Every investor has a different tolerance for risk, so before discussing investing aggressively it’s important to understand risk.
The risk indicator is based on how much a fund’s returns have moved up and down in the past. Therefore, is a reasonably good guide to how risky a fund investment is likely to be.
The risk indicator can be found on the fund overview. The lowest risk indicator of “1” tends to be associated with a cash fund, which usually has a small positive daily return, whereas the highest risk indicator of “7” tends to be associated with a particularly volatile equity-only fund (holding shares).
Bond funds tend to fall somewhere in the middle. Equity only funds can have quite different risk levels depending on their industry exposures. However, there are no definitive rules because the future is uncertain, and what happened in the past is not guaranteed to occur in the future. We can only use the past as a guide.
Every investor naturally wants to get the highest return for their money, so we sometimes get asked: “how can I invest my money aggressively for the maximum return?”. The answer is that with higher potential returns comes a higher risk.
An investment with a higher expected volatility generally offers the potential for greater long-term returns, but it also carries a higher probability of significant short-term losses and more severe negative outcomes. So, an aggressive investment strategy by its nature must involve commensurate risk. In general investors must make this trade-off, and you should always consider what level of risk you are willing to tolerate.
If one is willing to tolerate a high-risk strategy, the next question is how to invest aggressively. There are several dimensions to consider. The most risky and aggressive approach is to put all your money into one high risk-indicator undiversified fund. If you get it right, you can make the largest return, if you get it wrong, it could make a large loss.
Another option is to invest in a diversified fund which might contain a series of relatively risky investments, such as equity funds. A diversified portfolio will always have a lower return than its highest performing constituents, but a higher return than its worst ones. By this measure a diversified fund is less aggressive, but it might be a more suitable approach for some.
With Kernel, you are in control, you can invest in one specifically themed fund, a diversified fund, or create your own diversified mix.