This is the last part of the series on investment personalities, and we’re on the risky end of the risk/reward spectrum. If you were to overhear an aggressive investor describing herself, it might sound like this:
I am an aggressive investor. I believe that over the long term, the markets will go up. I believe that I can earn more in the stock markets than anywhere else, and that’s what is most important to me. I know that it will be ugly at times. I will lose substantial amounts of money (hopefully temporarily), but that’s part of the deal: you have to take risks to maximize your returns. I can afford to invest this way. I don’t need to spend any of this money for at least 10 years (I already have an emergency fund, and other sources of shorter-term money lined up).
I am optimistic. I don’t think that the end is nigh, and I believe that people and companies will continue to innovate and grow for many years to come. When things get ugly, I can easily tell myself “this too shall pass.”
Investments for Aggressive Investors
Aggressive investors invest almost all of their money in the stock markets. In some cases, they’ll invest money they don’t even have for extra leverage (using margin loans or other techniques). Aggressive investors may or may not be active traders. You don’t have to trade often to take risks – it’s all a matter of what you invest in. Aggressive investors might get stock market exposure using individual stocks, options, ETFs, or mutual funds. Some people mistakenly say that mutual funds or index funds are not risky (presumably because they are invested in a large number of stocks) but that’s not accurate. You can still lose plenty of money using mutual funds.
Within the world of stocks, aggressive investors typically own a little bit of everything. Risk takers especially like to have some exposure to smaller companies (not just the big firms we’re all familiar with), foreign names, and even emerging markets (countries that are still developing economically, and are therefore a bit more unpredictable). You don’t necessarily need a lot of exposure to those areas to invest aggressively.
Risks of Investing Aggressively
The main risk that aggressive investors take is market risk. Their account balances will go up and down with the stock markets (but it’s only the down part that causes problems). They need to be committed to hanging in there through thick and thin, or they will sell out of stocks when they start losing money. That might be the wrong time to sell.
Another risk for aggressive investors is “excitement risk.” If you’re aggressive because you want the potential for higher returns that come with risky investments (and you can afford to take the risk), that’s fine. But some people invest aggressively for a thrill – not in the service of a long term goal. This type of investing is rarely well thought out, nor is it disciplined. Investing should not be exciting, and successful investing usually isn’t. Red flags for this type of risk include:
- Using the term “playing” in regards to long term investments (as opposed to entertainment)
- Looking for “hot” ideas, tips, and “tricks”
- Making trades, and watching to see how those trades perform soon afterwards
Aggressive investors who use individual stocks take on additional risk. They expose themselves to company specific risks, as opposed to general stock market risk. What if the company is run by corrupt people? What if a product launch doesn’t go as well as planned? What if the industry as a whole struggles due to factors outside of the company’s control?
Most aggressive investors don’t use leverage, but those who do take on even more risk. They may end up losing money that they never had to lose in the first place. In the most extreme cases, speculators can expose themselves to unlimited risk (usually by “betting against” some type of investment). Fortunately, it’s not easy for most of us to get into that type of trouble. Most brokerage houses only approve leveraged transactions for certain people who’ve claimed – whether it’s true or not – that they can afford the risk.
When Markets Fall
Aggressive investors, instead of getting concerned when the market goes down, might rejoice. For them, market downturns could be an opportunity to buy something at a discounted price (with the assumption that prices will eventually move back up). However, aggressive investors need to be cognizant of the old saying “don’t try to catch a falling knife”. It’s difficult to know when things are done falling.
Another relevant saying is: “The markets can stay irrational longer than you can stay solvent.” Aggressive investors in general believe that the markets will go up, and any downturns are only temporary. However, there may come a day when the markets never go back up again. Or, more likely, there may come a time when you need money out of your investments, but selling is unappealing because the markets are depressed. Waiting may not be an option in some cases (even if you think the market’s shouldn’t be so low, markets can be uncooperative), and selling low can derail some of your goals. But that’s all part of the risk/reward tradeoff that aggressive investors sign up for.
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