How does an investor mitigate this risk? Research, research and more research.
I began my career as a journalist, and I learned there was no substitute for good old-fashioned shoe-leather reporting. That’s what brought me to one of my best picks, athenahealth, Inc (NASDAQ:ATHN), a health care IT provider that has returned a phenomenal 203%.
How many stocks in your portfolio were able to harness the power of a game-changer like that?
Aggressive growth investors must cut through all the hype. They must prosecute every claim. They must use facts and hard data to quantify a stock’s likelihood to head skyward.
Rule No. 2: Aggressive growth investors must be patient
Gains can take time to achieve — time that should be marked in years, not weeks or even months. Aggressive investors are by nature contrarians, as they are usually betting on developments the rest of the market has not yet perceived, and they must have strong conviction in these “buy” decisions to weather the storm. (Because sooner or later, it always storms.)
Consider Apple Inc. (NASDAQ:AAPL), a hall-of-fame game-changer if there ever was one.
The iPod, the device that began Apple Inc. (NASDAQ:AAPL)’s transformative march, was released in November 2001. The share price was around 20 bucks at that time, and the stock was functionally dead money for two years. But investors who had the foresight to see where Apple Inc. (NASDAQ:AAPL) was headed scored big.
Thereafter, the shares rallied, though the company also saw periods where the stock turned strongly negative. But look what happened if you held Apple Inc. (NASDAQ:AAPL) from 2001 through today…
To echo my earlier point: Research-driven conviction brings on confidence, and confidence brings about resiliency. The aggressive investor must nurture all of these virtues.
The third and final rule in aggressive growth investing is simple: Allocation, allocation, allocation.
I said earlier that all portfolios should have an aggressive growth component. But the aggressive growth segment of a portfolio, because of its risk profile, should be only a small percentage of total assets. I like the 10% rule, but it should never be more than 20%.
Is that too little? No. It’s just prudent. That’s enough upside potential to move the needle on your overall portfolio without shouldering an excessive amount of downside risk. That doesn’t mean that the other 80% to 90% of your portfolio can’t seek growth, it only means limiting exposure to the most aggressive securities.
Action to Take –> Following these three rules isn’t easy. Heck, if it was, everyone would be rich. And I would’ve invested in Apple Inc. (NASDAQ:AAPL) back in 2001 and be lounging on a beach right now. But these three rules have guided me to a string of triple-digit gains over the years, and there’s no reason why they can’t do the same for you.
– Andy Obermueller
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