Aggressive Investment Strategy: High-Risk Portfolio Management Explained

What Is an Aggressive Investment Strategy?

An aggressive investment strategy is a high-risk portfolio management approach that seeks to maximize returns by prioritizing capital appreciation over income or principal safety. Such strategies typically allocate heavily to stocks with little or no exposure to bonds or cash.

This approach is often suited to young adults with long investment horizons or to any investor with a high tolerance for risk, as they can better withstand market volatility and early losses. However, it generally requires active management to respond to market swings and maintain the portfolio's growth potential.

Exploring the Components of an 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 five 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.

The Role of Active Management in Aggressive Investment Strategies

Aggressive strategies require more active management than conservative "buy-and-hold" approaches due to their volatility and frequent adjustments needed. More rebalancing 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 increased effort can lead to higher fees as more staff might be needed.

Recently, there's been notable resistance to active investing strategies. Many investors have pulled their assets out of hedge funds, for example, due to those managers' underperformance. Instead, some have chosen to place their money with passive 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.

The Bottom Line

An aggressive investment strategy aims to maximize returns by accepting higher risk, often through heavy allocations to equities and, at times, commodities. It is typically best suited for younger investors with high risk tolerance and a long investment horizon, allowing them to weather market volatility.

Active management and frequent rebalancing can enhance returns but also bring higher fees and transaction costs, prompting many investors to shift toward lower-cost passive index strategies. Regardless of approach, understanding one's risk profile and limiting aggressive strategies to only a portion of the overall portfolio can help balance growth potential with financial security.