Many investors are familiar with the concept of risk vs reward. There is risk in any investment, whether large or small. For bearing that risk, you expect a return that compensates potential losses.
In theory, the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive.
High-risk investments can come in many different forms; some examples of high-risk investments include cryptocurrencies, options, forex, starting a business and venture capital. Although the potential return of these high-risk investment assets are higher, one must always be aware that they carry a higher possibility of losing money as well.
As an investor, one must always look at the big picture and decide what is your investment objective and your investment duration. Examples of common investing objectives for investment can include:
- Building a passive income stream
- Retirement planning
- Children’s tertiary education
- Purchasing a property
Before investing, remember to ask yourself three things:
- What are you investing for?
- Can I afford to lose this money?
- Is it for short term (1-3 years), medium term (5-10 years) or long term, (>10 years)?
Different investment objectives would determine if high-risk investments are suitable for you. For example, a retiree would generally be more concerned about preserving his accumulated wealth rather than risking his capital.
He would be more focused on ensuring his accumulated wealth will be sufficient to maintain his desired lifestyle for the rest of his life rather than risk it to get higher potential returns. Thus, high-risk investments might not be suitable here.
Another example would be children’s tertiary education. When investing for children’s tertiary education, one would not want to take too much risk as any reduction in the value of the investment due to market fluctuations might mean that the child has to delay their education, or in the worst scenario, there might not be enough for them to continue their tertiary education.
Millennials As A Case Study For High-Risk Investments
As of 2021, millennials and Gen Z now make up the largest demographic in the workforce. As their disposable income increases, they would have more surplus income to invest. One observation I have made is that younger investors are more inclined towards higher risk investments.
This is probably not due to higher risk tolerance, but because they want to achieve their goals faster. For a generation used to instant gratification, waiting for one year to get 1.8% return on a fixed deposit is much too slow!
Fear of missing out (FOMO)
Millennials and Gen Z have grown up in the age of social media and one impact of that is the desire to keep up with their peers. Seeing the luxurious lifestyles of their peers may make some millennials want to take on higher risk as a method to grow their wealth. Do remember that what we see on Instagram and Facebook may not reflect reality, and taking excessive financial risk just to keep up is unwise.
Availability of information
Millennials are digital natives and have grown up in the information age. We can now find any information we want with a quick Google search and that includes information about investing. This abundance of information can give millennials and Gen Z the confidence in having the knowledge on investing.
However, it is important to be able to filter out what is accurate and up to date information when making an investment decision as there are many websites and blogs which are keen to promote their products and investment ideas. One must differentiate knowledge from wisdom and applied wisdom will keep one grounded and clear headed when making an investment, especially when it comes to high-risk investments.
Always remember to ask yourself, is this in line with my investment objectives and can I afford to take this risk?
Be aware of greed and fear
Greed and fear relate to an old Wall Street saying: “financial markets are driven by two powerful emotions – greed and fear.”. This applies to cryptocurrencies as well. The fundamentals of investing are to buy low and sell high, but greed and fear has caused many investors to behave in the exact opposite manner.
For example, Bitcoin has delivered returns of 224% in 2020 alone. There are also many other cryptocurrencies in the market which have given even higher returns than bitcoin last year. These sky-high returns have encouraged many investors to invest in the crypto market in hopes of getting ever more returns.
As an investor, we must always remember that returns are never guaranteed and one must always remember to not let greed blind us to that fact.
When an investment has given you the returns which you have set for yourself, it is important to have the discipline to sell or lock in your profits. In this way, you can minimise your risk and will be able to enjoy the profits.
Are High-Risk Investments Suitable For Me?
High-risk investments can be part of one’s investment portfolio as they can help grow one’s wealth. However, it is crucial to have an understanding of the existing risks involved in high-risk investments and decide if it is aligned with your investment objectives. Finally, remember not to put all your eggs into one basket to ensure you minimise risk to your capital.
Do take note that your risk profile, commitments and requirements may also change through the years and you may want to adjust your investment portfolio and exposure to high-risk investments accordingly.
There are strategies you can employ to help manage your portfolio’s exposure to risks, minimising your risks whilst still offering exposure to the potential of sizeable gains. If this is something you find difficult to undertake alone, you can speak to a financial planner or advisor to learn more.
A financial planner offers a variety of services associated with wealth management, covering a large spectrum of services, from wealth generation, wealth protection, to wealth distribution and can serve as a professional in guiding one in investing their money.
About the Author
Nicholas Wong is a licensed financial planner of IPP Financial Planning Group that specialises in advising professionals and millennials to achieve their financial goals. He can be contacted at firstname.lastname@example.org