An aggressive investor employs aggressive investment strategies in order to beat the market. To achieve higher returns an aggressive investor is willing to take on more risk. Thus, its risk-adjusted returns tend to be higher, but there are also some other consequences of this risk-taking behavior. An aggressive investor will often experience a greater amount of volatility on its portfolio.
An aggressive investor aims to outperform the market. There are several strategies that can be implemented in order to generate above-average returns. These aggressive investment strategies will often entail selecting high-risk stocks, or other high-risk assets. It is also based on active portfolio management. It often includes timing strategies, where the investor will buy or sell a particular security at a certain time. By choosing the right timing he is able to get the lowest price when he buys, and the highest price when he sells.
Aggressive investors will use an index as their benchmark and their goal is to outperform the index.
How aggressive investors achieve higher returns
Aggressive investment strategies are often pursued through stock picking. However, they can also be applied to other asset classes. Aggressive investors do not adhere to the efficient market hypothesis, therefore they do not believe that securities are always fairly priced. In order to beat the market, they are willing to actively manage their portfolios, selecting individual securities, and timing the buying and selling moment.
Aggressive investors believe that active portfolio management is therefore the best way to outperform the market. By systematically exploiting market pricing imperfections, excess returns can be achieved. However, to achieve that aggressive investors require an edge over other market participants. There are two main types of analysis they will use, in order to get an edge over other investors:
- Fundamental analysis: Long-term oriented and tries to value a stock based on published company information in order to compare it with current prices.
- Technical analysis: Short-term oriented and seeks to forecast and exploit likely future price trends based on recurring price patterns.
There is a lot of debate among investors over fundamental analysis vs technical analysis. Both can be used successfully and are important to an aggressive investor.
Aggressive investment strategies
Active investment strategies in stocks include:
- Growth: look for stocks of companies with above-average growth that are expected to have corresponding price increases. Such shares often have a high P/E ratio (price/earnings ratio) or a negative P/E.
- Value: specifically looks for undervalued stocks in the market in the hope of a stock rerating, leading to "excess" returns. Here, a low P/E ratio is a selection criterion.
- Procyclical: follows the principle "the trend is your friend". Investments are made in cyclical stocks that have already performed well - with the expectation that this will continue.
- Countercyclical: does exactly the opposite. Focusing on stocks whose price has just fallen particularly sharply due to being countercyclical. The assumption is that the cycle for the industry of these stocks is about to start.
- Dividend growth: focuses on stocks with constant dividend increases The expectation is stable performance regardless of price fluctuations.
- Long/short equity: this is an investment strategy often used by hedge funds. Going long stocks with the most upside potential and going long, and conversely shorting stocks that will potentially go down.
- Momentum: short-term-focused approach, that tries to profit from sudden price fluctuations in stocks, both upwards and downwards.
Advantages of being an aggressive investor
- Due to the higher risk involved aggressive investors are often able to outperform the market during some periods.
- Active market participants, who provide liquidity and ensure supply and demand to ultimately enable fair price formation, are absolutely necessary. Active portfolio management plays an important role in this process and provides essential support for fair price formation in the market. Therefore, Active managers look for opportunities in the market but take different approaches and have divergent views. As a result, they provide liquidity in the market, both on the buy-side and the sell-side.
- Aggressive investing ensures the selection of securities. Passive investing, on the other hand, is not selective. It invests without quality control, and that is why index funds are inefficient. For example, if you buy an index ETF, the money is not invested in the best stocks of the index, but according to the weighting of the index.
Disadvantages of being an aggressive investor
- Actively managed funds do not always manage to beat the overall market. They sometimes underperform the market.
- Aggressive investors will often have a very concentrated portfolio. This increases the risk and volatility of the portfolio.
- An aggressive investor will execute more orders than a passive investor. This can lead to overtrading.
- The constant buying and selling will also mean that they will pay more commission to the broker. Therefore, they tend to have higher transaction costs.
- An aggressive investor will often have a shorter investment horizon, to try to profit from short-term price fluctuations.
Image source: istock
Leave a Reply