Find out what makes certain investments so risky and what you should consider before investing.
All investments involve some degree of risk, but some carry more risk than others.
High-risk investments include alternative investment strategies and products outside of common investment types to achieve a return. Some high-risk investments may be marketed as being able to achieve higher returns. But remember, investment returns are always uncertain and depend on factors beyond a company or individual’s control. Even common investment products with well-managed risk and strong businesses plans can fall short of expectations.
What Makes an Investment High-risk
A major factor with high-risk investments is that you are more likely to lose all of the money you invested.
Liquidity risk – There may be strict resale restrictions on the investment, or you may not be able to sell it at all. The investment may also not trade on a regulated stock exchange, which could affect its liquidity.
Socio-political risk – Political decisions can affect investment markets.
Interest rate risk – The interest rate reflected in the investment could change to a level that significantly affects the return or performance of the asset.
Management risk – Inexperienced management team members, unethical behaviour, or bad decisions can affect a company’s performance.
Credit Risk – A borrower, such as a bond issuer, doesn’t pay interest as scheduled or repay the principal at maturity.
How to Research High-risk Investments
Always consider any high-risk investment opportunity with caution. Incorporate these three steps into your research when considering any opportunity:
Generally, high-risk investments are only tolerable for those with high-risk tolerance.
Gather Information Before making a decision, get as much information as possible. Ensure you understand how the investment works and the factors that could affect performance. Documents for common investment funds like mutual funds and exchange-traded funds (ETFs) are available for you to review. These documents, known as the Fund Facts and ETFs Facts, will tell you if the fund is low-, medium-, or high-risk.
If you are considering investing in a public company, learn how to effectively research public companies. If you’re considering a private company investment, it may be more difficult to get information. Our Private Placement Guide can help you better understand how the private placement market works.
Seek Independent Advice An independent professional, like a registered investment advisor, may be able to help you determine if the investment is suitable for you. Learn more about working with a registered investment advisor. As well, a lawyer or an accountant may be able to advise you on other aspects of the investment, like its tax implications.
Higher risk investments are likely to fluctuate more in value over time – they may swing from being higher in value, to lower in value, more often. Choosing a low risk investment means that your money is likely to fluctuate by smaller degrees but you are less likely to see higher growth.
While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.
Since they are by definition riskier investments, they typically pay higher interest rates, thus the term "high-yield." Particularly in a low interest-rate environment, these higher-than-average yields can entice investors to take on added risk in an attempt to earn a higher return.
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly. A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly.
Scottish Widows Growth Funds have exposure to different types of investments as described in the fund aims. These investments can include bonds (also known as fixed interest securities), equities, property, commodities and alternative investments depending on the fund's investment objectives.
1. Running out of money. Running out of money is a significant risk for many retirees. Not only do retirees have insufficient savings in many cases, but people also live longer today than they did in decades past.
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.
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