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8 High-Risk Investments That Could Double Your Money

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.

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.

Key Takeaways

  • Finding an investment that enables you to double your money is almost impossible and would certainly involve taking on risks.
  • However, there are some investments that might not double your money, but do offer the potential for big returns; while they provide risk, the risk is manageable, as they are based on fundamentals, strategy or technical research.
  • They include the Rule of 72, options investing, initial public offerings (IPOs), venture capital, foreign emerging markets, REITs, high-yield bonds and currencies.

The Rule of 72

This is definitely not a short term strategy, but it is tried and true. The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. 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.

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 price of a security 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 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. If you want to learn more about how options work, read our tutorial or sign up for our Options for Beginners course on the Investopedia Academy.

Initial Public Offerings

Some initial public offerings (IPOs), such as Snapchat’s in mid-2020, 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), a cloud communications company that went public in June of 2020, raised $150 million at an IPO offer price of $15 a share.   In its third day of trading, Twilio was up 90 percent and by mid-December was up 101 percent. 

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.

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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. Venture capital investments usually have very high minimums, which can be a challenge for some investors. If you are considering putting your money into a venture capital fund or investment, make sure to do your due diligence.

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 2020.   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 economy that previously supported growth and innovation.

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.

While these investment choices can provide lucrative returns, they are marred by different types of risks. While risk may be relative, these investments require a combination of experience, risk management, and education.

High Yield Bonds

Whether issued by a foreign government or 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.

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. If you want to learn more, check out our tutorial or take our Forex for Beginners course on the Investopedia Academy.

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.

Low-Risk vs. High-Risk Investments: What’s the Difference?

Low-Risk vs. High-Risk Investments: An Overview

Risk is absolutely fundamental to investing; no discussion of returns or performance is meaningful without at least some mention of the risk involved. The trouble for new investors, though, is figuring out just where risk really lies and what the differences are between low risk and high risk.

Given how fundamental risk is to investments, many new investors assume that it is a well-defined and quantifiable idea. Unfortunately, it is not. Bizarre as it may sound, there is still no real agreement on what “risk” means or how it should be measured.

Academics have often tried to use volatility as a proxy for risk. To a certain extent, this makes perfect sense. Volatility is a measure of how much a given number can vary over time. The wider the range of possibilities, the more likely some of those possibilities will be bad. Better yet, volatility is relatively easy to measure.

Unfortunately, volatility is flawed as a measure of risk. While it is true that a more volatile stock or bond exposes the owner to a wider range of possible outcomes, it does not necessarily affect the likelihood of those outcomes. In many respects, volatility is more like the turbulence a passenger experiences on an airplane—unpleasant, perhaps, but not really bearing much of a relationship to the likelihood of a crash.

A better way to think of risk is as the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance. If an investor buys an asset expecting a 10% return, the likelihood that the return will be below 10% is the risk of that investment. What this also means is that underperformance relative to an index is not necessarily risk. If an investor buys an asset with the expectation that it will return 7% and it returns 8%, the fact that the S&P 500 returned 10% is largely irrelevant.

Key Takeaways

  • There are no perfect definitions or measurements of risk.
  • Inexperienced investors would do well to think of risk in terms of the odds that a given investment (or portfolio of investments) will fail to achieve the expected return and the magnitude by which it could miss that target.
  • By better understanding what risk is and where it can come from, investors can work to build portfolios that not only have a lower probability of loss but a lower maximum potential loss as well.

High-Risk Investment

A high-risk investment is one for which there is either a large percentage chance of loss of capital or under-performance—or a relatively high chance of a devastating loss. The first of these is intuitive, if subjective: If you were told there’s a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% percent chance that the investment will not earn your expected return, almost everybody will agree that that is risky.

The second half, though, is the one that many investors neglect to consider. To illustrate it, take for example car and airplane crashes. A 2020 National Safety Council analysis told us that a person’s lifetime odds of dying from any unintentional cause have risen to one in 25—up from odds of one in 30 in 2004.   However, the odds of dying in a car crash are only one in 102, while the odds of dying in a plane crash are minuscule: one in 205,552. 

What this means for investors is that they must consider both the likelihood and the magnitude of bad outcomes.

Low-Risk Investment

If investors accept the notion that investment risk is defined by a loss of capital and/or under-performance relative to expectations, it makes defining low-risk and high-risk investments substantially easier.

Low-risk investing not only means protecting against the chance of any loss, it also means making sure that none of the potential losses will be devastating.

Example

Let us consider a few examples to further illustrate the difference between high-risk and low-risk investments.

Biotechnology stocks are notoriously risky. Between 85% and 90% of all new experimental drugs will fail, and, not surprisingly, most biotech stocks will also eventually fail. Thus, there is both a high percentage chance of underperformance (most will fail) and a large amount of potential underperformance (when biotech stocks fail, they usually lose 95 percent or more of their value). 

In comparison, a United States Treasury bond offers a very different risk profile. There is almost no chance that an investor holding a Treasury bond will fail to receive the stated interest and principal payments. Even if there were delays in payment (extremely rare in the history of the United States), investors would likely recoup a large portion of the investment.

Special Considerations

It is also important to consider the effect that diversification can have on the risk of an investment portfolio. Generally speaking, the dividend-paying stocks of major Fortune 100 corporations are quite safe, and investors can be expected to earn mid-to-high single-digit returns over the course of many years.

That said, there is always a risk that an individual company will fail. Companies such as Eastman Kodak and Woolworths are famous examples of one-time success stories that eventually went under. Moreover, market volatility is always possible. CNBC noted that, though 2020 was historically one of the least volatile markets, 2020 saw wide swings when it was not even half over. 

If an investor holds all of their money in one stock, the odds of a bad event happening may still be relatively low, but the potential severity is quite high. Hold a portfolio of 10 such stocks, though and not only does the risk of portfolio underperformance decline, the magnitude of the potential overall portfolio also declines.

Investors need to be willing to look at risk in comprehensive and flexible ways. For instance, diversification is an important part of risk. Holding a portfolio of investments that all have low risk—but all have the same risk—can be quite dangerous. Going back to the airplane example, the Economist puts the odds of an individual plane crashing at one in 5.4 million, but nevertheless many large airlines have (or will) experience a crash.   Holding a portfolio of low-risk Treasury bonds may seem like very low-risk investing, but they all share the same risks; the occurrence of a very low-probability event (such as a U.S. government default) would be devastating.

Investors also have to include factors such as time horizon, expected returns and knowledge when thinking about risk. On the whole, the longer an investor can wait, the more likely that investor is to achieve the expected returns. There is certainly some correlation between risk and return and investors expecting huge returns need to accept a much larger risk of underperformance. Knowledge is also important—not only in identifying those investments most likely to achieve their expected return (or better) but also incorrectly identifying the likelihood and magnitude of what can go wrong.

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Which investments are the most and least risky?

All investments carry risk, and a lot of factors impact how they perform. Inflation, for example, is a bigger danger to bond investors than stock investors. Stocks, on the other hand, face greater liquidity risk (the risk of the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss) than do money market and short-term bond investments. Here’s how the big three investment classes rank:

Cash equivalents include certificates of deposit, Treasury bills, money market funds and similar investments. They typically earn lower returns than stock or bond investments but present very little risk to your principal. Cash equivalents may help you cushion your losses in the event of a downturn in the stock or bond markets. Keep in mind that money market funds, while considered safe and conservative, are not insured by the Federal Deposit Insurance Corporation the way certificates of deposit may be.

Bonds / Fixed Income Investments include bonds and bond mutual funds. They’re riskier than cash equivalents but are typically less risky to your principal than stocks. They also generally offer lower returns than stocks.

Stocks / Equity Investments include stocks and stock mutual funds. These investments are considered the riskiest of the three major asset classes, but they also offer the greatest potential for high returns.

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