Investing in Aggressive Growth Stocks and Mutual Funds
New investors need to take the time to learn the basics of investing. Of equal importance for the new investor, though, is to determine their investment objectives and tolerance for risk. While different types of investments, like stocks, bonds, and cash can be incorporated into most any portfolio, the mix of these asset classes and the subsets of investments within each of these classes need to be considered carefully to ensure that the investment mix is consistent with the goals, timeframes and risk tolerance of the investor.
What Makes an Aggressive Investor?
Aggressive investors construct and manage their portfolios with the goal of achieving the best possible return. These investors tend to focus on stocks over debt instruments and are willing to assume a high-level of risk in order to achieve maximum return. In addition to high risk tolerance, aggressive investors need to have a long-term time horizon as these types of investments can fluctuate wildly over the short-term.
Aggressive Growth Stocks
Aggressive growth stock investors seek out stocks that demonstrate high earnings growth (20% or more) with the likelihood that this growth will continue and accelerate. The companies that offer this type of growth are usually operating in promising and growing industries. At the same time, the aggressive growth investor will review profit margins to determine whether the company management is demonstrating the ability to manage costs. They will also look at the return on assets and return on equity measures to see ensure that the company is being run efficiently.
Screening for Aggressive Growth Candidates
In building a stock screen to identify potential aggressive growth candidates, the following criteria might be included:
Forward Price/Earnings Ratio of 20 > 40: The idea here is to find stocks that strike the balance of being reasonably priced while remaining in favor with the market.
Return on Equity > 15%: This component adds a measure of profitability to measure the return on investment to shareholders. Unless the company is profitable, it will not generate the cash it will need to fund growth and expansion.
Earnings per Share Growth > 20%: Stock prices are closely tied to earnings growth and those stocks that offer accelerated earnings perform best.
Can the Stock Price Double within Five Years?
For many aggressive growth investors, the answer to this question can filter out those stocks that do not fit within this strategy. While this expectation may seem a bit high, you would expect a five-year doubling in stock price if the company is achieving 15% annual growth rates.
Aggressive Growth Funds
An aggressive growth fund is a mutual fund that seeks to provide investors with high returns through capital gains. Investors in aggressive growth funds must be willing to accept volatility in the share price in exchange for high growth potential. Aggressive growth funds often perform well when the economy is healthy and growing, but much less so when the economy is faltering.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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