Everyone wants to get rich - the problem with getting rich isn't WHEN but HOW…
How To Assess High-Risk Investments With High Returns
What is risk in investment?
Generally speaking, risk is the chance that a result or an investment’s earnings will be different from what is expected. There is always a possibility when investing that you can lose some or all of your investment, which is why risk in investment exists.
So, what is risk in investment, and what form does it take? There are several categories of risk, as well as ways to assess it and reduce it, mainly using strategies such as diversification and hedging.
Risk and Time
A big factor that can often influence an individual’s risk tolerance is the time horizon of the investment in question, as well as whether their investment is ‘liquid’; that is to say, if the investor would have access to their funds if they needed them quickly.
Time can also be a big factor when discussing investments with investors of varying ages. If the investor is younger, they’ll have more time until they retire and may be willing to invest in higher-risk investments with higher returns. Those investors who are nearing retirement, however, may be more conservative, as they may need to have their funds more accessible and they may be looking to invest for a shorter term.
Risk vs return is all about balance. Speak with your financial advisor to find the right balance to achieve your financial goals with the level of risk that you are comfortable with.
Types of Investing Risks
When it comes to investing risks, there are two main types in question: systematic risk and unsystematic risk, both of which will most likely show themselves to investors at one point or another.
Systematic risks or market risks are those risks that affect the broader economic market, perhaps due to political or economic reasons. Systematic risks (market risks) are not easily avoided through strategy and are often part of the game when it comes to investing.
Common types of systematic risk are:
- inflation risks
- interest rates
- currency risks
- liquidity risks
- sociopolitical risks
Unsystematic risks are those that only affect one type of industry or company in particular.
This may be due to:
- regulatory changes in management
- market competition
- product recalls or failures
Unsystematic risks can often be managed through diversification and through investing in a variety of industries and shares.
High-risk investments with high returns
The major theme with investing is risk and return, the idea being that the more risk an investor will take on, the greater the return may be. In general, low levels of risk are associated with low potential returns and high levels of risk are associated with high potential returns. While this is the general idea, and many high-return investments are high risk, this does not mean that all high risk investments have the potential to hold a high return. It is also important to know that different types of investments have different prospects when it comes to return. Even though shares are often seen as high risk and high return, larger, well-established companies are seen as quite safe and appeal to your average investor due to their stability and potential for growth. While shares and property can be attractive assets to many because of their high return potential, these types of assets can also be exposed to a lot of volatility.
How do returns outweigh the risk?
Many experts and long-time investors will agree that “time in the market is better than timing the market”, and the longer you are invested, the more you will be able to weather the storms, fluctuations and volatility in the market and see a return on your investment. This is good news if you are not due to retire any time soon, as you may have many good years of investing to overshadow the bad years.
Risk and Diversification
The most fundamental strategy for mitigating risk in investment is diversification. While diversifying investments will not guarantee an investor against a loss, it certainly helps to minimise risk and assist an investor in reaching their long-term financial objectives. A portfolio that is well diversified will contain different types of assets from different industries, containing various levels of risk and interaction with returns. In order to have a well-diversified investment portfolio, regular check-ins with your financial advisor are essential. During these checkups, your advisor may rebalance your portfolio according to different factors, such as what is happening in the market and your current situation, ensuring that your portfolio is in line with your goals and financial strategy.
Let’s talk investing
Your advisor will understand your situation and assess your risk tolerance to tailor a balanced investment strategy that suits your individual needs. When assessing high-risk investments with high returns, it’s important to receive professional advice. For more information on high and low-risk investments, contact Elliot Watson Financial Planning at 02 4038 1623 and explore your different investment options today.
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.