Is It Too Late For Aggressive-Growth Stocks?


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Everyone knows the old Wall Street adage: A bull market makes every investor a genius. 

While the stock market has been on a roller-coaster ride in the daily picture, looking back over the past two years reveals a powerful uptrend in the major U.S. stock indices.

This uptrend has been a blessing for many long-term investors. However, the downside is that the nearly nonstop bullish move has created overconfidence in more than a few investors. It has also created confusion as investors are wondering if the bullish environment will change and how to manage portfolio allocation and diversification in such a great market.

While this confusion is certainly understandable, there are a few time-tested ideas that will keep your portfolio on the right track regardless of market conditions.

Regular StreetAuthority readers know about our primary investing themes of long-term growth combined with dependable dividend income. Above all, we emphasize the importance of portfolio safety while aiming for maximum growth and income. 

True diversification is the key factor to maximize portfolio safety while at the same time exposing your portfolio to the potential of rapid growth. Anyone can invest in either safe or riskier high-growth stocks. The trick is to find a balance that you are comfortable with as well as making objective sense. 

Andy Obermueller, chief investment strategist for Game-Changing Stocks , teaches that the percentage of your portfolio for allocation to aggressive growth stocks should be at least 10% but never more than 20%. 

"This is enough upside potential to move the needle on your overall portfolio without shouldering an excessive amount of downside risk. ... This doesn't mean that the other 80% to 90% of your portfolio can't seek growth -- it only means limiting exposure to the most aggressive securities."

Andy's pedigree includes picking more triple-digit winners than just about any other analyst over the past few years, so he speaks from successful experience. I wholeheartedly agree with Andy's ideas in this regard. The 10% to 20% aggressive growth idea is valid across most stock market conditions. However, it should be tweaked within the 10% to 20% parameters depending on your personal read of the market.

Obviously, in bullish conditions, allocations should lean toward the upper percentage in aggressive growth. Tuning down your exposure to aggressive-growth stocks during slow periods is also a wise decision. However, since no one knows the future, maintaining at least a 10% exposure will keep you from missing unforeseen bullish moves. 

Now that the critical subject of portfolio allocation has been addressed, what exactly are aggressive-growth stocks? Like the name suggests, aggressive-growth stocks are those that have or are expected to exhibit yearly double-digit percentage returns. In other words, aggressive-growth stocks are the fuel that will push your portfolio returns from average to extraordinary. 

However, along with that return trajectory comes equivalent risk. As explained earlier, this is why the general rule of 20% maximum portfolio exposure is a wise move.

Now, let's get practical. Here are two aggressive-growth investments.

Methode Electronics ( MEI )
Founded in 1946, this Chicago-based electronic subsystem manufacturer and marketer provides components and subsystems for a diverse client base stretching from automobiles to telecommunications. 

One thing that attracted me to this company is the fact that it pays a small dividend. The five-year average dividend yield is 2.9%. The company has consistently beaten estimates over the past several quarters and is expected to continue its strong growth. Exploding from the $8 range to nearly $28 in 2013, this stock has returned more than 300 %, placing it firmly in the aggressive growth category.

Primecap Odyssey Aggressive Growth (Nasdaq: POAGX)
This aggressive-growth mid-cap fund is made to order for investors who prefer the diversification already inherent in a professionally managed product to building their own portfolio with individual companies. It can also be used to add another layer of diversification to your personal portfolio.

The fund is up nearly 36% so far this year and 44% over the past 52 weeks. It requires a $2,000 minimum initial investment, then $150 minimum subsequent capital addition.

Risks to Consider: Aggressive growth equals high risk. There is no way around this fact. This is why the 10% to 20% rule is so important in most situations. Stop orders and diversification become even more important in hyper-growth stocks.

Action To Take --> I like both the POAGX fund and Methode Electronics right now. It is not too late to gain profits from these aggressive-growth stocks. I think they will both continue to outperform for at least the rest of 2013. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: MEI

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