Aggressive investing stock picks can give you bigger gains than conservative selections. But they can also give you bigger losses. Aggressive stocks are 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.

Here are three key ways to cut risk in your aggressive stock picks:

Tip #1

Aggressive investments should make up no more than, say, 30% of your portfolio. Ultimately of course, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive investing stocks. But we think 30% is a good rule of thumb.

Tip #2

You can cut your risk all the more by taking a conservative approach to your aggressive investing.

For instance, you should hold your aggressive investments within a portfolio that reflects our three-pronged Successful Investor wealth-building philosophy. That is, invest mainly in well-established companies; spread your money out across most if not all of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); downplay stocks that are in the broker/media limelight. That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar — a stock that does much better than average.

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You may stretch these rules a little in aggressive investing, while still sticking to the general idea. You may invest in more companies that are less well-established, compared to a conservative investor. But avoid loading up on penny stocks, recent new issues or any stocks that expose you to a serious risk of total loss.

Tip #3

Look for aggressive investing stocks with hidden value — value that attracts far less investor attention than it deserves. That gives buyers a bargain. It may also attract takeover bids.

Hidden assets can consist of real estate or underused brand names. For example, companies often carry 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 fail to assign any value to brand names, even those household names that had built up multitudes of loyal customers over the years.

One of today’s best-hidden assets in aggressive investing is research and development spending by technology stocks. High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones.

Looking for hidden value can produce huge profits – and when you lose, you generally don’t lose that much.

Most of our aggressive investing buys are in our Stock Pickers Digest newsletter. We look at many stocks before singling out our aggressive favorites, and we try to choose those with as much underlying value and as many hidden assets as possible. This is the best way to cut risk in aggressive investing.