Understanding high-risk investments

High-risk investments – often advertised as high-return investments – should always be treated with caution. They’re only suitable for experienced investors who understand the risks and are prepared to lose all of the money invested.

High-risk investments (header)

What is a high-risk, high-return investment?

High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns. But if things go badly, you could lose all of the money you invested. And the chance of things going badly is higher.

Unfortunately, there’s not always a direct relationship between risk and reward – sometimes when you take a risk you don’t get any reward for it.

What we can say for sure is that if you’re looking for big payouts in a relatively short time period you’ll have to accept a disproportionately higher amount of risk.

While the product names and descriptions can often change, examples of high-risk investments include:

  • Cryptoassets (also known as cryptos)
  • Mini-bonds (sometimes called high interest return bonds)
  • Structured products
  • Land banking
  • Contracts for Difference (CFDs)

Characteristics of high-risk investments

They target a high rate of return

High-risk investments offer the prospect of returns that are potentially more attractive than those available from mainstream investments. But there’s no guarantee that high-risk investments will actually deliver high returns. In practice, the actual returns could be below those of mainstream investments.

By association, there’s a high chance of losing all your money

In fact, if you choose to invest in high-risk products then you must accept the very real risk of losing some, or even all, of your money. And with some high-risk investments, if the worst happened you could even end up not only with nothing, but actually owing money.

This makes high-risk investments unsuitable for all but the most experienced investors who fully understand the risks, as well as the opportunities, that high-risk investments involve and those who have the finances to absorb losses.

It’s harder to access your money if you need to

High-risk investments typically offer lower levels of liquidity than mainstream investments, so, particularly if something’s gone wrong and performance hasn’t met expectations, getting access to your money when you want may not be as easy.

High-risk investments are suitable for a minority of consumers, so are likely to be less actively bought and sold by investors than mainstream products.

Some high-risk investments – such as structured products or land banking schemes – may involve investment in assets that are themselves not actively traded. This could make getting access to your money at short notice much more difficult. Even if short notice access is available, the investment provider may charge you a fee or you may have to pay penalties.

Volatility

High-risk investments often see more volatility than their lower-risk equivalents. The value of high-risk investments tends to be very dependent on market confidence, something that can change significantly from day to day. Sentiment towards riskier assets can be particularly fragile during periods of economic uncertainty. So investors in high-risk products should be prepared for their investment’s value to be much more volatile compared to mainstream products.

The lack of regulatory protection

Regulation aims to make sure that consumers are treated fairly when they invest. But many high-risk investments are not regulated by us. So if you invest directly in high-risk investments – such as commodities, student accommodation and wine (among a range of others) – you are unlikely to have access to regulatory protection from the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS) if things go wrong.
 

What the FSCS and FOS do

 

Tempted by high-risk investments?

Here are some things to remember:

  • High-risk investments may seem more innovative and exciting than the kind of mainstream investments that everybody’s heard about already. However, high returns are by no means guaranteed and in practice they can sometimes produce lower returns than mainstream investments. What’s more, the risk of losing some or even all of your money is very real.
     
  • High-risk investments are unsuitable for all but experienced investors who fully understand both the risks and the opportunities associated with these investments.
     
  • You should put no more than 10% of your total net assets in high-risk investments, with the remainder diversified across a range of mainstream investments. Read our article about how diversification can work for your investments.
     
  • If you do decide to invest in high-risk investments of any kind, either directly or through a specialised fund, you must be prepared to lose all of your investment. And with some high-risk investments, if the worst happened you could even end up owing money.
     
  • When looking at high-risk investments, be especially wary of investment scams. The promise or suggestion of high returns can often be a sign of a scam, particularly if small print is used to try to minimise or hide risks. But some scammers may also list more realistic returns in an effort to seem more legitimate. Our ScamSmart page explains the warning signs of an investment scam and how to protect yourself.

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