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 thepossibility of unattractive losses.
Make no mistake, there is no guaranteed way to double your money with any investment. But there are plenty of examples of investments that doubled or more in a short period of time. For every one of these, there are hundreds that have failed, so the onus is on the buyer to beware.
- While finding investments that enable you to double your money seems almost impossible, any legitimate attempt would likely involve taking on a usual degree of risk.
- There are some investments that might not double your money, but do offer the potential for big returns.
- Some investment risks are manageable, as they are based on fundamentals, strategy, or technical research.
- Rule of 72, options investing, initial public offerings (IPOs), venture capital, foreign emerging markets, REITs, high-yield bonds, and currencies, are all manageable investment risks.
1. The Rule of 72
This is not a short-term strategy, but it is tried and true. The Rule of 72is a simple way to determine how long an investment will take to double, given a fixed annual interest rate. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3) = 2). If you have the time, the magic of compound interest and the Rule of 72 is the surest way to double your money.
2. Investing in 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 security price turns out to be not as desirable during the future dates as the investor originally predicted, the investor does not have to purchase or sell the option security.
This form of investment is precarious 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.
3. 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. Most IPOs fail to generate significant returns, or any returns at all, such as the case with SNAP.
On the other hand, Twilio Inc. (TWLO), acloud communications company that went public in June of 2016, raised $150 million at an IPO offer price of $15 a share. On its third day of trading, Twilio was up 90 percent and by mid-December was up 101%.
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.
4. Venture Capital
The future of startups seeking investment from venture capitalists is precarious and uncertain. Many startups fail, but a few gems can 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 assess the viability of a brand new company securely. Venture capital investments usually have very high minimums, which can challenge some investors. If you consider putting your money into a venture capital fund or investment, make sure to do your due diligence.
5. Foreign Emerging Markets
A country experiencing a growing economy can be an ideal investment opportunity. Investors can buy government bonds, stocks, or sectors with that country experiencing hyper-growth or ETFs that represent a growing sector of stocks. Such was the case with China from 2010-2018. Spurts in economic growth in countries are rare events that, though risky, can provide investors with a slew of brand new companies to invest in to bolster personal portfolios.
The most significant 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 economy that previously supported growth and innovation.
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.
While these investment choices can provide lucrative returns, they are marred by different types of risks.While risk may berelative, these investmentsrequire a combination ofexperience, risk management, and education.
7. High-Yield Bonds
Whether issued by a foreign government or a high-debt company, high-yield bonds can 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 junk, and 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.
8. 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.
Currency, or forex trading, as it is called, is not for beginners. The forex market allows for high leverage. Brokers offering 50:1 leverage is standard, which can be additionally risky for investors if not used appropriately.
What Are High-Risk Investments?
High-risk investments include currency trading, REITs, and initial public offerings (IPOs). There are other forms of high-risk investments such as venture capital investments and investing in cryptocurrency market.
What Is Forex Trading?
The forex market involves trading one form of currency for another, and it has different margin requirements for trades than the stock market. Forex can be a complex market for beginners to navigate.
Are Penny Stocks High-Risk Investments?
Penny stocks (often sold for $5 or under a share) may sound simple but they can become a high-risk investment if a trader is not experienced in trading over the counter. Penny stocks have a lack of liquidity or ready buyers in the marketplace due to the nature of the company and the small size of the shares. These stocks are known as speculative and if you overinvest in them, you stand to lose your investment, which makes them a potentially risky venture.
The Bottom Line
High-risk investments are not for everyone. These investments may have a high chance of loss coupled with the potential for high returns. While some high-risk investments are enticing, it may be advisable to do your homework. By building knowledge of what the risk is and how it can impact you financially, you may be able to include some higher-risk investments in your portfolio and continue to have holdings with a lower potential loss as well.
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The article delves into the inherent risks associated with investment vehicles promising high returns in a short time frame. While there's no guaranteed way to double your money, the author explores several investment options and strategies, emphasizing the importance of understanding and managing risks.
The Rule of 72:
- The Rule of 72 is a timeless strategy for estimating the time it takes for an investment to double, given a fixed annual interest rate.
- The formula (72 divided by the annual rate of return) provides a rough estimate, showcasing the power of compound interest over time.
Investing in Options:
- Options trading is discussed, highlighting the potential for high rewards but also emphasizing the time-sensitive nature of this strategy.
- The article suggests that timing the market through options can be precarious, as it relies on accurate predictions of security prices within specified time frames.
Initial Public Offerings (IPOs):
- IPOs are presented as high-profile events that can attract attention, affecting valuations and professional judgments on short-term returns.
- Examples like Snapchat's IPO and Twilio's success are used to illustrate the contrasting outcomes of IPO investments.
- The article discusses the uncertainty surrounding startups seeking investment from venture capitalists, acknowledging that while many startups fail, a few can offer significant returns.
- It points out the importance of thorough research into the viability of new companies and the risks associated with poor management.
Foreign Emerging Markets:
- Investing in countries with growing economies is presented as an opportunity, but the article warns of the rare and risky nature of economic growth spurts.
- Political changes in such countries are highlighted as factors that can suddenly modify the economic landscape, impacting investments.
Real Estate Investment Trusts (REITs):
- REITs are discussed as investment options that offer high dividends but are susceptible to economic fluctuations, interest rate changes, and the overall real estate market's state.
- High-yield bonds are portrayed as instruments with the potential for outrageous returns but also a high risk of principal loss.
- The article cautions investors to be aware that a high yield may indicate a risky investment.
- Currency trading is presented as a high-risk endeavor best suited for professionals due to quick-paced changes in exchange rates.
- Leverage in currency trading is emphasized, and the article recommends careful consideration of the risks involved.
Additionally, the article touches on related concepts such as the nature of high-risk investments, the forex market, and the risks associated with penny stocks. It concludes by advising that high-risk investments are not suitable for everyone, underscoring the importance of thorough research and risk management.
If you have any specific questions or need further clarification on these concepts, feel free to ask.