Everyone loves reading about high risk investments. It makes sensational news. The highs and lows of high risk investing make for good stories. Hence why there is a huge amount of click-baity articles on high risk investments. There also is an entire movie genre dedicated to financial hijinks (think Wolf of Wall Street). These days I can’t surf two websites without coming across some article about crypto-currency (another high-risk investment). I’ve even been thinking of making my own crypto-currency just to cash in on the madness! I call it a ‘SamCoin’. It’s worth $1,000,000,000,000,000,000 a coin – because I said so.
But seriously, everyone thinks that they’re an expert on high-risk investment because of the ‘glamour’ associated with it. To cut through the hyperbole, I’ve written this down-to-earth piece about high risk investments. This article today will look at some high risk investments in better detail so that you can determine if they suit YOUR financial goals.
High risk investment #1: Individual Stocks/Shares of companies
Play the share market – get rich! This was a very popular saying back in the 90’s and early 2000s. Many people wanted to learn the tricks of investing in the share market so they could get rich fast. A lot of these people did so without understanding what the share market is. A lot of people lost their money during the 1998 and 2008 crashes – hence why it is a high risk investment. To get a better idea of how share markets work, check out this article I wrote.
How does share investing work?
The basic idea is that when you buy a share in a publicly listed company – you own a share of it (hence the name). So if I wanted to buy a share in Apple Inc, I’d buy it at its current trading price and, hey, presto! I’m a proud Apple Owner (just the company, not their non-third party friendly products!). Of course, I would just be the owner of one of its several million shares, but still an owner nonetheless.
Individual company shares are risky because their price is largely driven by supply and demand and speculation. Speculation means the pricing of an share (or any investment) purely through ‘gut feel’. Speculators with lots of money can often buy or sell enough of the share to influence its price. Fortunately for the share market, the price of the share will eventually reflect the actual performance of the company, over a period of time. So the general idea in buying individual shares is to:
- Find a good performing company
- Wait for its share price to drop to a level below what it should ACTUALLY be
- Buy it low
- Sell it high
- Repeat
And that’s it really. The main challenge comes in determining what the ACTUAL share price should be. The second challenge after that is determining when is the ABSOLUTE best time to buy or sell the share. Countless books, articles, podcasts, youtube videos and reddit boards have been dedicated to both these challenges. And everyone has a different idea on how to do things. I’m not going to start a debate now, so I won’t go into details here. If you are interested in buying individual stocks, I can recommend reading Phil Town’s #1 Rule of Investing. It’s a great beginner’s introduction to individual share investment. Then, you can determine if share markets suit your financial goals.
If buying individual stocks is too risky for your taste, you can always invest in an index fund. But we’ll save that for a different article.
High risk investment #2: Property
“But property is LOW risk!,” I hear you say.
Well, yes, in the sense that property prices hardly EVER go down. Also property is a very finite resource where demand almost always outstrips supply. Common sense tells us that as the global population grows, so too will the demand for property. In economic terms, property is what we call an ‘inelastic’ commodity – one who’s price doesn’t change much.
If you can jump on the property ladder and buy up in good locations, property investments are great! There is a reason why many retirees keep a property portfolio as part of their retirement plan. Property tends to be stable over the long term and you can make good returns from rental and capital appreciation (the value of the property increasing) over time.
BUT!
Well, it’s a pretty big ‘but’. (chuckles)
Why are properties a high risk?
Property are a high risk investment because the barrier to entry for the property market is generally quite high. Using a local example, here in NZ, the property market has been experiencing years of phenomenal growth – which means that it is increasingly harder for regular folks to get in. This is why property ownership for many kiwis (my family included) is a long-term financial goal. Saving up for a house deposit is increasingly hard especially as new lending regulations come into play. And then there is the challenge of getting a loan as a first home buyer (especially if you are a new business owner!! ARGH!).
Fortunately, if you already have a home, it’s easier to buy into the property market. You just have to, you know, use your own house as collateral. No biggie.
But let’s say you’re one of the financially lucky ones who are already on the property ladder (I salute you!). Being a landlord is tough work. You need to keep your tenants healthy, ensure your properties are up to scratch, ensure that they comply with regulations, etc. etc. etc. Depending on which country you live in, tenancy laws may favor your tenants over you, as the landlord. And even after all that, if you get a tenant who thrashes the house, comes straight from hell or converts your home into an animal shelter – you’re going to be tens of thousands of dollars out of money bub.
High Risk Investment #3: Crypto-currency
This one is a no-brainer. Out of all the risky investments out there, crypto is by far the most talked about high risk investment. But first – a crash course in crypto:
Crypto-currency burst onto the investment scene in the early 2010s. Back then bitcoin was a really fringe topic and only tech-nerds ever put money into it. Over time, public sentiment about crypto changed when there was a huge surge in interest in the currency – which was being touted as a ‘safe, independent and global’ currency. As interest mounted, so did the value of bitcoin – until it sits at the stupidly high levels it is at today.
All crypto-currencies are built on the blockchain. This is essentially a system which ensures that each unit of crypto currency created has its own unique digital signature and an electronic ledger exists for all transactions relating to that piece of crypto currency. Hence, you could say that each crypto-coin is a unique and finite asset which will continue to appreciate in value over time.
In theory anyway.
Why are crypto currencies so volatile?
In reality, crypto currencies are some of the most volatile assets you can invest in. The main reason for this is that unlike stocks and property, crypto currencies have no tangible, real-world assets that back them. When you buy a company’s share, you are invested in that company and ultimately, the price of the share is affected by the company’s performance. If you buy property, you buy building and land which you can see, touch, hug, kiss and ultimately sell or rent. But by buying crypto, you’re essentially buying an idea. An idea who’s value is 100% driven by what other investors perceive to be its value.
This means that crypto currencies are more vulnerable to manipulation strategies like pumping and dumping – made popular by billionaires like John McAfee (RIP) and Elon Musk. The idea is that a big buyer can buy (pump) heaps of crypto to drive up the price, and then sell it all (dump) to benefit from the increased price.
This also means that there is no objective way to determine the ACTUAL worth of a crypto investment. With shares, you can analyse the company’s performance to determine it’s value. For properties, you can analyse its location, accessibility and foot traffic (for commercial properties) to determine its value. With crypto, you can, uh, rely on the trusted word of techbros who have ABSOLUTELY have nothing to gain from telling you to buy/sell crypto (#heavysarcasm).
But hey, I’d be blind to deny that people have made money from crypto currencies – and they probably will continue to do so. But being a risky investment and all, lots of people have lost their money as well. Personally – I would only buy crypto with money I’m not afraid to lose. Because that is what aligns with my financial goals. Will crypto work for you? Only you can answer that question based on your financial goals.
That’s all I can fit into this article for now. Next time let’s talk about investing in index funds, otherwise known as ‘lazy investing’!