What People Get Wrong About Aggressive Investment Strategies – There’s No Free Lunch

February 12, 2023 | by V. Henry Astarjian | Posted in Blog

A number of years ago, I met a very successful entrepreneur who was looking to cool his heels when it came to his investments. He confessed that he had spent the last few years buying and selling “aggressive” stocks, sometimes making money, and sometimes losing it, but never coming out ahead. On balance, he said, he had nothing to show for all his efforts. His portfolio was flat.

His story struck an empathetic nerve in me. I thought how unfortunate that this otherwise smart and successful man had wasted so much time spinning his wheels trying to get ahead of the investment game. Time is one of the most precious assets an investor has. With time, great results are possible. 

Beyond his loss of time, he was frustrated with investing, finding it difficult to reconcile his lack of investment savvy on the one hand, with his business success on the other. He was great at his daytime job, but not so great at investing. To his credit, he finally decided to consult an investment advisor, which is something most people never do, but should. 

Over the years, I have seen my share of DIY investors with go-go aggressive mindsets who have ended up with uninspiring returns, or even losses. Maybe their preoccupation with DIY investing is a question of control. Some people don’t like to give up control of something as personal as an investment portfolio to an outside manager. Others love the fun and excitement of the fast chase – they find a stock, chase it up and down, and then talk about their experiences with their friends.

Most of the time though, poor DIY results come from a lack of understanding about the way investments and investing work. At its most extreme, this is like driving a car without understanding which foot pedal does what, or what that button on the dashboard with all the squiggly lines controls. As a result, DIY investors often get discouraged even as they continue to harbor their ever-present hope of making big money, fast.

Here’s something to keep in mind – there’s no free lunch in the stock market. Nothing is handed to us, except very rarely. Anything we gain on a consistent basis in the markets is usually the result of planning, strategizing, learning, taking wise steps, and waiting patiently for stocks and markets to play out. 

As a DIY investor, if you’ve fallen behind in your investment returns and are trailing the overall market, as many did last year, and if you’re now thinking of being more aggressive in your investing in order to make up for lost ground, you may want to rethink the best way forward. Bear in mind that if your portfolio was down in line with the market last year, then you may already have an aggressive portfolio and may instead need something more conservative.

Last year was a great example of a time in which aggressive portfolios fared poorly. On a total return basis (price appreciation plus dividend yield), the traditional S&P 500 Index lost -18.11% of its value in 2022. The more aggressive S&P 500 Growth Index on the other hand, was down -29.1%. Other growth indices had similarly negative performances, somewhere in the minus -30% range. This highlights a long-known fact – in short time periods such as 1-year, 3-years, 5-years, aggressive portfolios can be highly volatile and unprofitable. They often do the exact opposite of what they are intended to do.

However, if a growth oriented investor is willing to hold onto a portfolio for about 10 years, they stand a much better chance of beating the market, i.e. the S&P 500 Index. 

On average, over the 10-year period from 2012 to 2022, the S&P 500 Growth Index  returned a positive +13.54% per year. The S&P 500 Index, by contrast, returned a positive +12.52% per year. That 1.02 percentage point difference between the two indices shows that an aggressive portfolio can work as desired, given sufficient time. 

Beyond the 10-year mark, however, the return figures of the two indices start to narrow. At 25 years, the returns on growth indices revert to the stock market’s historical average rate of return, or roughly 7.5% per year.

The question every aggressive growth investor needs to ask is this: can I endure the potential short-term extreme ups and downs of my aggressive portfolio in order to reap the benefits it may provide several years down the road? In the case of my successful entrepreneur friend, the answer was a resounding no, and his shaken self-esteem was sufficient proof. 

Here’s what has a better chance of working in stock market investing. 

Take a long-term view, measured in years. Invest money you don’t need for a long while. Own companies that have value to consumers for many years down the road. Own companies that have great management teams focused on profitability from decade to decade. Own stocks that consistently pay a dividend over time. Understand what makes stocks and the stock market tick – read as much as you can in order to improve your odds of success. And be patient. Combine all of those with a bit of mental muscle power and concentration, and better results are possible. 

And finally, remember that if your stock portfolio does better than a 7.5% average rate of return per year over the long haul, you’re doing very well!

Happy investing! 

(Source of return figures: AJO Vista/FactSet). 

Disclosures: Waterstone Advisors, LLC is a Massachusetts registered investment advisor. Registration with securities authorities does not imply a certain level of skill or training. Investing carries risk of loss, including loss of principal. The information and data presented in this note have been compiled from publicly available sources that are believed to be reliable. However, their accuracy is not guaranteed. Waterstone Advisors LLC does not guarantee the performance of the securities or strategies discussed or analyzed in this note. An investment in these securities or strategies may result in complete loss of principal. For additional information and disclosures, please see our ADV Part 2 (the “Firm Brochure”) in the Our Approach page of our website at www.waterstoneadvisorsllc.com, or contact us at 978-828-2188.