High Risk Investing
High risk investing has a simple definition. You make big bets. You make a lot of money if you are right. You lose a lot of money if you are wrong. You need a substantial tolerance for risk you are going to use a high risk investment strategy.
Risk Tolerance
Risk tolerance is based on two simple concepts. How big of a loss are you willing to accept to earn higher returns? For example, would you accept a potential 20% loss if you had a 50% probability of earning 30%? Or, are you willing to accept lower returns if that would reduce your risk of big investment losses?
Speculative Investing
The investment process is based on intensive research and prudent decision-making that earns competitive returns that are consistent with your tolerance for risk. Speculation occurs when your investment decisions are based on limited research and the desire for enormous gains. For example, you are seeking a 300% return from a penny stock.
The Wall Street Casino
The highest risk strategies are more about speculation than investing. It is a lot like betting big dollars at your local casino. Risky investments and strategies include:
- Day trading
- Market timing
- Start-ups
- Penny stocks
- Small companies with no earnings
- Small companies in emerging markets
Paladin Says:
The mathematics of high risk investing work against you. For example, you invest $1.00 and it declines to 50 cents. You have suffered a 50% loss. Because you have a reduced asset base (50 cents) you need a 100% rate of return to break-even before you consider the impact of investment expenses and inflation. Depending on the amount of elapsed time, your breakeven point may be closer to 120%.