The Case For Very Aggressive Investing
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. My Experience With “Aggressive” Investors
2. Aggressive By Nature
3. Aggressive By Nurture
4. Aggressive By Necessity
5. The Case For Investing Aggressively
6. Introducing the Venture Investment Program
Over my 30-plus years in the investment business, many of which were spent specializing in the futures markets, I have seen my share of both truly aggressive investors and those who only thought they were. Sure, almost any investor would like to obtain market-beating performance, but not all of those who want high returns have the risk-taking personality necessary to endure the volatility inherent in many potentially high-return investments.
Today, there’s a lot of attention being paid to investor psychology, or “behavioral finance” as it is sometimes called. As I mentioned in my April 10, 2007 E-Letter, some Wall Street investment firms have even incorporated investor psychology into their money management techniques. While a scientific study of investor behavior is interesting, I’m going to approach aggressive investors from a different angle.
Specifically, I’m going to discuss aggressive investing both from the standpoint of being an aggressive investor myself, and from my own personal experience with such investors during my career. I’ll highlight my observations as to the characteristics of those who are truly aggressive, and differentiate them from those who only think they are, or pretend to be. I’ll also discuss some of the advantages and disadvantages of investing aggressively.
Finally, I will introduce you to our new Venture Investment Program which is designed to specifically address the needs of those of you who are very aggressive investors, and who are seeking investment opportunities that may fit your risk tolerance.
The Aggressive Investment Experience
Before going any further, let me clarify what I mean when I say an “aggressive investor.” For purposes of this E-Letter, when I say “aggressive,” I’m not talking about the aggressive slice of a Modern Portfolio Theory allocation where you might have an international, high-tech or small-cap stock mutual fund amongst a well-diversified portfolio. Instead, I’m talking about investors who eagerly look for opportunities that have the potential for very high returns, but also much higher risk than the stock market (more about this later on).
That’s right, I’m talking about the skydiving / bungee-jumping / mountain-climbing sort of investor personality who can withstand the sometimes significant investment risk. Whether you call them “very aggressive,” or even “ultra-aggressive,” in my book they are investors who have the personality, resources, and time-frame that permit them to consider investments that have a high potential for gain, but could also produce significant, or even total loss of their investment.
As I have written on several occasions, I began my career as a hedging broker in the fast-paced world of the commodities futures trading, where investors’ goals are to profit on buying and selling highly-leveraged futures contracts. This market is somewhat unique in regard to risk, since the margin requirements are very low and the difference between profit and loss often requires split-second timing.
Believe me, you come to respect the concept of risk when you trade highly leveraged futures contracts that can experience very large price movements as a result of everything from supply and demand to geo-politics to weather forecasts, etc. It’s definitely not a market for the weak or faint of heart, to say the least.
Even though my business model led to me finding ways to reduce the risk of being in the futures markets, and eventually the equity and bond markets, I have always found it interesting to note the very distinct traits of investors who eagerly “take a walk on the wild side,” so to speak.
In looking back at the thousands of clients I have spoken to and helped over the years, it has been my experience that those who seek out very aggressive investments fall into three broad categories:
The following is a discussion of each of these types of aggressive investors I have encountered over the years, as well as how they typically react to the risks inherent in very aggressive investments.
Aggressive By Nature
We all probably know someone who is aggressive by nature. In school, it was the kid who would take any dare, compete the hardest in sports and even sometimes challenge the teachers in the classroom. In college, they were the ones who took the hardest classes, strove for honors, and made a name for themselves on campus.
As adults, we see these aggressive personalities rise to the top of the corporate ladder (or at least attempt to), engage in dangerous pastimes like skydiving, rock climbing, hang gliding, etc., and often “swing for the fence” in virtually any endeavor, including their investments.
I know a lot about this type of personality because not only have I dealt with a lot of risk takers throughout my career, but also because I am an aggressive personality myself. As a kid growing up, I competed in just about every sport there was. As a teenager, I saddle broke horses so I could sell them to make money, and competed in several rodeo events. While working my way through college, I got very interested in the commodities futures markets, which are arguably the riskiest markets of them all. I have been involved in the futures markets ever since I got out of graduate school.
Therefore, I think I have a very good basis for evaluating the aggressive investor personality. Over the 30+ years I have dealt with investors and investments, I have found that very aggressive investors tend to have the following characteristics:
All of the above illustrates the point that some people are aggressive in virtually everything they do, including investments. It’s not that they don’t know of the downside risk of rock climbing, skydiving or commodities trading, it’s just that they find the level of risk to be an acceptable price to pay in order to participate in these activities.
Before leaving the topic of investors who are aggressive by nature, it is important to note that even some investors who are truly aggressive are not suitable for aggressive investments. There are a variety of factors that go together to determine the suitability of any investment, and just because someone has a risk-taker personality doesn’t mean that their financial situation would support an aggressive investment strategy.
Aggressive By Nurture
Never has there been any more information (both good and bad) regarding investments. Books, magazines, the Internet, radio shows and even whole cable TV networks are dedicated to the dissemination and discussion of economic, financial and investment topics. While the result of all of this information should be more educated investors, I’m afraid that it sometimes results in what I call “information overload.”
I see many examples of this as I deal with my clients and prospective clients. One example I often see is when investors claim to be aggressive, but do not actually have an aggressive personality or a high tolerance for risk. Instead, they have learned that they are “supposed to be” aggressive because of their age, financial situation or because they desire a high rate of return.
Unfortunately, an investor’s emotions often come into play when losses cease being theoretical. This sometimes becomes a problem when investors in certain age or net worth categories are automatically assumed to be aggressive. For example, the new “lifestyle” or “target date” funds automatically assume that younger investors need to be more aggressive. While that’s often true in regard to the basic rules of investing, aggressive investments are not always in line with an individual’s tolerance for risk.
I have noted on many occasions in this E-Letter how the Dalbar and other studies have shown that many investors jump out of the market when losses occur, only to buy the latest hot fund, or worse, to sit on the sidelines, not knowing when to get back into the market. If investors get “burned” enough times, they may resort to fixed-rate investments such as annuities, certificates of deposit and guaranteed investment contracts which provide safety, but a lower return than may be necessary to meet their financial goals.
Granted, there are some investors who are more moderate, or even conservative, who have also learned how to control their emotions and not jump out of the market when losses occur. However, it’s awfully hard to resist trading on emotions in down markets, especially when the news is full of “expert” opinions of how this could be the beginning of a new bear market.
One of the best real-life examples of this behavior comes from one of our recommended Advisors. The Advisor told us about one of his direct investors who had claimed on his questionnaire that he was “aggressive” and could stomach losses as high as 30% to 40%, as long as the potential for greater returns was present.
However, when the Advisor’s strategy experienced an inevitable, albeit mild, decline in value of only -8%, the client became extremely concerned, and eventually closed his account. Are you ready for the punch line? This investor was a securities broker who had been taught that aggressive investments often offer higher potential returns and risks, but did not realize that his own risk tolerance did not match his “learned” response.
While investors who are naturally aggressive can usually handle risk much better, that’s not to say that one cannot successfully learn to tolerate greater investment risks. Much is said of “sophisticated investors” and how they tend to remove emotion from their money management decisions. Based on my experience, I’d be willing to bet that the many of these sophisticated investors are not naturally risk takers, but rather have learned the behavior of successful investors, and to control their emotions when losses occur. Perhaps these investors are the ultimate success stories among investors who are “aggressive by nurture.”
Aggressive By Necessity
Making up the final category of aggressive investors are those that I define as being aggressive because of the influence from one or more external factors, not all of which are logical. Based on my experience, rarely are these investors aggressive by nature, and most have not developed into sophisticated investors through learned behavior. Instead, these are investors who are aggressive because they feel it is necessary to do so for one reason or another.
Let me explain: my staff and I have talked to many investors who seek out very aggressive investments, but for all the wrong reasons. Some are trying to make back what they lost in the market, which was a very common scenario at the end of the 2000 – 2002 bear market in stocks. Unfortunately, they are being aggressive out of a sense of desperation, and are looking only at the potential for growth of the aggressive investment, and not at its significant risk.
In too many cases, these investors end up losing more of their already reduced nest egg, and their desperation turns into downright despair. Plus, because of the general tendency of such investors to only concentrate on promises of large growth and big profits, they often become the targets of scam artists who end up taking most or all of their remaining savings. It’s a sad scene repeated all too often in today’s investment world.
Another kind of investor who is aggressive by necessity is one who, for want of a better explanation, is “keeping up with the Joneses.” Call it peer pressure, herd mentality or whatever you like, these investors seek out very aggressive investments due to perceived pressure from family, friends or coworkers. Sure, it makes for interesting coffee-break discussion, but it can also lead to emotional trading when short-term losses become unbearable.
And just to make sure you don’t think this is limited to low-end investors, the wealthy are just as susceptible to investor peer pressure as anyone else. Why else do you think that the number of hedge funds with their “snob appeal” has exploded in recent years? As I have often said, having a high net worth doesn’t necessarily make you a sophisticated investor, just as having a lower net worth doesn’t mean you can’t be one.
While I have experienced other reasons for people wanting to pose as aggressive investors out of a sense of necessity, the bottom line is that these investors are rarely, if ever, really aggressive risk takers by nature. Thus, they usually are not emotionally prepared for the volatility and short-term losses inherent in such investments, and often end up selling at a loss.
Fortunately, the use of questionnaires and follow-up calls usually allow us to spot the investors who think they want to be aggressive but should not. This underlines the importance of pre-qualification for very aggressive investments, which I will discuss in more detail later on.
The Case For Investing Aggressively
For those investors who are comfortable with taking on more risk to gain a potentially higher return, aggressive investments can have the following distinct advantages:
Obviously, very aggressive investments are not without their disadvantages, some of which have been discussed above in relation to a potential advantage. Some of the other most common disadvantages of such investments include:
Introducing the Venture Investment Program
By now, I hope you are comfortable with the concept of very aggressive investing, and what it takes to be suitable for such investments. Because of my experience both as an aggressive investor and with my aggressive clients over the years, I wanted to create a program that could serve the needs of very aggressive investors, and possibly offer investment alternatives that they might not find elsewhere.
At Halbert Wealth Management (HWM), we are typically on the lookout for risk-managed investment opportunities featuring reasonable returns with less risk than buy-and-hold investment alternatives. Accordingly, our AdvisorLink® and Absolute Return Portfolios (ARP) programs offer risk-averse investors the ability to access investment strategies where controlling risk is an important focus.
However, as we search for money managers and develop our own mutual fund portfolios, we sometimes come across investment alternatives that are attractive from a historical return standpoint, but are far too risky to be included in AdvisorLink® or ARP. Therein lay potential opportunities for those who are very aggressive in their risk tolerance, or who at least want to include a very aggressive strategy as a small part of a diversified portfolio.
For that reason, we have developed our Venture Investment Program (“VIP”) to offer very aggressive investors the ability to access investment strategies they may not otherwise run across. Each investment offered in VIP receives the same strict due diligence review by HWM as in all of our recommended investments. For Investment Advisors, this usually means an on-site visit to their place of business. For mutual fund and other “packaged” product portfolios, the vetting process includes evaluation based on our proprietary selection parameters using a variety of computerized software and analysis.
All VIP investments are also reviewed and evaluated based on the considerable knowledge and experience of our Investment Committee. The result is a selection of investment programs that offer the potential for superior returns, albeit with potentially higher risks. Of course, past performance of any investment does not necessarily guarantee favorable future results.
Since VIP is so new, we currently have only a few investments that we have identified as “very aggressive” from our recent due diligence activities. However, as we are now specifically looking for investments that may be more suitable for very aggressive investors, we hope to be able to add more investment alternatives in the future. As a qualified VIP investor, you’ll be among the first to hear about these new opportunities once they become available.
Since all we currently have in VIP are managed account programs, it may be difficult for you to envision all of the various types of investments that may be offered in the future. All I can say is that we have placed no limitations on the strategies or structures of investments to be included. Therefore, we anticipate that future VIP offerings may include those from emerging managers, new strategies offered by established money managers, cutting-edge trading strategies, emerging markets and technologies, etc., etc. Note, however, that VIP will not likely have all of these types of programs at any given time.
Obviously, there are absolutely no guarantees in regard to favorable performance of any of these categories of investments. “Hot hands” often cool off, and emerging markets may be cut off by political risk. However, the allure of ultra aggressive investments is the chance that you might just find that diamond in the rough.
Quite frankly, VIP is a club that not all investors can join. You see, almost any investor will opt for an investment with a high historical return, often ignoring the considerable risks that may also come along for the ride. The true test comes, however, when an investment enters a drawdown, and the losses become “real.”
Thus, we feel it would be a disservice to investors who are not, in fact, very aggressive to allow them to invest in an investment program that may have high historical returns, but also carries with it a higher degree of risk than they would be able to tolerate. Their emotions may overrule their reason when losses become real.
For this reason, we feel it is in the best interests of our clients that they qualify for VIP via a detailed questionnaire and follow-up discussions with one of our Investment Consultants.
Not until investors qualify as “very aggressive” will we issue a password to allow them to access the VIP strategy descriptions and performance information. While this may seem “unfair” since many other Internet websites allow investors to see any program they want, we view it just the opposite. It would be really unfair to allow investors to put money into investments that may not be consistent with their financial goals and risk tolerance, only to see them redeem when inevitable drawdowns occur.
The Qualification Process
Since it is so important that your risk tolerance match the very aggressive characteristics of the investments making up VIP, HWM has developed a qualification process to help us to get to know you and your investment style. The steps in our qualification process are as follows:
How To Get The Ball Rolling
If you are interested in investments that are a cut-above in potential returns, albeit with higher risk, VIP may be for you. To begin the qualification process, click HERE to download our Confidential Investor Profile questionnaire. (Note – Your confidential personal information will remain confidential. We will never sell, rent or otherwise share your questionnaire answers or financial information with any outside group or organization.)
If you would like to learn more about VIP before completing the questionnaire, feel free to give one of our Investment Consultants a call at 800-348-3601, or send us an e-mail at email@example.com.
Important Information: The investment programs available in VIP are very aggressive and have a high degree of risk, and are only suitable for very aggressive investors. Be sure to read all important disclosures before making a decision to invest.
Wishing you profits,
Gary D. Halbert
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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.