortune through shady junk bond trades and went to prison for securities fraud [source: McGrath]. Today, many high-yield bond investors try to offset their risks by purchasing the bonds through specialized mutual funds rather than investing all their money with one issuer.
Small-cap Stock Funds
Like other aggressive growth funds, small-cap stock funds are made up of companies selected for their potential to deliver a significant return on investment. But unlike basic growth funds, which can include promising companies of every size, small-cap stock funds invest only in companies below about $1 billion in market value [source: Fidelity].
Small-cap funds often include relatively new, unproven companies, as well as small companies developing new products or taking other steps to enter a new or growing market. Small-cap fund managers may also look for less risky bargain buys, such as established companies with a low market value (and an unusually low share price) due to a temporary market downturn.
Micro-cap Stock Funds
As their name implies, micro-cap stock funds invest in companies that aren't even big enough to be considered small-caps, targeting companies below about $250 million to $500 million in value [sources: Wherry, Fidelity].
While micro-cap stocks carry a higher risk than small-caps, micro-cap investors point out that the price of entry is low and the potential for payoff is almost unlimited. A micro-cap stock can produce huge returns for investors if the small company is acquired by a larger company, but if it moves up to small-cap size and outgrows the micro-cap fund on its own, the investor's returns are limited to the growth from micro-cap to small-cap, as the fund manager will need to sell shares in any companies that no longer meet the fund's own micro-cap definition [source: Caplinger].
Decidedly not for the faint of heart -- or the easily confused -- options trading is an aggressive investment strategy with huge risks and the potential for fast, enormous returns. Simply put, an option is a contract that gives a buyer the right to purchase or sell a specific asset, such as a particular stock or a piece of real estate, at a certain price before a specified expiration date [source: Investopedia.com]. The buyer is not required to purchase or sell the asset at the contracted price, but instead pays for the contract itself, or the option.
Imagine that stock in MegaCorp is currently trading at $10 per share. If an investor believes that MegaCorp's stock price is on the rise, he or she might pay a premium (the cost of the option contract itself) of $2.20 per share for the right to purchase 100 shares of MegaCorp at $12 per share within the next 60 days. At the end of the 60 days, MegaCorp stock is trading at just $8 per share, so the option is worthless, and the investor allows it to expire. The investor's loss is $220 ($2.20 per share x 100 shares).
However, if MegaCorp stock had gone up to $20 per share within the 60-day timeframe, the investor could have bought 100 shares at $14.20 per share (the $12 strike price plus the $2.20 premium per share), then immediately sold them at $20 per share, for a return of $580.
Options also give investors a way to make money if the market declines: Investors who believe that MegaCorp stock is on its way down can purchase an option giving them the right to sell the stock at a certain price instead.
Private Equity Arrangements
Private equity investors are usually in it for the long haul and provide funding while a company pulls itself out through a rough spot, brings a new product to market or perfects a new technology. If the business fails, the investment fails with it, but investors often have the opportunity to negotiate favorable terms at the time of the investment, putting them in a good position to make some serious cash if the business succeeds.
Venture Capital Pools
Venture capital pools are a twist on private equity arrangements, in which investors pool their money to offer start-up capital to growing companies. By requiring an initial investment that is significantly lower than in a private equity arrangement, venture capital pools give smaller investors the opportunity to invest in new or rapidly growing companies. Venture capital pools may be small groups of private investors, or they may be operated as managed funds called venture capital funds or private equity funds.
As with private equity arrangements, these investments usually pay off only in the long term, but they minimize the risks of loss somewhat by investing in multiple companies instead of just one.
REITs (Real Estate Investment Trusts)
Real Estate Investment Trusts, or REITs, are real estate companies that offer common shares to the public and return the profits to shareholders as dividends. Unlike buying stock in a single company, an REIT investor is buying a portion of a managed pool of real estate [source: Forbes]. As the properties in that pool begin to make money through property sales, rentals or leases, the REIT distributes the profits to investors.
While aggressive investors appreciate the potential for high return on investment and long-term growth that REITs offer, the single focus on property ownership means that they are extremely vulnerable to the ups and downs of the real estate market.
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- Beattie, Andrew. Investopedia.com. "Market Crashes: The Dotcom Crash." (Dec. 13, 2010)http://www.investopedia.com/features/crashes/crashes8.asp
- Caplinger, Dan. The Motley Fool. "Tiny Companies with Huge Potential." June 30, 2008. (Dec. 18, 2010) http://www.fool.com/investing/mutual-funds/2008/06/30/tiny-companies-with-huge-potential.aspx
- Domash, Harry. MSN Money Central "Investing 102: Pick a stock and buy it." (Dec. 13, 2010) http://articles.moneycentral.msn.com/Investing/StartInvesting/Investing102PickAStockAndBuyIt.aspx
- Fidelity.com. Investment Dictionary. (Dec. 15, 2010)http://wps.fidelity.com/401k/pfp/ie/defini.htm
- Forbes.com. "The REIT Way." June 30, 2010. (Dec. 18, 2010)http://www.forbes.com/2010/06/30/real-estate-reit-personal-finance-reit-way.html
- Investopedia. "Options Basics: What are Options?" (Dec. 18, 2010)http://www.investopedia.com/university/options/option.asp
- McClure, Ben. Investopedia.com. "Investing Beyond Your Borders." (Dec. 18, 2010)http://www.investopedia.com/articles/stocks/04/121404.asp
- McGrath, Jane. "How Junk Bonds Work." HowStuffWorks.com. (March 1, 2011) https://money.howstuffworks.com/personal-finance/financial-planning/junk-bond1.htm
- Wherry, Robert. SmartMoney.com. "Only Two Microcap Funds Make Our Cut." April 18, 2008. (Dec. 18, 2010) http://www.smartmoney.com/investing/mutual-funds/only-two-microcap-funds-make-our-cut-22915/