Aggressive investing involves higher levels of risk—but there are ways to cut that risk.

If you want to diversify your portfolio with aggressive stocks, you’ll first want to understand the chances you take. Aggressive investing is only suitable for investors who can accept substantial risk. You can be wrong on any of your stock picks, of course. But when you’re wrong on a speculative stock, losses are likely to be larger than with a well-established company.

Remember, too, that regardless of whether you are an aggressive or a conservative investor, the quality of your investments matters much more than your skill at selling.

Aggressive investing can involve subtle levels of risk

The problem is that the risks in bad investments are subtle—far easier to overlook than, say, a tiger’s snarl. That’s especially true of aggressive investments. Sometimes, the story is so good that success seems guaranteed, if you just hold on long enough.

For instance, investors may ask if a particular new stock issue or unproven tech stock or penny mine is a good choice for an RRSP. We explain that these investments are too risky for an RRSP. Some reply, “I don’t mind the high risk, because I plan to hold for the long term.”

They have it backwards. Well-established companies with a history of sales and profits, if not dividends, are your best choice for long-term investment success. They tend to survive the bad times and go on to thrive anew when good times return, as they inevitably do. You put the odds in your favour even more if you use our three-part strategy to build a portfolio of well-established companies.

Aggressive investing heightens fear and greed

It’s easy to think that stock prices vary between predictable extremes of high and low. If this was so, all you’d have to do is buy low and sell high to make money. In fact, it’s investor attitudes that vary widely, between greed and fear.

When greed dominates investor thinking, investors focus on profits they can make, and they downplay their fear of loss. This leads them to take more on risk. When risk backfires, costly surprises follow.

On the other hand, when fear dominates, investors focus on and exaggerate risks. This can stop them from accepting sensible risks. Many stay on the sidelines until greed takes over again, and risk is high. Then they jump into the market.

When you aim to buy low and sell high, you can wind up doing just the reverse. You may spend too much time out of the market when values are attractive. You may spend too much time in the market when risk is high. You may compound your error by focusing on risky stocks, in hopes of making up for lost time and missed profits.

Aggressive investors can cut their risk with hidden assets

Hidden assets can consist of real estate or underused brand names. For example, companies often carried their real-estate assets on the corporate books at its purchase price, even though its value had multiplied many times over the years. Balance sheets often failed to assign any value to brand names, even those household names that had built up multitudes of loyal customers over the years.

Looking for aggressive investing stocks with hidden value can provide investors a bargain. It may also attract takeover bids.

We suggest that even an aggressive investor should choose investments with as much underlying value and as many hidden assets as possible. This is the best way to cut risk, for conservative and aggressive investors alike. At the same time, we recommend limiting your aggressive holdings to no more than about 30% of your overall portfolio. This is because aggressive stocks expose you to a greater risk of loss.

Aggressive investing can pay too much attention to the actions within the market and not the quality and value of the company involved. Do you think this short-term insight can lead to success for investors, or is it necessary to keep the company’s quality in consideration?