When an investment vehicle offers a high rate of return in a short period of time, investors know this means the investment is risky.
Given enough time, many investments have the potential to double the initial principal amount, but many investors are instead attracted to the lure of high yields in short periods of time despite the possibility of unattractive losses.
Leveraged Oil ETFs
Leveraged oil ETFs are typically subject to high-volume trading activity and are known for high levels of volatility. For these reasons, the ETFs can offer investors exponential returns or losses if trades are made due to pesky emotions. The price of oil can be equally volatile, and for this reason, trading activity reflects an amplified level of volatility in its prices.
An example of this can be seen in the ProShares UltraShort Bloomberg Crude Oil ETF with a one-year return from 2014 to 2015 of 193%. Alternatively, the VelocityShares 3x Long Crude Oil ETN ETF has a three-year loss of 79.71%.
Options
Options offer high rewards for investors trying to time the market. An investor who purchases options may purchase a stock or commodity equity at a specified price within a future date range. If the price of a security turns out to be not as desirable during the future dates as the investor originally predicted, he does not have to purchase or sell the option security.
This form of investment is especially risky because it places time requirements on the purchase or sale of securities. Professional investors often discourage the practice of timing the market and this is why options can be dangerous or rewarding. (For more, see Why Options Trading Is Not for the Faint of Heart
Initial Public Offerings
Some initial public offerings (IPOs), such as Snapchat's in mid-2017, attract a lot of attention that can skew valuations and the judgments professionals offer on short-term returns. Other IPOs are less high-profile and can offer investors a chance to purchase shares while a company is severely undervalued, leading to high short- and long-term returns once a correction in the valuation of the company occurs.
IPOs are risky because despite the efforts make by the company to disclose information to the public to obtain the green light on the IPO by the SEC, there is still a high degree of uncertainty as to whether a company's management will perform the necessary duties to propel the company forward.
Venture Capital
The future of startups seeking investment from venture capitalists is particularly unstable and uncertain. Many startups fail, but a few gems are able to offer high-demand products and services that the public wants and needs. Even if a startup's product is desirable, poor management, poor marketing efforts and even a bad location can deter the success of a new company.
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. Many startups are fueled by great ideas by people who are not business-minded. Venture capital investors need to do additional research to securely assess the viability of a brand new company.
Foreign Emerging Markets
A country experiencing an industrial revolution or a new political regime that encourages development can be an ideal investment opportunity, as it has been for China over the past ten years. Spurts in economic growth in countries are rare events that, though risky, can provide investors a slew of brand new companies to invest in to bolster personal portfolios.
The greatest risk of emerging markets is that the period of extreme growth may last for a shorter amount of time than investors estimate, leading to discouraging performance. The political environment in countries experiencing economic booms can change suddenly and modify the free market or capitalist economy that previously supported quick growth.
REITs
Real estate investment trusts (REITs) offer investors high dividends in exchange for tax breaks from the government. The trusts invest in pools of commercial or residential real estate.
Due to the underlying interest in real estate ventures, REITs are prone to swings based on developments in an overall economy, levels of interest rates and the current state of the real estate market, which is known to flourish or experience depression. The highly fluctuating nature of the real estate market causes REITs to be risky investments.
Although the potential dividends from REITs can be high, there is also pronounced risk on the initial principal investment. REITs that offer the highest dividends of 10% to 15% are also at times the riskiest. (For more, see: How To Analyze Real Estate Investment Trusts).
High Yield Bonds
Whether issued by a foreign government or high-debt company, high yield bondscan offer investors outrageous returns in exchange for the potential loss of principal. These instruments can be particularly attractive when compared to the current bonds offered by a government in a low-interest rate environment.
Investors should be aware that a high yield bond offering 15 to 20% may be junkand the initial consideration that multiple instances of reinvestment will double a principal should be tested against the potential for a total loss of investment dollars. However, not all high yield bonds fail, and this is why these bonds can potentially be lucrative.
Currency Trading
Currency trading and investing may be best left to the professionals, as quick-paced changes in exchange rates offer a high-risk environment to sentimental traders and investors.
Those investors who can handle the added pressures of currency trading should seek out the patterns of specific currencies before investing to curtail added risks. Currency markets are linked to one another and it is a common practice to short one currency while going long on another to protect investments from additional losses.
Trading on the forex market does not have the same margin requirements as the traditional stock market, which can be additionally risky for investors looking to further enhance gains. (For more, see Top 6 Questions About Currency Trading).
Bottom Line
While in some cases these investment choices can provide lucrative returns, they are marred by different types of risks. While risk may be relative, the listed investments require a combination of experience, risk management, and education. If you do not know what you are doing, it is likely that your money invested will quickly vanish, or your risk of ruin will be exceedingly high.
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