As an investor, it can be easy to fall into the trap of trying to build a portfolio that returns as much as possible for as little risk as can be taken. However, if you are seeking to earn truly generous returns on investment, you will need to accept and take risks. In the short term, this means you could see negative returns. In the long term, it is well established that high risk investments come with the highest rewards. That being said, not all risk is equal, and some types of high-risk portfolios are more likely to benefit you than others.
One of the simplest ways to convert your low-risk portfolio to a high-risk one is to significantly increase your investment in a single sector or industry. The potential return on investment will thus be proportionally increased, but so too will the risk, making this strategy dependent on truly understanding the industry in which you are investing as well as its place in the business cycle.
“It is important to have a good sense of market psychology and moods; overweighting an unpopular sector is not likely to boost returns,” writes CFA charterholder Stephen D. Simpson for Investopedia.
Startup businesses seeking investment from venture capitalists are especially unstable, and even those who have great ideas may fail as the result of poor management, marketing or other factors.
“Part of the risk of venture capital is the low transparency in management’s perceived ability to carry out the necessary functions to support the business,” Melissa Parietti writes for Investopedia. “Many startups are fueled by great ideas by people who are not business-minded.”
Yet investing in the right startup business can prove to be particularly lucrative. Picking out the winners is a matter of doing the research and properly assessing the viability of the new company. Emerging technology companies tend to be a good place to turn your attention.
High yield bonds
Often referred to as “junk bonds,” high-yield bonds are issued by companies or foreign governments with poor financial strength. In exchange for the possible loss of principal, they offer the potential for extreme returns compared to safer alternatives such as the bonds offered by a government in a low-interest-rate environment. The Balance’s Dana Anspach writes that most investors would find high-yield bond mutual funds to be attractive options for investment and diversification.
Real estate investment trusts
Real estate investment trusts are like mutual funds that own real estate, offering investors generous dividends in exchange for government tax breaks. They allow you to easily invest in a variety of real estate such as hotels, retail spaces, mortgages, storage and healthcare properties. However, because of the highly fluctuating nature of the real estate market, REITs represent great risk.
Parietti warns that REITs can change based on factors up to and including the current state of the real estate market and interest levels. REITs can be private or publicly traded and may own a broad or narrow portfolio of real estate, the details of which you will want to take into consideration when assessing the investment risk.
In the short term, high-risk investments are likely to prove less fruitful than low-risk investments. However, patience and smart high-risk investments can return far more in the long term. For the best results, make sure to consult a financial expert for help on planning your investment strategy.