Investments have varying levels of risk that typically track with the potential reward they can offer. For instance, higher-risk securities typically offer a higher return potential, and vice versa. While a diversified portfolio often contains a mix of high- and low-risk investments, it can make sense for investors with a high tolerance for risk to focus a little more on the former.
While it's important to do your research and evaluate different investment options before you buy, some of the best high-risk investments include things like initial public offerings, venture capital, real estate investment trusts and more. Here's what to know about each.
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1. Initial Public Offerings (IPOs)
An initial public offering (IPO) occurs when a company sells shares of its stock to the public for the first time. For the most part, access to IPOs is limited to institutional and high-net-worth investors, but some brokers give individual investors the opportunity to buy shares of a company before they hit a stock exchange, even if they don't have much to invest.
Between 2012 and 2021, annual returns for IPOs ranged from -42% to 62%, with eight out of the 10 years generating positive results. However, prices can be extremely volatile right out of the gate. If you're looking to make a quick buck and sell within the first days or weeks—a process known as "flipping"—of the stock going public, your broker may limit your ability to participate in future IPOs.
2. Venture Capital
Venture capital involves investing in startups in their early stages. In exchange for your investment, you'll typically get equity in the company. If the company grows and performs well, your investment could generate a significant return—funds often target a range of 20% to 35% annually.
However, it can take several years for a startup to grow, gain market share and generate a profit, and there's a significant risk that you won't ever get the return you're hoping for or even get your initial investment back.
To get access to most venture capital funds, you need to be an accredited investor. Common requirements include having a net worth over $1 million (excluding your primary residence) or earning $200,000 or more ($300,000 if you're married) for at least the past two years.
Venture capital funds also typically have high minimum investment requirements, ranging from hundreds of thousands to millions of dollars—though some offer minimums as low as $1,000.
3. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are companies that own income-producing real estate and related assets. Many REITs trade on major exchanges, so you can buy and sell them like a stock, but some are privately traded. Returns can vary based on the types of properties held by the REIT.
By law, REITs must pay out 90% of their annual taxable income in the form of dividends, making them a good option for investors who are looking for consistent income. Additionally, you can also benefit from share price increases, similar to a stock. While returns can fluctuate, REITs generally perform better than the stock market.
REITs are considered risky because they're subject to factors that don't affect other types of investments as strongly, namely the real estate market and interest rates. However, some REITs can minimize risks by investing in a broad range of property types.
4. Foreign Currency
Called forex trading for short, investing in foreign currency involves buying and selling currency from other countries around the world. Unlike other types of investments, anyone can trade foreign currency around the clock because there's always a forex market open somewhere around the world.
The goal of forex trading is to generate a return on fluctuations between a pair of currencies. For example, if you use U.S. dollars to buy Japanese yen, you're hoping that the value of the yen will strengthen relative to the dollar, allowing you to trade back for more U.S. dollars than your initial investment. Wide swings in value for one or both currencies could yield significant returns.
Like other foreign investments, forex trading can be risky because it exposes you to geopolitical, governmental and economic factors affecting more than one country. With different ways to trade, investing in foreign currencies can also be complicated. To mitigate some of the risk and research, you could invest in foreign bond funds or currency exchange-traded funds.
5. Penny Stocks
Penny stocks, also called microcap stocks, are a type of stock offered by smaller companies that don't trade on major stock exchanges. Instead, they trade on what's called over-the-counter exchanges. Just about anyone can invest in penny stocks through a brokerage firm.
Most investors consider a stock to be a penny stock if it trades for less than $1 per share, but some go as high as $5 per share. But with such low stock prices, even a small uptick could generate a sizable return.
That said, penny stocks are risky because they're offered by relatively new companies with little or no track record of performance. They also don't have the same requirements for transparency compared to stocks that trade on major exchanges, making it difficult to get a good assessment of the investment opportunity.
Finally, penny stocks typically trade at much lower volumes compared to major stocks, so even if you want to sell your position, there's no guarantee someone will be willing to buy it.
Frequently Asked Questions
The riskiest investments are often speculative in nature. While there are investment opportunities in each asset class that could result in you losing some or all of your money, cryptocurrency is often considered to be among the riskiest types of investments.
The technology behind digital currencies is still relatively new and difficult for many to understand. Additionally, regulations for the crypto market are still evolving, and the industry has been rife with scams, fraud and security problems.
As a result, prices can be incredibly volatile, even for more established currencies.
The prospect of earning a great return on your investment is tempting. But to determine whether any high-risk investment is suitable for you, it's important to understand your experience, financial situation and overall investment strategy.
Here are some indicators that you can afford to have a high risk tolerance:
- You have a high net worth or income and can meet minimum investment requirements.
- Your financial situation is stable, and you can afford to absorb heavy losses.
- Your primary investment goals, such as retirement, are in good shape.
- You're an experienced investor and have fully researched your opportunities.
- You're working with a financial advisor who can help you manage your risks.
If you consider yourself to be a low-risk investor or you simply want to diversify your portfolio with both high- and low-risk investments, there are plenty of ways to earn a decent return without a lot of risk.
That said, there's no single safe investment that consistently outperforms all the others. If you're looking to minimize risks while maximizing your return, you could compare current returns for options like Treasury securities, certificates of deposit, savings bonds, municipal bonds, high-quality corporate bonds and preferred stocks.
The Bottom Line
If you have a high risk tolerance and your financial situation gives you some flexibility to take on more risk, there are plenty of high-risk investments that can potentially give you a better return on your money.
With each option, however, it's crucial that you thoroughly research and understand how it works and the specific risks you're taking. You'll also want to take advantage of the different tools and resources that investment firms and brokers provide and possibly even consult with a financial advisor.
With each new investment you consider, think about your overall investment strategy and determine whether it's a good fit for what you want to accomplish.