Time horizon and risk tolerance each play a significant role for investors when determining how to allocate their investments. High return investments come with higher levels of risk than low-risk investments do.
When looking to increase wealth, investors can decide between low-risk investments paying a modest return or aim for larger profits with high return investments. Those with a higher tolerance for risk and workers still concentrating on building their nest egg for retirement are in a better situation to handle riskier portfolios, as long as they remember to diversify. Investors need to remember to do their homework and look around for kinds of accounts that fit both their long- and short-term goals.
High Return Investments
- Currency Trading
- Foreign Emerging Markets
- High Yield Bonds
- Initial Public Offerings (IPOs)
- Investing in Options
- Leveraged Investments
- The Rule of 72
- Venture Capital
Types of High Return Investments
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Conservative investors and those closer to retirement are often more comfortable appropriating a greater percentage of their stock portfolio to safe investment options. This is also ideal for investors saving for short- or intermediate-term goals. Here are nine high return investments to consider:
1. Currency Trading
Forex trading, as Currency trading is sometimes called, isn’t for beginners. Investing and currency trading does require a higher level of expertise, as the quick-paced changes with exchange rates create a higher-risk environment that could quickly overwhelm sentimental and newer investors and traders.
Those investors that are able to handle the increased pressure of currency trading should look for patterns in specific currencies prior to investing to avoid additional risks. Currency markets are connected to each other, so it’s standard practice to short one currency at the same time as going long on another to protect your investment from losses.
Trading on forex markets doesn’t have the same margin requirements as traditional stock markets do, which makes it even riskier for investors hoping to enhance their financial gains further.
2. Foreign Emerging Markets
A country with a growing economy presents an attractive investment opportunity. Investors are able to purchase ETFs representing a growing sector of stocks, or the government sectors stocks or bonds, from the country experiencing the hypergrowth. This was the case with China for the years 2010 through 2018. Bouts of economic growth aren’t common events, so, while risky, they provide investors with a completely new set of stocks to invest in to beef up their personal portfolios.
The greatest risk surrounding foreign emerging markets is that the extreme growth time period may be shorter than investor estimations, resulting in poor performance. The political environment in these countries experiencing economic growth can also quickly change, modifying the economy that previously supported innovation and growth.
3. High Yield Bonds
Whether issued by a high-debt company or foreign government, high yield bonds can provide investors with outrageous returns, if they can handle the risk of potentially losing their investments. These instruments can be especially appealing compared to current bonds offered by governments in lower interest rate environments.
It’s important for investors to recognize that high-yield bonds, boosting 15%-20%, have a chance of being junk. The original consideration in which several instances of reinvestment may double the principal should be compared against the probability of a total loss of the investment. However, not every high-yield bond fails, and they have the potential to be quite lucrative.
4. Initial Public Offerings
Some IPOs, like Snapchat’s in mid-2017, draw a great deal of attention, skewing valuations and judgments offered by professionals on short-term returns. Professionals offer valuations for short-term returns. Other lower-profile IPOs can provide investors an opportunity to buy shares while a company is extremely undervalued, resulting in high short- and long-term returns after a correction in the company’s valuation occurs. Many IPOs fail to produce high returns, if any return at all, which was the case with SNAP in 2017.
On the other hand, a cloud communications company, Twilio Inc. (TWLO), went public in June 2016 with an IPO share price of $15 and raised $150 million. Twilio was up 90% in its third day of trading and 101% by mid-December.
IPOs are risky. Despite efforts made by companies to disclose information to the public in order to receive the IPO green light from the SEC, there’s still an increased degree of uncertainty as to if a company will complete the necessary tasks to push the company forward.
5. Investing in Options
Options can offer investors who are attempting to time the market high rewards. Investors who buy options have the ability to buy a commodity or stock equity at a specific price within a set date range. If the price of a stock doesn’t turn out to be as desirable during these dates as the investor initially predicted, they don’t have to buy or sell the stock option.
This type of investment is specifically risky due to having to place time requirements on the sale or purchase of stocks. Professional investors generally discourage trying to time the market, making options either rewarding or dangerous.
6. Leveraged Investments
Investors looking to make money may use borrowed funds to increase an investment’s potential return. It’s possible to achieve two or three times an average return with leverage, but with an equal risk on the downside.
There are several leveraged products available, including exchange-traded funds (ETFs), having double or triple leverage. For example, investors can buy a triple leveraged S&P 500 ETF offering three times the index return. This also means they risk losing three times their investment if the market heads downward. Even more important, returns of leveraged ETFs are determined by the index’s daily returns, so investors risk losing a great deal of money in just one day.
Real estate investment trusts, or REITs, provide investors high dividends in exchange for governmental tax breaks by investing in pools of residential or commercial real estate.
Based on the underlying real estate venture interest, REITs are subject to swings due to the current state of the real estate market, developments in the overall economy, and levels of interest rates. The extremely fluctuating nature of the real estate industry results in REITs being risky investments.
While the potential dividends offered by REITs can be significant, there’s also a notable risk on the initial principal investment. REITs offering 10% to15% dividends are also the riskiest.
8. The Rule of 72
While not a short-term strategy, the Rule of 72 is a tried and true way to determine how long it will take a given investment to double based on a fixed annual rate of interest. Investors divide 72 by the annual rate of return to obtain an approximate estimate of how many years it will take an initial investment to double.
For example, the Rule of 72 stipulates if an individual invests $1 at an annual fixed interest rate of 15%, it will take 4.8 years (72/15 = 4.8) to increase to $2.
9. Venture Capital
The future of startup companies looking for investments from venture capitalists is especially uncertain and unstable. While most startups fail, a few gems are able to provide high-demand services and products the public needs and wants. Even with a desirable startup product, bad location, poor management, and poor marketing efforts can all deter the success of a new company.
Very high minimum investments are usually required with venture capital investments, a challenge for many investors. Part of the risk associated with venture capital is the low transparency in the management’s ability to complete the required functions of supporting a business. Most startups are fueled by good ideas from individuals who aren’t business-minded. Additional research is definitely needed by venture capital investors to securely access a brand-new company’s viability.
While, in some cases, high return investments can result in lucrative returns, they also include a unique set of risks. While the risks are relative, the investments above require a combination of education, experience, and risk management. Schedule a free online training session today with Raging Bull’s team of investment experts to learn more about high return investments and to build your investment portfolio.