From jumping out of an aeroplane with a parachute on your back to suddenly changing your career, life can be full of risks. Some risks are unavoidable but others we choose to make, because we know they can deliver a worthwhile return. In this article we interview some experts within our investments team to get their take on the ins and outs of high-risk investments. Armed with this knowledge, you’ll be in a better position to make the right investment decisions for your circumstances.

1. What would you classify as high-risk investments, and why?

A high-risk investment is one where there is either a large percentage chance of a loss of capital or of underperformance, or a relatively small chance of a devastating loss. 

Some investments are considered risky because there’s no guarantee on your capital, or the prices of the underlying investments fluctuate based on factors beyond your control as an investor.

2. Why would people choose these products and when is the best time to invest in them?

There is an old saying: ‘it’s time in the market, not timing the market’ that counts – and this applies here. Knowing the best time to buy and sell tactically so that you make a profit is far easier said than done. That’s why when you go into an investment that’s perceived as risky, it’s advisable to have a long-term goal in mind. This will help to minimise any shocks that come as a result of short-term fluctuations in your investment value.

3. What are the advantages of high-risk investments?

There are lots of benefits to making a high-risk investment:

  • High-risk investments can yield huge gains: Although there’s always a risk of losing out, there is also the chance of earning larger than normal gains.
  • You have limited liability: With these types of financial vehicles, you are only allowed to invest with limited liability, meaning that the amount you invested initially would be the most that you would ever lose in the event of liquidation.
  • There’s an easy buying and selling process: Typically you have the option to sell it any time you want, or buy more of the same kind of investment.
  • You earn capital gains and you get paid out dividends: This means you benefit in two ways in a high-risk investment such as stocks.

4. What are the disadvantages of high-risk investments?

While the potential returns are high, so are the downsides:

  • You face more risk with these investments: For example, the prices of equities are volatile compared with other investment vehicles and can fluctuate erratically.
  • You have less control: if you buy equities, your success depends on whether or not the company you’ve invested in has excellent practices and strategies. Since you have no right to walk into their offices and demand a copy of their business plan, you have to research them in other ways. As a shareholder, you’re also subject to the will of stockholders, as you can’t join in the decision-making process or suggest a better way of doing things. That’s why performing due diligence on the company you’re investing in is vital.
  • You’re last to be paid. If you buy equities and then the company liquidates, you won’t get paid until creditors, employees, suppliers and the taxman get their share. You can try and pull out your stocks just in time but because stocks don’t always behave consistently, anticipating their performance is difficult.

5. What is a sound investment strategy?

There is no quick fix. To build real wealth you need to save for the long run while bearing these key principles in mind:

  • Start young. Because of the power of compound interest, starting young is the key to wealth accumulation, as your income is reinvested together with the principle over time – so the longer it’s invested for, the more rapidly your wealth grows.
  • Be keen on fund expenses: these are the expenses your chosen fund charges and they can be the biggest drag on your ability to grow your portfolio.
  • Use diversification to balance risk and return. There are three main asset classes: stocks, bonds, and cash, and owning any single kind of stock or bond is more risky than owning many types. To diversify within an asset class, it’s best to own many securities rather than just a few.

6. How will the state of the market affect high-risk investments?

When the market is doing well, high-risk investments yield higher returns and tend to outperform it. But when there are negative returns in the market, high-risk investments yield lower returns and will perform below the market average.

If you’re thinking of going into high-risk investments, we hope this article has helped shed some light on what can be quite a confusing topic. Need some more help growing your wealth? Whether you’re just starting out, or a more experienced investor, we can craft the right portfolio for your needs. Get in touch with us to find out more.