In the world of investing, the term “aggressive” is a siren’s call. It promises the potential for elevated returns but whispers little of the profound risks and volatility required to chase them. As someone who has analyzed countless fund prospectuses and performance charts, I find that the concept of an “average return” for aggressive funds is one of the most misunderstood ideas in finance. An investor hears “aggressive” and imagines outsized gains, often overlooking the brutal arithmetic of risk and the high probability of underperformance. My aim here is to dissect this category with a clear-eyed perspective. I will define what makes a fund aggressive, explore the realistic range of returns you can expect, and, most importantly, calculate the emotional and financial cost of pursuing this tantalizing but treacherous path.
Table of Contents
What Truly Makes a Mutual Fund “Aggressive”?
An aggressive mutual fund is not defined by its past returns but by its strategy and portfolio composition. It is a fund that deliberately takes on higher levels of risk in an attempt to achieve superior returns. This risk manifests in several ways:
- Market Capitalization Focus: These funds primarily invest in small-cap and mid-cap stocks. These companies are more volatile, less established, and more sensitive to economic downturns than large-cap blue chips.
- Growth Investing Bias: They often target growth stocks—companies expected to grow earnings at an above-average rate. These stocks are typically priced at high valuation multiples (e.g., high P/E ratios), making them vulnerable to sharp corrections if growth expectations are not met.
- Sector Concentration: Instead of being diversified, an aggressive fund may concentrate its holdings in a few volatile sectors believed to have high potential, such as technology, biotechnology, or emerging markets.
- Use of Leverage: Some aggressive funds may employ leverage (borrowed money) to amplify their returns, which also amplifies potential losses.
The common thread is a willingness to sacrifice stability and embrace volatility for the chance at a higher reward.
Quantifying the “Average” Return: A Range of Outcomes
There is no single “average” return. Performance is highly dependent on the specific market cycle measured. However, we can use long-term historical data for the benchmarks these funds aim to beat to establish reasonable expectations.
The most common benchmark for an aggressive U.S. equity fund is the Russell 2000 Growth Index, which tracks small-cap growth companies.
Over very long periods (20+ years), the historical average annual return for the Russell 2000 Growth Index is in the neighborhood of 9-10% before fees.
However, this long-term average masks extreme volatility. The journey to this average is a rollercoaster, featuring periods of spectacular gains and devastating drawdowns.
For a typical actively managed aggressive growth fund, we must then subtract the expense ratio. These funds are often more expensive due to the intensive research required for their strategies. An average expense ratio might be 1.00% to 1.50%.
Therefore, a realistic “net return” expectation for an aggressive actively managed fund might be:
Gross Return (Benchmark): ~9.5%
Minus Average Expense Ratio: ~1.25%
Net Return Expectation: ~8.25%
But this is wildly optimistic if the fund fails to keep up with its benchmark, which most do.
The Active Management Drag: The SPIVA Evidence
The S&P Dow Jones Indices SPIVA scorecard provides humbling data on active fund performance. It consistently shows that over a 10-year period, the vast majority of actively managed funds underperform their benchmark indices.
For U.S. Small-Cap Growth funds, the percentage of managers that underperform the Russell 2000 Growth Index over 10 years is often 80-90%.
Therefore, a more realistic net return for the average aggressive actively managed fund might be below its benchmark. If the benchmark returns 9.5%, the average fund might return 0.5-1.0% less before fees.
A more pessimistic, yet evidence-based, calculation:
- Benchmark Return: 9.5%
- Active Underperformance: -0.75%
- Gross Fund Return: 8.75%
- Minus Expense Ratio (1.25%): -1.25%
- Net Return to Investor: 7.5%
This 7.5% is a more plausible “average” experience for an investor in an aggressive active fund—a return that is only marginally higher than that of a large-cap index fund but achieved with significantly higher risk and volatility.
The Risk-Adjusted Return: The Forgotten Metric
This is the most critical part of the analysis. Evaluating an aggressive fund solely on its return is like evaluating a race car solely on its top speed without considering its brakes and handling.
We must consider the volatility endured to achieve that return. The Sharpe Ratio is a common measure of risk-adjusted return. It calculates how much excess return you receive for the extra volatility you endure.
An aggressive fund might have a Sharpe Ratio of 0.50, while a less volatile large-cap index fund might have a Sharpe Ratio of 0.70. This means the large-cap fund delivered more return per unit of risk taken. The aggressive fund’s higher nominal return did not adequately compensate the investor for the wild ride.
A Realistic 10-Year Scenario: A Calculated Comparison
Let’s compare two investors over a 10-year period that includes a major bear market, like the 2008 Financial Crisis or the 2022 downturn.
- Investor A: Aggressive Growth Fund
- Net Return: 7.5%
- Max Drawdown (Largest Peak-to-Trough Drop): -55%
- Investor B: S&P 500 Index Fund
- Net Return: 10.5%
- Max Drawdown: -35%
The Outcome:
After 10 years, Investor B has significantly more money. Investor A took on 57% more peak risk (a 55% drawdown vs. 35%) but achieved a 28% lower return.
This is the reality of aggressive investing for many: higher risk does not always guarantee higher returns. Often, it just guarantees higher volatility.
A Strategic Framework: Should You Invest in Aggressive Funds?
An aggressive fund is not inherently bad. It is a tool. But it is a specialized tool for a specific job.
- They are not core holdings. They should not constitute the majority of your portfolio. A small allocation (5-15%) can be used as a “satellite” holding to potentially boost returns.
- You need a long time horizon. You must be able to withstand a 50%+ drop in value without panicking and selling. This requires a time horizon of 15+ years.
- You must truly understand the risk. It is not enough to know that a fund is “risky.” You must be prepared for the real possibility of significant and prolonged losses.
- Consider a low-cost index alternative. Instead of an active aggressive fund, a passive small-cap growth ETF (like IWO) provides the same aggressive exposure at a fraction of the cost (e.g., 0.25%), dramatically improving your net return potential.
Conclusion: The High Cost of Aggression
The pursuit of the “average aggressive mutual fund return” is a chase for a phantom. The evidence suggests that the average experience is one of higher fees, higher volatility, and a high probability of underperforming a simple large-cap index.
The higher returns these funds promise are not a guarantee; they are a possibility. The higher risk, however, is a certainty.
Your goal should not be to find the best aggressive fund. Your goal should be to build a diversified portfolio that matches your risk tolerance. For most investors, taking on additional risk through higher savings rates and a longer time horizon is a more reliable path to wealth than taking on additional risk through security selection. The most aggressive move you can make is to consistently invest in a low-cost, broad-market index fund for thirty years. The power of compounding from that strategy will almost certainly outperform the frantic and expensive pursuit of the next hot aggressive fund.
