Many people are searching for a technical definition of a “high-risk” investment. Ultimately they will find that there is no official definition for high-risk and in fact most common investments are fairly high-risk. Many modern investment strategies are predicated on the returns of recent decades, which represent a fairly small sample space. What may seem low-risk, based on the past few decades may actually turn out to be high-risk.
Real Estate and Stocks
Both real estate and stocks have come into vogue in the last 50 years as can’t-miss investments. However both can exceed many people’s threshold of risk. While real estate becomes fairly safe if it is also providing a basic need—housing—real estate speculation is often based on the false belief that “real estate always goes up.” Claims that stock market results average 11% per year are also based on a few decades of results. During this period, both investments were advocated as safe investments so more and more people entered each market, creating great returns and continuing the notion that they were safe. However, all bubbles can and will come to an end and these “safe” investments may come crashing down.
Hedge Funds, Currency Exchange and More
These are the types of investments that usually come to mind when people are visualizing high-risk investments. However, these might better be classified as ultra-high-risk investments. They require a considerable amount of due-diligence and monitoring to protect your investments. Many of these investments require that people entering them are classified as “sophisticated investors.” Think carefully on this requirement and why it exists before jumping to get involved with them.
True Safe Investments
The safest investments are those that bear very little risk. FDIC insured deposits are a good example. These are backed by the US government and if the government is defaulting on loans you have a lot of problems on your hands. Real estate is often a fairly safe investment if you are living in the real estate you buy and if you are buying within your means. Think of the primary purpose as satisfying the need for housing and any “investment income” as a nice bonus. This kind of hedging is the basis for truly safe investing.
The pursuit of high-risk investments should be considered carefully by anyone and usually avoided by those without considerable experience and insight.