Learn the difference between aggressive and conservative stocks to help you build a better portfolio (2024)

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Learn the difference between aggressive and conservative stocks to help you build a better portfolio (1)

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January 16, 2024|by Scott Clayton

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Learn the difference between aggressive and conservative stocks to help you build a better portfolio (2)

Understanding the difference between aggressive (including aggressive stocks to buy) and conservative stocks (like most bank stocks in Canada) will help conservative investors develop lower-risk and well-diversified portfolios

Aggressive stocks are typically more highly leveraged (with more debt) and volatile than value or conservative stocks, like almost all bank stocks, for example. That doesn’t mean conservative investors should avoid aggressive stock investing all together. Even for conservative investors, there are very good reasons to add some aggressive stocks—in limited quantities—to their portfolios. It’s why we continue to recommend several aggressive stocks to buy.

True Blue Chips pay off

Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' for FREE from The Successful Investor.

Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.

Know the difference between aggressive and conservative stocks so you can determine how much to invest in stocks for the aggressive segment of your portfolio

Aggressive stocks (includingaggressive stocks to buy) typically don’t have a secure hold on a growing market or at least the stable clientele that conservative stocks have. When something goes wrong with aggressive investments, conservative investors run the risk of serious, if not total, loss.

When we single out our aggressive favourites, or aggressive stocks to buy, we try to choose those with as much underlying value and as many hidden assets as possible. This is the best way, for both conservative investors and aggressive investors alike, to cut risk with those stocks.

Our stock selections for the aggressive investor tend to be more volatile than our conservative recommendations for conservative investors–for example, almost all bank stocks in Canada. As well, aggressive stocks to buy can give you bigger gains and bigger losses. This may be due to financial leverage, or to the risk in their industry or particular situation. Keep in mind that these, or any aggressive investments, should make up only a smaller part of most Successful Investor portfolios for conservative investors.

Zeroing in on a handful of small to medium-sized companies can pay off nicely when it works, but it can be extremely costly when you pick too few winners and/or too many duds.

But that doesn’t mean you should avoid aggressive stocks altogether in favour of a portfolio of all bank stocks, say. We recommend limiting your aggressive holdings to a smaller part of your overall portfolio. This is because aggressive stocks expose you to a greater risk of loss. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks.

As an aside, if you add highly speculative stocks to your portfolio first you should understand the chances you’ll take. They’re only suitable for investors who can accept a greater degree of risk. You can be wrong on any of your stock picks, of course. But when you’re wrong on a highly speculative stock, losses are likely to be larger than with a well-established yet aggressive company.

Understanding the difference between aggressive and conservative stocks in your portfolio

Conservative investing, as an investment strategy, involves focusing on lower-risk, predictable and stable businesses, like almost all bank stocks in Canada. This strategy typically involves the purchase of blue-chip stocks and other low-risk investments. A conservative investing approach also means building a well-balanced portfolio gradually, over time, including holding one, two or more of almost all bank stocks in Canada.

Aggressive stocks–even aggressive stocks to buy–are higher-risk investments that can potentially produce higher returns than more conservative stocks, but also have equal potential for bigger losses. As a general rule, we recommend that you limit aggressive stocks to a smaller part of your overall portfolio. They should also make up an even smaller portion, say, of a portfolio for highly conservative investors.

Pay attention to the risk difference between aggressive and conservative stocks to protect your portfolio

Conservative investors cut your risk by taking a conservative approach to aggressive investing.

For instance, you should hold your aggressive investments within a portfolio that reflects our three-pronged Successful Investor wealth-building philosophy. That is, invest mainly in well-established, dividend-paying companies; spread your money out across most if not all of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); downplay stocks that are in the broker/media limelight. That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar—a stock that does much better than average. It also means, for example, that you favour almost all bank stocks in Canada over speculative stocks.

You may stretch these rules a little in aggressive investing, while still sticking to the general principles. You may invest in more companies that are less well-established, compared to a conservative investor. But avoid loading up on penny stocks, recent new issues or any stocks that expose you to a serious risk of total loss.

Understand the management difference between aggressive and conservative stocks to maximize your earnings

Well-established companies are the key to profitable and low-risk investments for conservative investors.

Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

You can get our advice on investment issues, plus buy/sell/hold advice on stocks you may be considering buying, in our Successful Investor newsletter.

Conservative investors look for hidden assets in their aggressive stock picks

Look for aggressive investing stocks with hidden value—value that attracts far less investor attention than it deserves. That gives buyers a bargain. It may also attract takeover bids. We see the best of these types as aggressive stocks to buy.

Hidden assets can consist of real estate or underused brand names. One of today’s best-hidden assets in aggressive investing is research and development spending by technology stocks. High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones.

How has your tolerance for aggressive stocks changed throughout your investing career?

What would you recommend to new investors looking at both aggressive and conservative stocks?

This article was originally published in December 2019 and is regularly updated.

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