The market is changing. Emerging markets are creating competition and growth, companies are going global, and technology is changing the way we all operate. Thanks in part to the Eurozone crisis and the slow recovery from a global recession, the investment market has become a volatile place. For many investors, high risk opportunities are increasing at every side.
Risky investments have always attracted people with their potentially high returns. But investment should never be like gambling – you need both security and strong returns to successfully increase personal wealth. This means that high risk investments have a key place in your finances, but they should never be chosen to the exclusion of other instruments. Balance is the key, and understanding the basics of risk management is the best beginning.
The Ideal Risk Investor
The ideal risk investor is typically young, meaning they won’t need to depend on investments for a retirement fund. Risk investors must also have enough spare funds to purchase risky instruments without suffering steep personal losses. Last but hardly least, the ideal risk investor must be educated. If you can examine a funds beta and standard deviation to accurately judge volatility, you will be able to recognize risk no matter what other people try to tell you. Learn to examine the history of losses and gains, understand how to offset risk using futures or options, and read economic theory to prepare yourself to make the key decisions.
High-Risk Investment Basics
Any investment has some risk. High-risk versions simply increase the probability that low growth or a loss in value will lose the investor money. They balance this with the chance that the investment will succeed and grow very swiftly. Market forces, political forces, weather, and simple chance all play a key role in high-risk investments, making them very difficult to predict.
No portfolio should be solely high-risk. Indeed, high-risk investments only work when properly combined with low-risk instruments and balancing options. For example, certain stocks and bonds – like those in off-brand companies – perform better in times of recession; this willhelp decrease losses taken in high risk stocks if things go wrong. Low-risk mutual funds, highly dependable government bonds, and similar instruments serve the same role. Skilled financial advisors can help you find the right risk-return balance. For example, many advisors suggest keeping 70 to 80 percent of your portfolio in stocks (based on your age) to increase both risk and return. But there are many ways to manage the riskiness of your investments.
Common Risk Instruments
High Risk Stocks: When it comes to stocks, you can pick your own field with relative ease. Biotechnology stocks are a favorite in advanced markets, but tech and industrial stocks can be ideal high risk possibilities depending on your comfort zone.
High Yield Bonds: High yield bonds are offered by new and struggling companies that cannot receive strong credit ratings. In return for the risk, they offer very high bond rates and other benefits. Search these out on a case-by-case basis and consider the always-present danger of the company failing (penny stocks fall under similar guidelines).
Risk Funds: Sector funds are some of the most popular high-risk mutual funds. These funds tackle specific fields, such as financial companies or health companies. The fields move as one with the market, which means high future returns are possible as well as sudden losses. Market prediction is key with these funds. Regional funds are similar, but focus on a region of the world, often a specific country, instead of a field. If chosen correctly, emerging markets could show high returns for little input, but sudden recessions can have the reverse effect.
Risky Commodities: Commodities shift based on specific market conditions that are both unique and global. Industrial metals, for example, prove volatile but often highly rewarding in certain growing markets. Agricultural commodities are famously volatile due to weather and demand shifts; as a result, they require extensive study. Energy commodities are also a possible high risk option for those that can follow price trends well.
Risk Dangers and Controls
To help control the dangers inherent in risk, investors use many tools. One that all risk investors must learn is the Sharpe Ratio, which shows how well a portfolio reacts to risk. The higher the percentage of the Ratio, the more easily you can afford to branch out into riskier instruments.
If your portfolio is balanced, then turn your attention to the nature of your instruments. Lax investors tend to associate high risk with high returns without actually exploring the investments they make. In fact, many high risk instruments may prove successful but show only low returns after steep investment. To avoid losses, thoroughly research your investments; you’ll soon see that swift growth is necessary for strong returns, no matter the field. Volatility means there is never a guarantee of reward.
Keep in mind that common errors can trouble even experienced risk investors. Avoid leaping on high-growth stock just because it has seen swift growth in the past. Do not give up on funds because they have had a bad year or a recession seems eminent. And always remember that high returns can easily lead to high taxes for all those capital gains, so budget responsibly.
Keeping Your Eyes on The Goal
No secret exists for instant riches. High risk investment can be a way to grow your income, especially when mixed with more stable instruments in a complete portfolio. You will make the best investment decisions possible if you always look to learn, move forward, and research your decisions.