Nearly every investing advice article suggests that a diversified portfolio is the best way to both safeguard and grow your money. Divide your funds among industries, and among companies within those industries, to prevent any one or two stocks from tanking your entire portfolio. What a lot of these articles fail to get into, however, is that diversification goes far beyond that. The most successful investing strategies combine the safety of conservative stocks with the profit-generating power of aggressive stocks for truly impressive results.
You need a blend of stocks, including aggressive stocks, to get the most profit from your portfolio.
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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:
- Aggressive stocks can easily outpace the market, and the best ones can earn triple-digit returns in a short amount of time.
- Earnings can exceed 20% each year.
- Revenues can grow 15% or more each year.
- The right aggressive small-cap, growth, or tech investing approach can yield outstanding longer-term returns.
- It’s not unreasonable to set your sights high—300%, 500%, 1,000% profits and higher. All you need are a couple of these big winners every year or two to produce spectacular portfolio returns.
And in case that seems like a lot, our Profit Curve shows us that it’s easier to get 1,000%+ profits than you might think.
For example, let’s say you buy a stock and watch it double. Great! You now have a 100% profit. Now assume your stock works its way still higher, doubling again. After your second double, your profit expands, not to 200%, but to 300%. A third doubling would yield a 700% profit. And a fourth would give you a whopping 1,500% profit.
Even setting aside the multi-bagger potential of the most aggressive stocks, 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 Achieve the Right Balance of 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 pre-defined 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.
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.
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*This post has been updated from an original version, published in 2020.