What You Need To Know About High-Risk Investments
One of the most important factors in every investment is an investor’s tolerance for risk. As an investor, your tolerance for risk will likely depend on a variety of factors, like your age, current financial situation, and long-term goals. While many investments include at least some risk, there are certain types of high-risk investments that all investors should be aware of.
High-risk investments typically offer the potential of higher-than-average returns. However, as the name implies, they also carry a substantial amount of risk as well.
Types Of High-Risk Investments
The following are some of the most common types of high-risk investments available to the average investor. Each one has its own pros and cons, and you should always consult with an experienced financial professional before investing in any of them.
A leveraged investment means you borrow money on top of whatever you’ve already invested to increase the potential return on your investment. The upside is that it’s possible to see two or even three times the return.
The downside is that if the market goes down, you may lose double or triple the amount of money.
Leveraged investments are not a good option for long-term investors, and are generally best left to speculative investors and billionaires with nothing else to spend their money on.
Buying an option gives investors a way to make money on stocks and other securities even if the market isn’t going up.
An options contract essentially gives you the right to buy or sell a stock at a fixed price before a certain date. For example, you could buy an options contract to sell one thousand shares of Google stock at $1,500/share a week from now. If the price of the stock is less than $1,500 at that point, you would make money.
It may sound good in theory, but options have some of the highest risk of any investments in the financial world. From an average investor’s standpoint, investing in options offers about the same amount of risk as going to Las Vegas and playing craps for six hours straight. You might win, but there’s a pretty good chance you’ll lose all your money very quickly.
High-Yield / Junk Bonds
Many investors, especially older and retired investors, are familiar with low-risk corporate and municipal bonds, as well as bonds from the US treasury. These types of bonds rarely default and offer a predictable stream of income. The downside is that these bonds offer fairly low rates of return.
There are, however, other types of bonds that offer higher returns, but carry a correspondingly higher risk. These bonds have lower credit-worthiness ratings and are commonly referred to as “speculative” or “junk” bonds.
While just having a lower rating doesn’t mean the borrower is guaranteed to fail, it does substantially increase the risk for long-term investors.
Buying and selling currencies is done on the foreign exchange market, commonly referred to as “forex”. Currency trading is a bit like the wild west of the financial investing world, and is really not for the faint of heart.
While the potential for huge gains exists, the value of any given currency can skyrocket or plummet in the span of just a few minutes. To make things even riskier, most forex trading is done with leverage, meaning that both gains and losses are magnified on every trade.
Much like buying options, forex trading is best left to those playing with other people’s money and the insanely wealthy looking for a niche hobby to brag about to their friends.
Are High-Risk Investments Right For You?
So, are high risk investments worth the risk? In almost all cases, the answer is probably not. If your goal is to buy stable, long-term investments that will help you achieve your financial goals and save for retirement, this is not the strategy for you.
At Miles Brown Asset Management, we help investors find opportunities at every stage in life. Getting a decent return doesn’t have to mean risking all your savings on wild investment strategies. We help our clients come up with personalized plans that are based on their financial goals first. Once we understand your goals, we’ll help you develop an investment strategy that will help you meet them.
To learn more, call us today or use the form below to schedule a free financial consultation.
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