Aggressive stocks can be volatile, unpredictable, and difficult to hold when markets turn downward—but that does not mean you should avoid them entirely. For investors with a long time horizon and the ability to tolerate short-term losses, these higher-risk investments can provide meaningful growth potential, exposure to innovative industries, and valuable diversification.
While they require careful research and disciplined position sizing, aggressive stocks still serve a role in a balanced portfolio. Here are five reasons investors may want to keep them in the mix.
[text_ad]
How Aggressive Stocks Benefit Your Portfolio
Regardless of the percentage of aggressive stocks you have in your portfolio, choosing the right ones can bring real monetary benefits. Here’s what that might look like:
- Higher long-term growth potential
Aggressive stocks—often tied to fast-growing companies, emerging industries, or disruptive technologies—can deliver stronger capital appreciation than more conservative investments. - A hedge against inflation over time
Companies that can expand revenue and raise prices may help investors preserve purchasing power, especially over longer holding periods. - Portfolio diversification
Adding a measured allocation to aggressive stocks can complement bonds, dividend stocks, and other defensive assets by introducing a different source of potential returns. - Access to innovation and changing market trends
Aggressive stocks can give investors exposure to developments such as artificial intelligence, biotechnology, renewable energy, fintech, and other evolving industries. - Volatility can create opportunities
Sharp price swings can be uncomfortable, but they also allow patient investors to purchase promising companies at more attractive valuations. The key is maintaining a long-term perspective and appropriate position sizing.
As we’ve seen in the market lately, the outsized gains of market leaders can help buoy total returns. Something as straightforward as a 100% return in one stock out of a 10-stock portfolio lifts your entire portfolio performance by 10%.
And there’s a bonus reason to rethink aggressive stocks if you are in or close to retirement. If you still need to be focused on growing your nest egg, the safest, lowest-volatility investments are simply not going to meet your needs.
How to Manage the Risks of Aggressive Stocks
This is, of course, the tricky part.
If you want to own fast-moving aggressive stocks, but don’t want to live and die with every tick, then buy smaller amounts, dollar-wise, of the stock at the outset. There’s nothing wrong with owning a smaller dollar amount of a very volatile stock.
You can also take partial profits at predefined levels. This way, you don’t have to take a small initial position … but you will have to take some profits on the way up (dubbed offensive selling) when things are good.
And, of course, managing positions with tools like stop-losses or mental stops if they move against you is critical to preserving your capital.
Cabot has a full roster of investment advisories, including growth stocks, small-cap stocks, options, income stocks and digests of recommendations from many different advisors, and most of them have some exposure to more aggressive investments.
The important thing to remember is that investing in an aggressive stock doesn’t have to shift your entire portfolio to a risk level that you’re not comfortable with; position sizing and portfolio management can go a long way to counteract it.
And if you need some help, consider subscribing to one of Cabot’s advisories today.
[text_ad]
*This post has been updated from an original version, published in 2020.