Strategies for the Risk Tolerant Investor
Investors don’t have to look very far to find investment advice. From the tip given by a co-worker to the myriad of financial advisors available, there’s plenty of material on the subject out there. But unless you fall into the standard risk tolerant category, you might be missing out on a more efficient investment plan.
Some investors discover that standard portfolio design doesn’t suit them. Moderate returns and a relatively stable account balance can sometimes lead to boredom and apathy. Investors may decide to do something else with their money after a while and give up on the idea of investing altogether. Instead, they need a more aggressive strategy to keep them involved.
If the idea of extreme volatility, swings of 10%, 20%, or more, in your portfolio doesn’t keep you up at night, you might fit the description of someone who should be investing aggressively. The risks might be higher, but so are the potential returns.
Not for the faint of heart
Aggressive investors sometimes have a harder time designing a portfolio than conservative ones. That’s because there are far more resources and articles geared towards balanced or conservative investors. Professional advisors also tend to discourage aggressive strategies in an investment portfolio. While they might design something they consider to be aggressive, it often falls short of what more risk-tolerant investors have in mind.
One of the key aspects of aggressive portfolios is their stock-to-bond mixture. A hard and fast figure for how much stocks and bonds should be weighted in a portfolio is hard to give because an investors time horizon plays a large role in how much risk should be taken. The longer the maturation date of the portfolio, the more risk can be taken.
A simple rule of thumb is to subtract your age from 120 and the resulting figure is the percentage of your portfolio that should be in stocks. For example, if you’re 35 years old, you should have 85% of your portfolio invested in stocks and 15% in bonds.
Of course, there’s another strategy that’s considered extremely aggressive and incredibly easy to set up. If you have a long-term investment horizon, twenty years or more, you could simply invest in an S&P 500 index fund. Returns over its entire 90-year history have averaged out to be 9.8% on an annualized basis. Considering that in the past 20 years stock mutual funds have only averaged 5.19%, there’s a strong case to be made for index investing.
Even the most aggressive investor needs to stay diversified. While some noted investors like Warren Buffett don’t actually follow a diversification strategy, unless you have sophisticated market knowledge and can analyze stocks on a professional level, you might want to hedge your bets. Being aggressive in your portfolio shouldn’t mean that you resort to gambling.