How to assess high-risk investments

High-risk investments can play a role in some portfolios, but they aren’t right for everyone. They can offer higher returns, but they can also fall sharply in value, become hard to sell, or result in a partial or total loss. In some cases, losses can exceed the original investment amount, especially when borrowing or using derivatives is involved. 

You should only choose investments that fit your financial goals, risk tolerance and investment time frame, and be especially wary of high-risk or unregulated products.

What are high-risk investments?

High-risk investments are those likelier to experience large price swings, volatility, reduced liquidity, or permanent capital losses. In plain English, they are investments with unpredictable outcomes and significant downsides.

Examples include start-ups, small-cap stocks, venture capital, contracts for difference, foreign exchange trading, speculative commodities exposure, and some unlisted or lightly regulated products. Some investors include certain growth stocks or narrowly focused managed funds, which carry increased risk and less diversification.

People often search for high-risk/high-return investments in hopes of making a quick dime, but the key is to remember that higher risk can also mean a higher risk of loss. Returns of any kind are never guaranteed. 

Why some investors choose higher-risk assets 

Some investors choose higher-risk assets because they want capital growth, exposure to markets with greater return potential, or diversification across different asset classes.

That said, the trade-off matters. High-return investments can also bring volatility, sharper declines, and a higher risk of loss. Even experienced investors need to balance growth opportunities with lower-risk investments such as cash, fixed income, or government bonds, depending on their time horizon and broader investment strategy. 

No matter your experience, we recommend diversifying across asset classes such as cash, fixed interest, property, and shares, and reviewing your investments over time to ensure they still fit your goals.

Risk, time horizon and liquidity

Risk tolerance is only one part of the picture. Time horizon and liquidity matter just as much.

If you are investing for a short-term goal, a higher-risk product may leave you with too little time to recover from losses. If you need quick access to money, a less liquid investment fund or a thinly traded market can create pressure at the worst possible time.

Younger investors may have more time to ride out market falls, but that doesn’t mean they should put all their money into riskier investments. A sensible approach still includes an emergency fund, diversification, and, where appropriate, a base of lower-risk assets. 

Types of investing risk

All investment decisions involve risk. The main question is what kind of risk you are taking and whether you understand it.

#1: Market risk

This is the risk that the broader stock market or another market falls. Even a strong company can decline when market sentiment turns.

How to manage it: Diversify across asset classes, sectors and regions. Diversification lowers exposure to any one failure, but it cannot eliminate market risk.

#2: Inflation risk

Inflation reduces the future spending power of your money. This matters for savings accounts, cash holdings, and fixed-interest assets if returns do not keep up with rising prices.

How to manage it: Review whether part of your portfolio needs growth assets to achieve long-term returns, while maintaining enough lower-risk assets for stability.

#3: Interest rate risk

Rising interest rates can hurt the value of some bonds and affect valuations across shares and property-related assets, including some real estate investment trusts.

How to manage it: Avoid overconcentration, understand the fund’s duration or sensitivity, and keep your portfolio aligned with your time frame.

#4: Liquidity risk

Some products are hard to sell quickly without accepting a lower price. This can happen in private markets, some small caps, and thinly traded products.

How to manage it: Know how and when you can access your money before you invest.

#5: Company or issuer risk

A single company can struggle due to poor management, rising competition, debt pressure, or a failed product launch. Publicly traded businesses are not immune to this.

How to manage it: Avoid putting too much capital into a single company or theme.

#6: Regulatory and scam risk

Some products are sold outside well-regulated channels or by unlicensed operators. Some investments are unregulated by ASIC, including certain crypto or digital assets, direct investments in property or precious metals, and some international offers not provided by licensed Australian businesses.

How to manage it: Verify the provider, the product and the person offering it through ASIC before you invest money.

Common types of high-risk investments

#1: Startups and venture capital

Backing start-ups can lead to very strong growth, but many early-stage businesses fail. These are usually suited to private investors who understand the risks involved and can afford a total loss.

#2: Small-cap shares and growth stocks

Smaller companies and fast-growing businesses can deliver strong capital growth, but they can also be more volatile than larger, established stocks. Future performance is uncertain, and past performance is not a reliable indicator of what comes next.

#3: CFDs and foreign exchange trading

These are among the clearest examples of risk investments where losses can exceed your original amount, particularly because leverage magnifies outcomes. These products are not suitable for many retail investors.

#4: Commodities and futures

Exposure to commodities can rise and fall quickly in response to supply shocks, interest rates, global demand, or geopolitical events. Prices can be difficult to predict over the short term.

#5: Concentrated property or sector bets

A narrow exposure to a single market segment, such as certain real estate investment trusts or specialist funds, can increase risk if that sector comes under pressure.

#6: Unlisted or lightly regulated products

Some other investments may be hard to value, hard to exit, or offered by groups that are not properly licensed. This is where due diligence is essential. Check before you invest and be wary of unregulated offers and investment scams.

Things to consider before investing in high-risk products 

• Can I afford a potential loss without affecting my lifestyle or short-term plans?
• Does this fit my financial goals, time horizon and broader portfolio?
• Do I understand how the investment works, how fees apply, and how returns are generated?
• How liquid is it if I need access to money?
• Am I diversified, or am I taking too much exposure to one company, one fund or one theme?
• Is the provider licensed or registered where required?
• Have I done proper due diligence, rather than relying on marketing claims or hype?
• Would a mix of lower-risk investments and growth assets be more suitable?

Who high-risk investing may suit

• Investors who have a long-term horizon
• Investors who have a strong capacity for loss
• Investors who understand volatility and can tolerate large swings in value
• Investors who already have a diversified base portfolio
• Investors who have researched the product and understand the risks involved

Who should be cautious or avoid it completely 

• Those with short-term goals
• Those who need quick access to money
• Those nearing retirement
• Those with low risk tolerance
• Those relying on this money for essential living costs
• Those who do not understand the product or the market they are entering

Due diligence steps before you invest

• Confirm whether the adviser is listed on the Financial Advisers Register
• Check the provider or organisation on ASIC’s professional registers, where relevant
• Read the product information carefully
• Understand how the investment makes money
• Check fees, exit conditions and liquidity
• Look at where the product sits in your portfolio, not in isolation
• Be sceptical of past performance claims, especially where they are presented as if they predict future performance

Risk and diversification 

Diversification is one of the most practical ways to manage risk. It lowers portfolio risk by spreading money across different asset classes and options within those asset classes.

That does not mean diversification removes risk altogether. A broad market downturn can still affect most portfolios, but diversification can reduce the damage caused by any one company, fund or sector underperforming.

A balanced portfolio may include a mix of growth assets, such as stocks and property-related assets, alongside lower-risk investments, such as cash, savings accounts, fixed interest and government bonds. The right mix depends on several factors, including your financial situation, investment goals, time frame and appetite for more risk.

Let’s talk investing

High-risk investments can have a place in some portfolios, but they should never be chosen just because they sound exciting or promise higher returns. The better starting point is to understand your financial goals, risk tolerance, time horizon and capacity for loss.

Before making any investment decisions, review your current portfolio, ensure you are diversified, and be clear about how much risk you are actually taking. If you are unsure whether a product fits your needs, speak with a qualified financial adviser before you invest.

For more information about high and low-risk investments and investment strategies that may better suit you, contact the team at Elliot Watson Financial Planning.

Disclaimer:

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the author’s express written consent. Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.