Investing part of your portfolio in aggressive investments can pay off. But buying aggressive short-term investments can put a big dent in your stock-market returns

It’s hard to come up with a fits-on-a-T-shirt description of our philosophy on holding conservative and aggressive stocks. Partly that’s because a great deal depends on your investment objectives, financial circumstances and temperament. It also depends on the market outlook.

We generally feel that most investors should have conservative securities from well-established, dividend-paying companies as the bulk of the investments in their portfolios. This means holding a total of 15 to 25 mainly well-established, dividend-paying stocks, chosen mainly from our “Average” or higher ratings, and spreading your holdings out across most if not all of the five main economic sectors. However, some investors choose to add more aggressive short-term investments or speculative stocks to their holdings, in pursuit of bigger, faster gains.

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We recommend a number of speculative stocks in our Power Growth Investor newsletter, and we comment on other speculatives in our Inner Circle mailings, in response to questions by members. We also recommend some higher-risk investments in our Spinoffs & Takeovers publication.

Our Aggressive Growth Portfolio selections in The Successful Investor and Wall Street Stock Forecaster also 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 in that risk. Still, they are typically less aggressive than the picks in, say, Power Growth Investor.

We can be wrong on any of our stock recommendations, of course. When we’re wrong on an aggressive stock, losses are likely to be larger than with a well-established company.

Ultimately, the percentage of your portfolio that you should hold 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 afford to invest some money in aggressive stocks.

Studies show that the trading of aggressive short-term investments leads to losses       

Studies by the Dalbar organization in the U.S. show that if investors do a lot of in-and-out trading, they routinely make only about one-third of the return they could have earned with a simple buy-and-hold approach.

According to research on top-performing mutual funds, most of their investors lose money or make negligible returns. Why? That’s because most of the investors in a top-performing fund only buy into the fund after it has already made big gains. Investors also tend to sell former top-performing funds only after a major slump in the value of the funds’ holdings. When you chase investment performance, it’s all too easy to buy at the top and sell at the bottom.

Here’s an investor saying you should always keep in mind: “If it was easy to predict which way the market will go, why would anybody work?” In fact, it’s hard if not impossible to consistently profit from short-term trading. That’s due to the large random element in short-term market trends.

Keep highly aggressive short-term investments away from your portfolio and you can limit your exposure to major risks

Many investors get involved in short-term investments in hopes of quickly reversing the losses they experience during market downturns. It’s a natural temptation in troubled times.

You may have noticed a lot of ads for courses in online trading of highly aggressive short-term investments or foreign-exchange trading. The promoters are aiming their pitch at inexperienced investors who have suffered losses due to market volatility. These investors may be inclined to follow the example of desperate gamblers who bet their last few dollars on a handful of lottery tickets, or a long shot at the track or the casino. That’s a wasteful example to follow.

Remember that highly aggressive investing can also 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.

Use our three-part Successful Investor approach to make better investment decisions

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What types of aggressive stocks do you find worth the investment?

There is little guarantee of a profit with aggressive stocks, so why do you think so many people take the risk of investing in them?