As far as investments go, the most valid advice would be the Latin proverb – do not commit all to one boat. In fact, when circumstances are likely to rock a boat, it is probably best to disembark altogether. In many ways, investments are like boats; they go up and down and sometimes even sink.
Regardless of the type of investment, it is important to remember that risks in investments are truly a matter of perception. While some might not stand the idea of losing a few dollars, for others, losing a million on the chance of an investment costing more the next year might be an acceptable risk.
Even still, there are investments that generate higher returns, but the risks are much greater too. For anyone who cannot afford to lose the entire amount invested, should be able to do well as long as they avoid investments that are nothing but fads. In general, such investments might yield great returns but there is a high chance that you lose all that you invested. Knowing that the risks can outweigh the potential rewards is a good place to start when you first set out to invest.
Risky Investments that You Should Avoid
Read on to find out the six high risk investments that you should steer clear of if high risk high return investments aren’t your cup of tea!
Crypto currencies are digital currencies that operate independent of a central bank. The proponents of this type of investment believe that it will be a widespread way of monetary exchange in the near future. While it is okay to root for digital currency, the likelihood of it taking over currency notes completely is a far-fetched idea.
Thus, crypto currencies, like bitcoin, are risky investments. The value of bitcoin took a bad fall from the high of $17,000 in 2017 to $3,800 this year. Investors, especially those who want to avoid risky ventures, should avoid adding bitcoin to their portfolio. This type of investment is far too volatile and has proven to be the biggest bubble after the tulip bubble of the 1600s.
Much like regular exchange-traded funds, leveraged ETFs are investments designed to replicate a stock index. But leveraged ETFs aim to yield 2-3 times the benchmark index by using a couple of complicated financing strategies to give your invested amount more exposure. It is very much like margining on steroids.
The sheer idea of doubling or tripling your investment is similar to buying stocks on margin. This means that while it might lead to great returns, it can also magnify your losses big time. In fact, the tricky part of this investment is that it invests in a different product every day to keep up with the makeup of the underlying index. For this reason, leveraged ETFs might be best for the portfolios of day traders with deep pockets who can do with high risk high return investments.
Out of hobby or as a future investment, a lot of people fancy the idea of collecting cars, stamps, art pieces, etc. Many collectors expect this hobby to pay them off with a good return in the future. While it is interesting to hold a collection just for the sake of enjoyment, it might be risky to do so in expectation of making a profit out of them.
Collectibles are largely illiquid assets, which means it can often be challenging to find a buyer for them. Even if you find a buyer, you often have to sell them on steep discounts. Besides, it is also hard to determine their actual value as they do not list on the stock exchange. The tax payment on collectibles is also higher than that of long-term stocks. By far the biggest risk involved in investing in collectibles is the physical damage to your collection.
Another high risk investment for your portfolio are penny stocks. They are typically stocks of small companies that trade for less than $5 per share. The reason behind penny stocks being so cheap can vary from company to company. Usually, it is the lack of history of earning a profit or that the company had run into trouble and was delisted by a major stock exchange. In any case, these are the kind of investments that you should avoid.
Here is a detailed article that talks about it.
Penny stocks trade infrequently so it is hard to sell your shares. Moreover, due to the small size of the company, a single good or bad news can make or break this investment. Apart from that, fraud is also prevalent in the penny stock world. They are often falsely hyped to pump up the price and to dump the shares on other investors.
Venture capital is a type of pooled investment fund that invests in private market companies from the start to their last funding round before exit. This is usually done through trade sale, IPO, etc. Venture capitals are commonly regarded as long-term, high risk investments as many of the companies they invest in return little to nothing. The goal of these investments is solely to back one or two in your portfolio that would return many times the actual investment in order to cover other losses.
Lately, investments in gold have been the talk of the town as the prices are going up. And it is obvious that nothing else seems more solid than an investment that you can touch and see. But the truth is far from that. There are storage and insurance costs as well as the lack of short-term gains to consider.
Despite the recent surge in gold prices, metals do not increase in value substantially over months or years. In fact, it is surprising to notice that in 2010, gold reached the same price as it did in 1980. While having a small investment in gold or silver can diversify your portfolio, anything above 5-10% is probably risky.
Metals, especially gold and silver, are highly volatile. A discovery of a new source of gold can cause an instant decline in its value. Be it gold or silver, both metals underperform the S&P 500 in the long term.
Metals, Gold in particular, are a good anti-inflation hedge, however, when it comes to investment, it does not compete well with other options.
It is important to remember that every time you invest, you are exposing your money to risk. Under normal market conditions, it is natural for stocks, bonds, commodities and other typical investments to go up and down. In fact, there is no foolproof trick that would protect your investment from the normal market fluctuations.
While it wouldn’t be right to assume that all of these investments are a no-go area, you must know the difference of a risky and safe investment. Therefore, it is best to avoid these risky investments when you cannot afford to lose much.
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