Investing in aggressive growth funds can be profitable for ETF investors who understand the risks.

It’s hard to come up with a short, definite answer when talking about our philosophy on aggressive growth funds. Partly that’s because a great deal depends on the individual’s investment objectives and financial circumstances. It also depends on the market outlook.

We generally feel that most investors should hold the bulk of their investment portfolios in securities from well-established companies. For stock-market investors, this means holding a total of 10 to 20 mainly well established, dividend-paying stocks, chosen mainly from our average or higher ratings and spreading their holdings out across most if not all of the five main economic sectors.

If you want to invest in equities through ETFs, you should pick up to five conservative ETFs we recommend in Canadian Wealth Advisor.

We also recommend some aggressive growth funds in Canadian Wealth Advisor, however. 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.

We recommend a number of speculative stocks in Stock Pickers Digest, and we comment on other speculatives in ourInner Circle advice, in response to questions by members. We also recommend some aggressive ETF funds in Canadian Wealth Advisor. But at the same time, these aggressive growth funds and stocks are only suitable for investors who can accept higher risk.

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

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 in that risk. Keep in mind, though, that these or any aggressive investments should make up no more than, say, a third of most investor portfolios.

There is no set rule for the best holding period in growth funds. It depends on the fund and on the market outlook. Sometimes it pays to get out of an aggressive growth fund after it has a great year. But some growth funds turn out to be good investments for decades.

Investor tip: stay away from stop-loss orders

Market setbacks always revive investor interest in the stop-loss order—“stop” for short. A stop is an order to sell a stock if it falls to a price you choose. If you own an $18 stock, you might tell your broker to sell it ‘on stop’ if it hits $16. This limits your loss if you paid more than $16; if you paid less, it preserves some profit. In real life, however, things seldom work out so neatly.

On average, up to a third of your stocks drop after you buy, just from random fluctuations. Using stops will get you out of any stock that puts on a temporary dip. Then too, stocks can be maddeningly uncooperative. Before setting off on a big rise, they often drop to a three-month to nine-month low.

For instance, suppose a stock goes sideways for six months between $10 and $12. Before heading to $18, it’s by no means unusual for it to first drop to $9. If you set a stop at $9 or above, you’ll sell out (possibly at a loss), and you’ll miss out on a 100% gain.

In deciding when to sell, it pays to consider all available information, not just price fluctuations.

It’s extremely rare to meet investors who have improved on their investment results over long periods by using stops or any fixed rules on selling. These rules just ensure that you’ll do a lot of buying and selling and spend lots of money on brokerage commissions.

Do you have your own aggressive growth fund investing philosophy? Do you feel we’re too conservative with our advice? Share your experience with us in the comments.