A few years ago, a national poll conducted by the Pew Charitable Trust, in conjunction with focus groups in three major cities, found that 92 percent of Americans prefer the security of financial stability over income growth.
In other words, they’re more concerned about their savings going down than they are about their savings not growing enough.
Meanwhile, 55 percent of Americans worry that they won’t achieve financial security in retirement.
That, in a nutshell, is the ultimate financial conundrum, risk—risk of loss, risk of volatility—vs. reward—having enough saved to comfortably retire.
There are three solutions to this puzzle: Save earlier, save more, or accept more risk by investing in more aggressive stocks.
The problem is an emotional one (fear), but the solution is purely mathematical.
Let’s start with a desired outcome: A dollar amount that will give us the green light to retire (let’s call it $2 million). This outcome is fixed and has three “inputs": how much you’re saving, for how long, and your rate of return.
If you’re just starting out in the workforce and have 40 years until retirement (save earlier), the years of saving ahead of you can do a lot of heavy lifting. You can afford to set aside less and accept lower returns because your time horizon is so long (playing with a retirement planning calculator is a useful exercise here).
Saving $7,000 per year for 40 years at an annual rate of return of 8% will just about get you to your $2 million goal.
In essence, you’re dialing down the “rate of return” and “how much” variables and dialing up “how long.”
If you’re mid-career and have only 20 years until retirement, you lose the advantage of time. In that case, you can drastically increase the amount you’re setting aside (save more) as one means of reaching your savings goal.
Here, we dial down the “how long” variable and keep “rate of return” constant, but dial up “how much.”
Saving $40,000 per year for 20 years at the same rate of return achieves the same goal.
The third option, which is where investing in more aggressive stocks comes into play, is upping our rate of return instead.
Instead of saving $40,000 per year for 20 years at an 8% rate of return, we can reach our $2 million target by saving $31,000 per year at a 10% return.
Our years to retirement stay the same, but by dialing up the rate of return we can turn down “how much.” (Your mileage may vary and you can fine-tune the years, amount and rate of return to better match your situation using a retirement calculator.)
If you’re reading this, the number of years you have until retirement is mostly out of your control (other than moving your retirement date back by a few years), and the amount you can save is probably constrained by your income.
Obviously, we could all save $2 million for retirement if we could save $500,000 a year for four years, but most of us can’t do that.
Where we can exercise control is by adjusting the amount of risk (and the expected return) we are willing to accept.
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The Truth About Aggressive Stocks
If your portfolio doesn’t include some exposure to aggressive growth, you’re short-changing yourself. Will these aggressive growth stocks underperform when the market corrects? Of course, we’re seeing that play out right now.
And that’s why you need an advisory like Cabot Growth Investor, which will lower your exposure to growth stocks when the market turns bearish.
But not having any exposure to aggressive growth stocks puts you back at square one—balancing fear of risk against reaching your retirement goals.
Even so, investing in aggressive stocks is not for everyone. Here are some of the factors to consider before taking the plunge.
Aggressive Stocks: The Pros
- With the right aggressive investing strategy, you’ll have the most money invested in your biggest winners and the least amount invested in your worst choices.
- When you find a few good stocks, the gains can come in big bunches.
- You can buy smaller amounts if you want to invest in fast-moving stocks but don’t want to live and die with every tick of the market.
- Aggressive stocks have the potential to help you maximize your investments.
Aggressive Stocks: The Cons
- With higher returns comes higher risk.
- Managing an aggressive growth portfolio isn’t easy. It takes hours of study and analysis, and you have to be prepared to live through some dismaying downmoves as stocks hit the rocks from adverse earnings reports, scandals, market downturns, and inexplicable failures to thrive.
- To get the big winners, you must invest in fast-growing leaders, but you also need a position you can hold on to for months without panicking because big moves play out over time.
- The more volatile your results, the more faith you’re going to need to stick with a system. It’s easy to stay with the plan when all your stocks are going up, but it’s infinitely more difficult when a falling market and some bad earnings results are gashing your portfolio, especially when the pain continues for many months.
The Secret to Investing in Aggressive Stocks
Many investors are searching for a system that (a) invests in cutting-edge leading stocks with dynamic new products or services, and in turn, allows them to hit the occasional home run … but (b) they don’t want to see their portfolio take enormous drawdowns during the occasional sour earnings season.
Can you have both? To some extent, yes. To get there, all you need to consider are two simple portfolio management techniques: position sizing (buying smaller amounts, dollar-wise, of a stock) and taking partial profits (buying larger positions, but taking some profits when things are good).
Finding aggressive stocks isn’t easy, but we’re here to help you. Cabot Growth Investor reviews IPOs, market leaders, the stocks to watch, what to hold, and what to sell. Learn how to profit from growth stocks with Cabot’s time-tested investing system.
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*This post has been updated from a previously published version to reflect current market conditions.
