Aggressive investing strategies: Pros and cons for your 20s and beyond | Human Interest
Aggressive investing strategies: Pros and cons for your 20s and beyond
LAST REVIEWED: Jan 26 2024
Key Takeaways
- This article reviews some definitions and common psychology concepts behind investing for retirement.
- We’ll compare differences between conservative and aggressive portfolios—and layer in the concept of balanced portfolios.
- And we’ll learn why some investors may consider a more aggressive approach to investing (with a focus on retirement).
Time and time again, headlines pop up that investors, especially ones in their 20s, are investing too conservatively.
- According to a Wall Street Journal analysis, younger investors’ most common money mistake is investing too conservatively, putting too much money into cash and bonds, and not enough into equities.
- US News & World Report highlights that 41% of people ages 18 to 33 say the bulk of their savings is in savings accounts or CDs rather than invested compared to 22% of Boomers, 30% of Gen Xers, and 31% of retirees.
- According to Dr. Robert Johnson, quoted in BankRate, “The biggest financial mistake people make is taking too little risk, not too much risk.”
It’s understandable. Between growing up during the Great Recession, graduating into anemic job markets, carrying record amounts of student loan debt, and dealing with the economic (and other) effects of the pandemic, it’s no wonder that many younger investors feel some hesitation when it comes to investing—let alone when considering whether to invest aggressively.¹
How do people become investors anyway?
A 401(k) is one main way that people first become investors. For many, it can be a great way to practice automating savings through routine payroll deductions and get a handle on how to invest with a particular goal in mind (in this case, retirement).
In this article, we’ll review key things that new investors need to know, including:
- Definitions of an investment portfolio and common investments.
- Comparing the differences between conservative and aggressive portfolios.
- An intro to balanced portfolios and how those compare on returns.
- Reasons that an investor, even one in their 20s, may consider a more aggressive approach to investing (with a focus on investing for retirement).
- Reviewing common psychological pitfalls that can get in the way of investment decisions (or even getting started with investing).
Back to basics: Defining investment portfolios and comparing investment strategies
Before we dive into defining what a “conservative” investing strategy might look like, and what differentiates it from an “aggressive” one, let’s first cover, at a high level, what’s in an investment portfolio?
What’s in an investment portfolio?
An investment portfolio can consist of a variety of financial vehicles, including, but not limited to, money market funds, bonds, stocks, and more.
Money market funds are a type of mutual fund developed in the 1970s that have relatively low risk and lower returns compared to other mutual funds. Typically, money market funds invest in high-quality, short-term debt securities and are either used to store cash or as an alternative to investing in the stock market. Although money market funds seek to preserve the value of investments at $1.00 per share, there is no guarantee. It’s important to note that money market funds are not FDIC-insured and the principal invested may lose value.
Bonds are debt securities. Borrowers issue bonds to raise money from investors willing to lend them money for a specific amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.
Finally, stocks are a type of security that gives stockholders a share of ownership in a company. Stocks are considered a riskier investment vehicle when compared to money market funds or bonds.
What is a balanced portfolio?
The goal of a balanced portfolio is to hedge against volatility. This typically involves investing in a combination of both stocks and bonds. The specific tactics involved in constructing balanced portfolios vary widely but tend to include:
- Identifying the threshold where an investor is comfortable vs. not.
- Assembling a mix of investment vehicles in a portfolio.
- Aligning with your investment goals.
Comparing risk and reward: conservative, balanced, and aggressive portfolios
To illustrate the variations in risk and returns across portfolio types, Vanguard created hypothetical model portfolios using historical returns of various market indices. Here’s a sample of their findings:
| Portfolio type | Average return (1926-2021) | Single-year best return | Single-year worst return |
|---|---|---|---|
| 100% bonds (conservative) | 6.3% | 45.5% | -8.1% |
| 50% bonds; 50% stocks (balanced) | 9.3% | 33.5% | -22.5% |
| 100% stocks (aggressive) | 12.3% | 54.2% | -43.1% |
Why would an investor consider a more aggressive portfolio?
There are many reasons you (or any investor) may want to consider investing aggressively.
Reason 1: You don’t expect to need the money anytime soon.
If you’re already retired or about to retire and your 401(k)’s value plummets, you could find yourself in a tight spot. However, if retirement is decades away, you could be better positioned to recover those losses.
Reason 2: Small differences can grow over time.
By investing in a more conservative portfolio, you’re choosing both lower risk and accepting that, in turn, your returns may be lower.
Reason 3: You know retirement investing should be for the long term.
In the interim, market fluctuations are likely to occur. A portfolio allocation—whether conservative, balanced, or aggressive—based on the investor’s age and risk tolerance is what really matters.
Reason 4: Your portfolio is powered by automatic rebalancing.
As part of our services, Human Interest offers complimentary rebalancing each quarter to ensure your investments match your risk tolerance and goals.