Investing while your young is all about taking calculated risks. While I am still young today, I’m not as young as I used to be. In fact I’m in my thirties now and I’m investing more aggressively than I did in my 20’s while taking what I perceive as the same amount of risk. In this article I will explain how I wish I would have invested in my 20’s. This Partly comes from knowledge but also stems from the opportunities of having less capital.
Aggressive investing in your 20’s should focus entirely on stocks. This contrasts from the typical more conservative bond and stock approach. Aggressive investing in stocks should also target smaller capitalization companies. These are sometimes but not always penny stocks.
I know penny stocks typically get a bad rap for being volatile and extremely risky if you don’t know what you are doing. But, not all small and micro cap stocks are penny stocks and due diligence investing by looking at the balance sheet will reveal many opportunities.
Aggressive Investors Understand The Difference Between Risk and Volatility
In finance and especially investing, risk and volatility are often the same thing. They are lumped together and referred to as the beta. The beta is a gauge of how much your portfolio can fluctuate in value. Fluctuations in value can lead to psychological pressure and stress which play on human emotion and reduce returns.
While volatility and stress are not good for a stable financial portfolio young investors typically have higher cash flow coming from a job vs investments. This makes volatility far easier to stomach than an investor that receives most of their money from stocks. This is where young investors can take advantage of volatility and hopefully give them the springboard they need in order to build up quick capital to get them a head start.
Volatility is where opportunity lives, wherever there was less volatility there is less potential for stocks to become mispriced. This is where a value investor who knows what they are doing can thrive.
Now, earlier I stated volatility and risk are the same thing. But, to the value investor they are far from the same. When a value investor looks at risk, the most important variable is downside risk, or the risk of permanent loss of capital. But, to a value investor volatility is opportunity. Volatility is very beneficial if you can harness it to the upside.
Small Capitalization Stocks vs Mega Caps
At the beginning of the article I explained that I made a mistake in my 20’s. I was investing in large companies and index funds. While this is perfectly acceptable if you don’t want to focus all your energy on investing, it is not the most aggressive form of investing in your 20’s. I wish I would have focused exclusively on smaller stocks.
Small stocks have much greater volatility and thus mispricing’s are much more common. This is because small investors have the advantage of less money or capital. Less capital makes it more difficult to materially impact the price of a stock. This can not be said for large funds or large professional investors.
If an investor with a lot of money began investing in a small stock it could only invest a small portion of its money into it or it could risk buying the entire company and driving up demand and the price for the stock. Because, it will impact their portfolio returns so little it really isn’t even worth taking the added risk.
Yolo Culture and Growth Investing
Another area for aggressive investing is in the growth space. Over the last 20 years this has meant tech companies that operate online and in the social economy.
These types of companies are also the ones where many young investors decide to throw all of their money, simply because they are popular. You can achieve great returns for a period of time, but it is ultimately unsustainable. Eventually the returns will reverse and you will need to continue to hold for a number of years before eventually reaching previous highs.
This form of investing is also perfectly fine with small amounts of capital but as you accumulate more capital you will want to protect the money earned. The best way to protect it is to buy undervalued companies with growth catalysts.
How I Invest Like I’m in My 20s
I am a value investor, but in particular I’m a deep value investor. Sometimes referred to as bargain bin investing or cigar butt investing. To me this is a simple form of investing that takes advantage of investor psychology.
I focus on companies that are trading below their book value. What this means is they have more cash and assets than the stock price is trading at. By looking at a simple P/B ratio anything below 1 is what I’m looking for. I know it seems impossible but there are plenty of stocks that are trading this way.
Now before you go out and buy every stock below a P/B ratio of one there are a few simple questions you should ask yourself before you invest.
- Is the company losing money?
- How much debt does the company have?
- Is the company selling its own shares or buying them?
- Are insiders buying or selling?
These are specific questions you will need to research in order to figure out whether or not the company has the potential to turn itself around and rise in value once again. You can also read about my 10 factors to consider when buying a value stock to help you decide when to invest.
Debt Fuels Returns in Good Times but is Dangerous in Bad
When it comes to aggressive investing debt cannot be understated. It is the highest form of aggressive investing and can juice your returns. However, it can also magnify your losses. The best way to utilize debt is to understand it before you invest.
There are two forms of debt good debt and bad debt.
These forms of debt don’t really have a big distinction other than the interest rate is either acceptably low or terribly high. For example examples of good debt are:
- Home mortgages.
- Debt invested into appreciating assets.
- Debt used to fuel a successful business plan.
Examples of bad debt are:
- High interest credit card debt.
- Car loans or loans used on depreciating assets.
- Variable rate loans.
Understanding the difference between these two forms of debt can help you make better decisions but overall both are still debt and if you have a short time horizon for investing they could hurt more than help.
Once you have created an investment plan and have outlined your rules for investing a little bit of debt can be good. Especially when investing in a home. Right now with interest rates so low and home inflation being out of control, this is a great way to compound your wealth. Just be aware of your own personal debt to equity, just as you monitor a company’s.
Aggressive Saving and Investment
Aggressive investing in your 20’s is not always about making the right type of investments but could be as simple as saving more money. If you are perfectly content earning a safer investment return and investing in index funds then saving more money can help you increase your returns without taking extra risk.
Investment advisors suggest saving anywhere from 10-20% of your income to invest. This can either be in a retirement account or you own personal account. However, if you are interested in retiring early, Investing 50-60% of your income is an aggressive way to speed up your wealth compounding.
Aggressive saving is much easier if you have a high earning job, but if you don’t have much money than more active investing in small cap companies might net your more capital faster.