The high rewards of aggressive growth stocks come with high risks.

The problem with aggressive growth stocks is that they’re high risk. Aggressive growth stocks are highly volatile, which means the more you invest, the more you can lose. If you’re lucky, you can also win. That’s why we only recommend investing a small percentage of your portfolio in aggressive stocks, if at all.

We look at many stocks before singling out our favorite aggressive growth stocks, 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 your risk in aggressive investing.

You can minimize that extra risk—and expand your profit—by applying the risk-cutting philosophy of The Successful Investor to aggressive investments. Learn more about our approach below.

Recognize that new aggressive growth stocks can have high risk

At some time in their lives, many people feel a near-automatic attraction to things that are new or different. That’s why the food, fashion, music, TV and other industries thrive by regularly introducing new products.

People get used to the idea that it’s good to try something new. They get used to the idea that you can largely take advertising claims and glowing reviews at face value. However, when assessing financial commitments, those same attitudes are dangerous.

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.

The reverse is true of companies whose main appeal is that they have come up with something new. Most new private companies eventually fail. The risk is even worse with public companies. For every Facebook or Google, there are a million duds.

Want to find the best aggressive growth stocks? Look for hidden assets.

Hidden value attracts far less investor attention than it deserves. That gives buyers a bargain. Hiddend assets may also help 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 the initial purchase price. That’s even if the value of that real estate has multiplied many times over the years. The purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet.

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.

How aggressive growth stocks fit into our portfolios

Ultimately, 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 some money in aggressive funds or stocks.

Our aggressive selections tend to be more highly leveraged and more volatile than our conservative recommendations, and they can give you bigger gains and bigger losses. This may be due to financial leverage, or to the risk in their industry or particular situation, or our estimation of upcoming changes to that risk. Keep in mind, though, that these or any aggressive investments should make up no more than 30% of most investor portfolios.

What to look for in aggressive growth ETFs

Our favorite aggressive ETF funds are the sort that invest in well-established small companies that dominate their markets.

You should avoid aggressive growth funds that mainly invest in stocks of companies that hold a lot of concept stocks, or that do a lot of trading, or that delve into options or futures trading.

Did you have an aggressive growth stock that you held for far too long?

What’s been your most successful aggressive investment?