It’s important to recognize that investing aggressively, through penny stocks, concept stocks and other speculative ventures, can quickly lead to big losses.

There are a variety of ways investors lose money by investing aggressively. Highly aggressive investors will often look for penny stocks in mineral exploration, new software, biotech and so on. These investors actively look for stocks with higher risk—but with a chance for higher rewards. Even so, they often take on outsized risk far in excess of any potential rewards.

The Successful Investor philosophy suggests that even those who are investing aggressively should choose stocks with as much underlying value and as many hidden assets as possible. This is the best way to cut risk, for aggressive and conservative investors alike.

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Investing aggressively with penny stocks

Invest in penny stocks with only a small portion of your portfolio, if that.

When you buy penny stocks you could have a big payday if you make the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies, launching new software, and so on.

In general, penny stocks have lower trading volumes or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news can cause a penny stock’s price to rise or fall.

Ultimately, penny stocks should only be a small part of any diversified portfolio. You should only buy the most speculative of them with money you can afford to lose.

Investing Aggressively often leads to riskier sectors

Compared to a conservative investor, you may choose to invest more heavily in Manufacturing and Resources, the two riskiest sectors. If so, take care to spread your money out across the many industry groups within each of these sectors. That way, you protect yourself from an unforeseeable industry downturn.

What’s more, when holding aggressive investments in Resource and Manufacturing, we continue to recommend picking the top companies in these sectors. For example, if you want to hold gold as an aggressive investment, we’d recommend that you hold top-quality gold mining companies that continue to increase production and generate cash flow even when gold prices are low.

Another key part of our Successful Investor approach is to downplay stocks that are in the broker/media limelight, since it fosters bloated investor expectations. When stocks fail to live up to those expectations, big downturns can follow.

Applying the Successful Investor philosophy to aggressive investments also leads us to stay out of most new issues or IPOs. That’s because most new issues come to market when it’s a good time for the company or insiders to sell. Generally, that is rarely a good time for you to buy.

Investing Aggressively: You can minimize extra risk—and expand your profit—by applying our risk-cutting philosophy

That means 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 and Utilities); and downplay stocks that are in the broker/media limelight.

As an aggressive investor, you may stretch these rules a little, while still sticking to the general idea.

You may invest in more companies that are less well-established, compared to choices that would appeal to a conservative investor. But you’ll want to stay away from the most highly speculative types of aggressive investments. For instance, you’ll want to avoid loading up on “penny mines” (speculative mining stocks that have not yet proven they have a mineral deposit that can be mined at a profit). You’ll also want to stay away from “concept stocks”—junior companies that have a business plan but do not yet have an established business. That’s especially the case with companies that have yet to make a profit or generated cash flow. Stocks like these expose you to a serious risk of total loss. You find a lot of these kinds of concept stocks in the technology industry.

Bonus Tip: Investing aggressively and conflicts of interest

Investors lose more money to conflicts of interest than to any other single risk. That’s not a comment about the average broker’s sense of ethics.

You’ll find lots of conflicts of interest in the investment/financial business. It’s hard for a broker to settle these conflicts in the investor’s favour and still make a good living. However, brokers have no legal obligation to settle conflicts of interest in the clients’ favour. By law, they only need to ensure that investments they sell are “suitable” for a client. For example, stock options generally qualify as suitable for a client who wants to invest aggressively and who can afford to absorb the inevitable losses.

On the other hand, portfolio managers, like lawyers and doctors, have to live up to a “fiduciary” standard. That is, rather than simply adhere to the much looser “suitability” standard, they have to do what’s best for the client. They have to try to avoid profiting from any conflicts of interest with their clients.

What is your favourite strategy for investing aggressively?