When a client meets with a financial advisor, there is always a question about how aggressive they should be in approaching planning efforts. There is something to be said for seeking risk premiums through aggressive strategies, but that approach also has potential pitfalls. You should consider the question by looking at these three issues.
Life Circumstances
Aggression may be suited to some situations and not others. Someone with two younger children who still have many expenses ahead of them, for example, might want to take a more conservative approach. It's normal in those circumstances to purchase life insurance policies that provide protection and long-term investment value.
Conversely, a single and childless person who is young has more room to take risks and recoup losses on positions that fail. A financial planning advisor may tell them to look at the upside when they have the chance to take cheap positions aggressively. That might mean investing in IPO stocks or distressed real estate.
Heavy Activity
Many aggressive investing strategies involving moving in and out of investment positions quickly. One of the reasons that a financial advisor will often encourage a client to stick with a buy-and-hold strategy is to keep costs down. This is especially the case if individual transactions incur even small expenses in the form of fees or percentages. These can accumulate quickly if you're constantly aggressive.
It's also notable that active strategies aren't inherently aggressive and don't always yield better returns. Short-term trends often follow what's called a random walk. This means there are lots of ups and downs in prices even though they tend to wash out over time. Consequently, aggressively trying to buy an upswing may lead to buying too high.
Outstanding Debts
It is hard to do financial planning if you're playing from behind. There's nothing wrong with carrying debt, and it can be a useful tool when you need it to buy a house or car, start a business, or deal with an emergency.
However, a large debt load can become dangerous to your finances. It might harm your credit, creating a cycle where interest rates go up and drive even more debt.
You might be tempted to make a few aggressive financial bets because you feel behind. You'll have to win big on your bets, though, for the benefits to outweigh simply paying down your debts. Typically, it's better to pay down your debts and only become more aggressive with your financial planning once you have a safe monetary base to work from.
Contact a local financial advisor to learn more.
Share6 April 2021
I still remember the day that my wife and I bought our first home. We were excited about filling the place with new furniture and looking for great area rugs. Unfortunately, before we knew it, we found ourselves deeply in debt. It was difficult to dig our way out, but over the course of the next several years, we were able to make things right. I want to teach other people how to manage finances so that they can avoid the turmoil that we went through. Financial planning might seem impossible, but with a little practice, I know it can become second-nature.