High risk investing

High-risk investing is not for the faint hearted. As the term suggests, these investments are extremely risky and there will be a higher than average chance that you could lose the entire value of the investment.

So why does anyone ever opt for high-risk investing? High risk is often correlated with high rewards. The investor accepts the higher risk only because of the potential for high returns. For instance, cryptocurrency is a high-risk investment, as the sector is completely unregulated and vulnerable to fraud. You may place £1,000 in a brand-new crypto coin, only for the coin to disappear from the market a few days later, or shutter completely. On the other hand, that £1,000 could become £3,000 within a week, if the coin takes off. The possibility of making a £2,000 return might just convince you to take the risk of investing your £1,000.

What is high risk investing?

High risk investing involves choosing assets which have the potential to dramatically appreciate or depreciate. Choosing a high-risk strategy opens your portfolio up to significant, often permanent losses. Businesses can fail, markets can be disrupted, and innovative technology can quickly be surpassed or prove to be ineffective or inefficient.

This type of investing requires a few things:

• A strong stomach and the ability to bounce back from big losses
• Youth, wealth, or both
• And a keen understanding of your industry of choice

High risk investors must be able to afford to lose everything. This is not the type of investment that you bet the kids’ college fund on – it is only viable if you can afford to weather the losses in the hopes of making big gains. For this reason, high-risk investing is particularly suited to younger investors and high-net worth individuals. The younger you are, the longer you have to re-earn and re-invest your money; while very wealthy investors can make big investments in higher risk assets using only a small percentage of their overall portfolio.

Some high-risk investment classes include emerging markets and frontier markets, property development, unregulated assets such as cryptocurrency, and initial public offerings, or IPOs. Venture capital and angel investments are also considered to be high risk, as they typically invest in start-ups which have a high rate of failure.

Why choose high-risk investing?

If there is no risk without reward, then significant risk opens the door to significant returns. High risk strategies are chosen by individuals with the financial capital, experience, and nerve to commit to a trading strategy that manages risk to the greatest possible extent. These investors are highly confident in their ability to execute the plan and are able – and prepared – to weather the impact if their predictions do not pay off.

This involves understanding volatility, portfolio composition, and market trend. Despite this, it is likely that you will only be able to partially insulate yourself from any fallout that comes from your investment.

How to be a high-risk investor

There are a few investment sectors which are particularly suited for high-risk investors.

Emerging and frontier markets

Emerging markets are younger economies in countries which have a higher degree of geo-political risk than the likes of the G7. However, the pace of development in these markets will often signal the potential for huge growth over the medium-to long term. The current, leading emerging markets are known as the BRICS - Brazil, Russia, India, China, and South Africa.

Frontier markets are slightly behind emerging markets in terms of their development. This makes them even more of a high-risk prospect, not least because many frontier markets don’t have sophisticated financial regulation, making the potential for fraud even higher. Some frontier markets include Bangladesh, Argentina, Kenya, and Slovenia.

These markets offer fresh opportunities but introduce a range of unique variables that require significant research and careful timing to exploit. Many of these countries can be disrupted by geopolitical, logistical, or economic disruption which can devalue in investment. But judicious research around growth potential, volatility, income capita and other key variables can make them a potentially desirable investment.

Property development

Property development investing effectively means you are investing in something that doesn’t exist. Property development represents the potential of a building that hasn’t yet been built, and the possible value of its sale. This means that investors are required to take a bit of a leap of faith from the outset, and pledge their money to a property developer or broker in the hope that they will be able to create a profitable building.

Of course, sometimes these investments don’t succeed due to financing running out, demand disappearing, the bankruptcy of the developer or key suppliers, or a global pandemic. If the development never happens, investors may not be able to recoup their money. However, if the building plans go well, early investors can make handsome returns of around 20 per cent or more.

Cryptocurrency

These headline-grabbing assets are decentralised, cryptographically generated and distributed through secure blockchain technology. Since the creation of Bitcoin in January 2009, the market has exploded in value with investors able to freely buy crypto tokens on digital exchanges and use them for day-to-day transactions.

It is important to understand that cryptocurrency is a novel product and currently operates in a market that is very volatile and subject to disruption from regulation, technical innovation, and influence from prominent public figures and individuals within the crypto space. Any investment should be underpinned by deep knowledge of the token and its place in the digital ecosystem, and comprehensive awareness and application of your online security.

How to assess your high-risk investments

High risk strategies require significant knowledge about the sector and being able to confidently respond to opportunity and protect against volatility. This type of investing strategy should only be undertaken by experienced investors and those who are fully braced, and practically prepared to weather losses and utilise gains.

That doesn’t mean mere mortals are precluded from dabbling in higher risk investments. It simply means allocating a very small percentage of net worth – typically 5% or less – to riskier investments while building up a larger capital base and more experience.

The best protection from losses is the creation of a diversified portfolio, which includes a portion of high-risk, medium-risk and low-risk investment options.