Are penny stock mutual funds a solid aggressive investment?
I have $10K to spend on an aggressive penny stock mutual fund. What will this sort of fund do for me? Is it a wise investment, and if not, what is a better investment that will remain aggressive?
Penny stocks are extremely speculative and you really have to do an enormous amount of due diligence. If you are to go that way, I would look at the manager's track record. But my advice is to steer clear.
If you want to be aggressive, you could go with the Russell Small Cap 2000 ETF, ticker IWM. This will give you all of the companies in the Russell Small Cap 2000 index, which are small companies, but larger than penny stocks, generally about 250 million up to a few billion, with the median size company being 690 million. This would give you small cap exposure and diversification (in that space) at the same time. I do hope you have other investments in larger companies and other asset classes.
Hope this helps, Dan Stewart CFA®
There is a difference between speculative trading and investing. Trading is a tactic used in trying to anticipate market movements and to take advantage of short-term market opportunities. Investing is a strategy in which you are anticipating to profit from the long-term growth and prosperity of a company. Mutual funds are designed for long-term investing and penny stocks are often associated with short-term speculative trading. Because these concepts are opposite of each other, when combining them, you may find that you attain neither the long-term growth nor the short-term profitability.
If you wish to invest in an aggressive long-term strategy, look into small cap (domestic or international) funds. By definition, some of the small cap companies inside of a small cap fund may actually be penny stocks, but they are likely to be limited. Penny stocks tend to be classified as either Micro or Nano Cap stocks. Micro Cap stocks are defined by having a market cap (size of the company) of $50 million - $300 million, Nano Caps are under $50 million. These "micro" companies are often hard to analyze because of their size and lack of transparency, this makes investing in these companies complicated. A small cap company is defined as having a market cap of $300 million - $2 billion. Generally, investors can do better analysis on these companies when compared to the micro caps. Small cap investments are theoretically more risky than large cap (over $10 billion) investments, thus have potential to offer more of a reward over an extended period of time.
I hope you found this helpful.
You assume that an "aggressive" mutual fund will make you more money than a less aggressive mutual fund. Why? Aggressive means more risk. Risk means there is an increasing possibility that your investment does not perform as expected.
There are no mutual funds that buy penny stocks, that should tell you something about the penny stock market.
Buy a solid stock mutual fund or ETF like SPY or the Vanguard S&P 500 Index Fund. Yes, they will go down in value during a market correction, but you will own the 500 largest companies in the U. S. Market and the value loss will be due to market fluctuation, not permanent loss from a company(s) going out of business.
In a word, "No", penny stock offerings are not solid at all. In fact, they would be considered extremely risky and highly speculative. Penny stock investments are definitely not in the category of a 'wise investment'. Please steer clear of them.
Investments should always be well-diversified across many asset classes. So, putting $10K into one aggressive investment is not an option.
Here are two resources to read to help you develop your own solid and wise investment plan:
As you are developing your own investment strategy, you might consider a Target Date fund that matches your retirement age. Before investing, check out the fund's expense fees and its rating.
If I had a penny for every penny stock I've seen go to zero... well... I wouldn't be rich, but I would have more pennies than not since most are not investments, they are wasteful gambles.
I don't believe you will find penny stock mutual funds, typically funds have to be far more diversified, and even if you had a mutual fund it would have many problems.
For example, if a mutual fund invested heavily in penny stocks and was successful, it would grow pretty quickly. If its mandate was to invest only in penny stocks, it would not take much before it was actually moving the price of the penny stocks just by investing in them.
Think about that for a moment... the fund you hire to make you money is actually driving up your cost to buy the penny stocks you own.
Thankfully I don't think such a thing exists, but to answer the question, it would be a terrible investment.
Own the world of stocks with a tilt to small and value. I do like that you're thinking small, but, there is such a thing as 'too small.'