Aggressive mutual funds, also called growth funds, tend to invest in stocks with higher risks. With that risk comes a chance of higher returns than the market average or an index. You may choose to buy funds with more risk and build a portfolio with them to achieve a higher growth potential. However, this leads to a much higher chance that you'll lose more than you gain. To make it work, you'll need to balance the portfolio out with some fixed-income and lower-risk assets.
Find out how to make an aggressive mutual fund portfolio and learn some ways you can reduce the risks and enjoy the higher returns.
- Growth mutual funds tend to invest in areas that can give higher returns than market averages or indexes.
- Higher returns come with a tradeoff, as you have to trade returns for greater market risk when buying into them.
- A growth portfolio is right for you if you are not averse to high risk and have a time horizon of more than 10 years.
Decide Whether It's Right for You
There are three basic types of portfolios: aggressive, moderate, and conservative. Choosing the right one is like choosing rides at a park; the worst mistake you can make is to choose a ride that frightens you.
When you invest, you can jump off the ride if it becomes too scary, but you'd have to sell your funds in the middle of a down market though. This is one of the main reasons people lose money; they invest and panic when the market drops. A plan to grow your assets should include making it through market panics by picking investments that will also make it through it.
It's vital to choose funds that you will be able to stay with for the entire ride. Many people tend to buy when the market is coasting nicely, and sell when a slow-down occurs. You'll know the ride is "over" when your mutual funds have met your investing goals.
As a general rule, the longer you have until you retire, the more you can focus on growth in your portfolio, because you have time to make up for downturns in the market.
Learn the Side Effects of Aggressive Portfolios
A growth portfolio works well if you can handle high risk and have a time frame of more than 10 years. You'll be able to include more stocks than a moderate or conservative portfolio does. Mutual funds tend to reduce the risks of investing in stocks, since they bundle many stocks together. However, when you build a portfolio of growth funds, you override the lower levels of risk that mutual funds bring.
One of the mistakes people make when building a growth portfolio of mutual funds is that they buy into funds that do not match their goals and risk levels.
You'll need to be willing to accept market swings and downturns in hopes of high returns that outpace inflation. However, if you're investing for the long-term and have decades until you retire, you shouldn't worry (as much) about the market's daily swings. Instead, your focus should be on building enough money to provide you with a living after you retire.
Building wealth is hard to do without using the returns that stocks can create. If you're too conservative when you're young, you risk not being able to harness the power of reinvested dividends and compounding returns.
Allocate Your Portfolio
A typical growth portfolio split is at least 80% stocks. It isn't uncommon to find one with 85%–90% in stocks in young investors. To help you find the ratio that might be good for you, you can subtract your age from 110. The result is the number of stocks (in the form of a percent) that you should hold.
For instance, if you're 25 years old, you would want 85% of your assets to be stocks and 15% bonds; if you're 50 years old, you'd want 60% in stocks and 40% in bonds. Here is an example of a growth portfolio using the basic types of mutual funds:
- 30% large-cap stock (Index)
- 25% foreign or emerging stock
- 15% mid-cap stock (growth)
- 15% small-cap stock (growth)
- 15% intermediate-term bond
Large-cap stocks are companies valued at more than $10 billion. Mid-cap stocks are valued between $2–$10 billion, and small-cap stocks are valued under $2 billion. If you diversify among all three, you ensure that you'll have stable blue-chip stocks and small-cap ones with large growth potential.
As you age, you can reallocate your assets to reduce risk within a growth portfolio and still have a portfolio that grows.
Intermediate bonds, which mature between 5 and 10 years, give you some risk relief; they also offer constant biannual coupon payments. If you plan to retire in the next 10 years but still want a growth portfolio, look at this example:
- 35% Large-cap stock (Index)
- 15% Foreign or emerging stock
- 10% Mid-cap stock (growth)
- 10% Small cap stock (growth)
- 30% Intermediate-term Bond
The Bottom Line
A growth portfolio will work well for you if you have enough capital to withstand any losses. It would also work well if you have enough time to recoup your losses. Using a predefined allocation can help you build the wealth you're after, but only if you stick to the plan you've made.
If you feel that your mix of mutual funds is too aggressive, it might be good to listen to your instincts. If you lose sleep at night, feeling that your portfolio might decline in value, you may want to think about building a moderate or conservative portfolio.