In this article:
- 5 High-Return Investments With High Risk
- Low-Risk Investments Worth Considering
- The Bottom Line
Investing is one of many ways to make your money work harder for you. The goal is to net eventual returns, and there's a link between an investment's risk level and reward. Higher-risk investments usually have the potential for greater returns, and vice versa. When people talk about high returns, they're usually referring to investments that net higher-than-average financial gains.
Building a diversified investment portfolio is a critical part of long-term financial wellness, and high-return investments such as stocks may be more likely to increase your wealth year after year. Here is a rundown of high-risk investments that could render high-returns.
5 High-Return Investments With High Risk
Some investors have pulled in huge returns with high-risk investments, but it's important to remember that past performance never guarantees future returns. Each involves some degree of unpredictability, which makes them volatile by nature. Here are five types of high-risk, high-return investments:
1. Cryptocurrency
Cryptoassets are considered extremely risky, though there is the potential for significant gains. For instance, the price of Bitcoin (the most well-known cryptocurrency) jumped from $29,864 in July 2021 to $67,802 in November—a 127% increase in just four months. However, value tends to swing widely without much notice. As of January 2022, the price had dipped back down to a low of around $35,000.
This relatively new investment vehicle is both unpredictable and largely unregulated when compared with other securities. There are also inherent cybersecurity risks in crypto investing.
Cryptocurrency is unique in that it's a fully virtual business, and coin value appears to be in constant ebb and flow. It still represents uncharted waters for investors, which is why crypto is still considered a riskier investment than stocks.
2. Individual Stocks
Stock investing is often a risky but necessary part of growing your investment portfolio. From 2001 to 2020, the average annualized return on the S&P 500 was 7.5%, according to J.P. Morgan. Meanwhile, bonds came in at just 4.8%. But unlike bonds, individual stocks are considered volatile as it's virtually impossible to predict winning stocks and time the market just right.
Most experts agree that investing early gives you a longer time horizon and is one of the best ways to hedge stock market risk. Exploring mutual funds and exchange-traded funds (ETFs) is another strategy. They consist of small shares of different kinds of securities, including stocks, bonds and other assets. This provides some built-in diversification and helps reduce risk.
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3. Initial Public Offerings (IPOs)
An IPO occurs when a private company first starts offering stock shares to the public. Doing so allows them to raise capital. IPOs can trigger a whirlwind of hype and media attention, which can inflate expectations and cloud an investor's judgment. If you do decide to invest in an IPO, you agree to buy stock shares at the initial offering price.
Getting in isn't always easy, as some brokerage firms require investors to meet certain asset requirements or trading frequencies to participate in an IPO. Either way, IPOs are risky. For every business that takes off after its IPO, there are others that peter out—which could lead to major losses for shareholders. On the flip side, investors could make out well if they buy up shares of a business that ends up thriving. When Tesla announced its IPO in 2010, it began trading at just $17 per share. In late January 2022, that number was over $950.
4. Venture Capital or Angel Investing
There are multiple ways to fund an early-stage business. If you're an accredited investor (meaning you have adequate income and assets), you could explore venture capital. Venture capitalists typically work for a firm or fund that invests large amounts into startups and other potentially lucrative companies.
Angel investors usually invest in companies directly or with a private group, providing capital and mentorship in exchange for an ownership stake in the company. Angel investors typically invest smaller amounts than venture capitalists, but both are experienced investors who have significant knowledge about growing and profiting from newer companies with strong growth potential.
Risk comes with the territory—there's no way to know for sure which startups will succeed and which will fail—but high returns are definitely a possibility. In early 2021, venture capital funds recorded an internal rate of return of 19.8%, according to financial data company Pitchbook.
5. Real Estate
There are many ways to invest in real estate. You can purchase residential properties and earn income renting to tenants, or you can "fix and flip" a property for a quicker potential profit. Commercial real estate is another option, allowing investors to buy properties to rent out to businesses. In any of these examples, you may be able to capture the equity you've built in the property and see a nice return when you sell it—but nothing is ever guaranteed. The real estate market in general can be unpredictable, and future profits are never a sure thing.
There are also upfront costs when buying an investment property. This includes your down payment, closing costs, taxes and insurance. Maintenance and repairs can add up quickly too. Real estate investment trusts (REITs) are considered a safer and less expensive way to get into real estate investing without ever buying actual properties. Most are publicly traded companies that own real estate portfolios containing several different assets. Investors can purchase stock, and the money a REIT brings in is put toward income-generating residential or commercial real estate. They're also required to return 90% of their taxable income to their shareholders by way of dividend payments.
Low-Risk Investments Worth Considering
Finding safe investments with high returns isn't always easy. While returns are typically higher with riskier investments, there are certain lower-risk assets that are worth exploring. They're usually considered safe because losing your invested amount is much less likely. What's more, many can provide more consistent returns than high-risk investments.
Returns will depend on the investments you choose and how much you invest. Here are four types of low-risk investments that may be worth your attention:
1. High-Yield Savings Accounts
A high-yield savings account earns interest and is an ideal place to keep an emergency fund because it is liquid—meaning you can access the money easily when you need it. What makes high-yield savings accounts appealing is that they generally earn more interest than a traditional savings account. Some have interest rates, known as annual percentage yields (APYs), as high as 0.5% with no minimum deposit, though you can expect caps on monthly electronic withdrawals and transfers. High-yield savings accounts allow you to keep your emergency fund safe while netting a return in the process.
2. Money Market Accounts
This type of low-risk investment earns interest just like a high-yield savings account. But money market accounts are unique in that they allow even easier access to your money. It isn't uncommon to have a checkbook or debit card attached to your account. These options streamline withdrawals and provide more liquidity than savings accounts—while possibly earning slightly more interest.
You may get a better return with a high-yield savings account, but the flexibility of a money market account can be appealing. Your financial institution might restrict how many electronic withdrawals and transfers you can make in a statement cycle, however, so check the terms before you sign up.
3. Certificates of Deposit (CDs)
When it comes to low-risk investments, a certificate of deposit (CD) might be worthwhile, especially if you don't mind giving up access to your funds for an extended period of time. With a CD, your money is essentially locked up for a predetermined length of time. When that period ends, you'll recoup your investment along with interest. CDs do not offer much in the way of liquidity—you'll be hit with a penalty fee if you choose to tap your funds early.
They earn more interest than traditional savings accounts, but less than many high-yield funds. Some five-year CDs earn around 1%. However, their structure can keep your investment safe and discourage you from making impulsive withdrawals.
4. Series I Bonds
A Series I bond is a high-return investment that blends two different interest rates. One is fixed, the other fluctuates with inflation. Together, they're referred to as the composite rate. Series I bonds that are purchased between now and April 2022 will have a composite rate of 7.12%. U.S. Treasury Inflation-Protected Securities (TIPS) are also indexed for inflation. That means the principal value of your investment is adjusted so that you won't lose money.
The Bottom Line
There's no such thing as a guaranteed loss or return, but understanding risk can help you determine which investments are right for you. Diversification is often the best path forward. It seeks to balance your portfolio with both high- and low-risk investments to help you meet your long-term financial goals.
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