How to Build an Aggressive Investment Portfolio

Some aim to preserve their funds and protect them from inflation, while others seek to grow their capital as quickly as possible. For rapid growth of invested funds, an Aggressive Investment Portfolio is typically used. How do you assemble one, and what should you pay special attention to?

What is Aggressive Investing?

People unfamiliar with investing often believe that the term “investing” only applies to long-term investments with returns slightly higher than bank deposit interest rates. Other common misconceptions are that investing can only preserve funds from inflation and that a decent income requires large initial contributions. While there’s some truth to these notions, investing can also yield significant returns in a short period with relatively small investments. To achieve this, an investor needs to choose an aggressive strategy, correctly form a portfolio, and, of course, accept the associated risks.

Aggressive Investment Strategy

There are three main investment strategies:

• Conservative.
• Moderate.
• Aggressive.

The first two aim for stable income with minimal or optimal risk, making them suitable for beginners and those looking to preserve and grow their capital over time.

For those seeking rapid and substantial returns, an aggressive portfolio strategy is ideal. Its distinguishing features include:

• Potential for relatively high returns (usually over 50% annually, sometimes exceeding 100%).
• Elevated risk levels, which can sometimes reach up to 100%, meaning the total loss of the invested amount is possible.
• Impressive dynamics, with investment income potentially rising or falling sharply over short periods — months or even days.

These characteristics require adjustments in key portfolio parameters, such as:

• Types of assets. High-risk or even speculative assets take up the majority.
• Restructuring period. While conservative portfolios might be reviewed 1-2 times a year, aggressive portfolios demand attention quarterly or even monthly.

Special care must be taken when forming the initial structure of the portfolio and selecting the instruments included.

Attention! An essential condition for an aggressive strategy is a strong grasp of portfolio analysis methods and optimization. Equally important is the ability to evaluate assets quantitatively, using statistical methods and technical analysis of prices, among others.

Structure of an Aggressive Portfolio

Even among professional investment managers, there is no consensus on building a growth-focused portfolio. Some believe it should consist solely of high-risk instruments like stocks, derivatives, and similar assets. However, this approach is hardly rational as such a portfolio:

• Lacks instruments to protect against total capital loss.
• Is equivalent to purely speculative operations on the stock market and has little to do with investing.

A more accurate method involves incorporating all three main components even in an aggressive portfolio:

• Accumulative or protective.
• Stabilizing.
• Income-generating.

The first part consists of assets that provide stable, albeit minimal, income with zero or near-zero risk. This part aims to partially compensate for potential losses from the high-risk income-generating portion.

This section includes:

• Government bonds (e.g., Treasuries in the U.S.), preferably of different types and maturities.
• Bonds issued by regional and local administrations (only those from developed regions with stable economic conditions are considered protective).
• Bonds from “blue-chip” companies, which are the most stable in the market.
• Stable dividend-paying stocks.
• Fixed-term bank deposits.
• Physical gold (bars, collectible coins).

In an aggressive portfolio, such assets should not exceed 15-20%. Distributing them across several instruments makes the protection more effective.

The stabilizing portion includes liquid assets. Its purpose is to be quickly realizable at any moment if a negative scenario develops in the income-generating part. The funds obtained from this can then be used to restructure the latter to minimize losses.

Liquid assets can be converted to cash:

• Within a limited period (usually, the maximum term is 20 days).
• Without significant losses compared to the purchase price.
• Without complex conversion schemes.

Such instruments include:

• Cash in bank accounts.
• Shares of market leaders that are in steady demand.
• Short-term bonds, which are also in demand among investors.

The recommended liquid portion of an aggressive portfolio is 15-30% of the total amount.

Income-Generating Portion

The income-generating portion includes assets whose expected returns ensure the achievement of investment goals within specified time frames. This part is also known as high-risk, high-reward investments, as it provides the necessary portfolio returns but also carries the main risks.

High return investment options:

1. Speculative bonds. Typically, corporate bonds either from enterprises with a high default probability or from rapidly expanding issuers in the most progressive sectors (e.g., IT) can offer returns up to 50%.
2. Stocks of undervalued and fast-growing companies.
3. Stocks of potentially successful market newcomers, acquired at the IPO stage.
4. Derivatives (futures and options). These derivative instruments are directly linked to the price of the underlying asset but provide incomparably higher returns (sometimes hundreds of percent). When chosen correctly, they can significantly alter the return/risk balance.
5. Spot currencies and precious metals. These are considered speculative instruments, often yielding returns much higher than stocks, but their volatility significantly increases the risks.

Important note. Portfolio managers typically avoid including assets with negative returns in investment portfolios. However, if an investor can engage in margin trading on a brokerage account, such instruments can deliver equally impressive results. The key difference is opening short (selling) rather than long (buying) positions.

The income-generating part of an aggressive portfolio includes 60-70% high-risk assets. Several conditions must be considered when forming this portion.

Conditions for Including Instruments in the Income-Generating Part of an Aggressive Portfolio

When selecting instruments for an aggressive portfolio, it is necessary to:

• Conduct thorough fundamental analysis to identify undervalued and rapidly growing issuers, and assess the financial health of companies and industries.
• Evaluate the advisability of including securities and calculate their proportions based on existing methods of return and risk calculation, and optimization programs.
• Ensure maximum diversification across types of assets, countries, markets, and industries.
• Avoid buying securities at price peaks.
• Purchase assets in several tranches rather than all at once, taking advantage of improving situations and optimal prices.
• Prefer securities with a correlation coefficient close to 0 rather than negative ones around -1.

Note. Correlation coefficients can be calculated independently or by using ready-made data from various investment resources.

Another crucial rule for an aggressive investor is the high frequency of analyzing the current state of the portfolio and its restructuring. For short-term strategies, it is recommended to do this at least once a month, and for longer-term strategies, quarterly.