When you’re investing to build wealth, it seems like a no-brainer to choose the option with the highest potential to grow your money.
However, while high potential earnings are attractive, wise investing decisions aren’t based on these numbers alone. There are other things you must know before investing in any asset.
Here are the things to keep in mind when considering investments with large potential profits.
What to expect from investments with high potential returns
Most deals that offer big rewards often come with a catch. It’s important to read the hidden print and understand the best- and worst-case scenarios so you won’t be caught off-guard.
Here are some common characteristics of investments that offer higher returns:
1. Higher risk
In general, the higher your potential to earn, the more risk you’ll encounter. If you’re eyeing high-return investments, you should know that there’s an increased possibility of not earning as much as you expect. At the worst, you might even lose some or all the money you put in.
To attract investors, a high-risk investment product needs to offset its risk with higher possible returns. On the other hand, low-risk investments provide safety and so they’re less inclined to offer higher earnings.
2. Increased volatility
High-risk investments are usually more volatile than other options. Their value can drastically rise and fall within short periods.
Investing in a highly volatile asset could grow your money at faster rates. However, it could also lose its value just as quickly. This is something to consider if you’ll need your money sooner.
You’ll likely face a loss if you must withdraw at a time when prices are down. Investments with high volatility might be better for a long-term strategy. That way, they’ll have more time to grow and bounce back from downturns.
This is why having an emergency fund is highly recommended before you even start investing. It will keep you from withdrawing from investments too early because of an emergency.
Should you choose a high-risk, high-reward investment?
You might be wondering how much risk is acceptable when investing. Answer these questions to help you determine if a high-risk investment is right for you:
- Does it suit your risk tolerance?
Your risk profile will tell you the amount of risk you can handle. High-risk, high-return investments are often suited to Aggressive investors.
What if you’re a Moderate or Conservative investor? You can still aim for acceptable growth by investing to the highest level your risk profile allows.
- Is it the best option to help you reach your goals?
Revisit your reasons for investing, such as the amount you want to have and when you need it. Let’s say you want to have enough money to put a downpayment on a house in 5 years.
Check an investment’s potential returns over a 5-year period to see if it can help you with your goal. If it would require taking on more risk than you’re comfortable with, look for less-volatile alternatives which suit your investor personality.
There might be another option that’s less risky but can still allow you to achieve your goal. That option might be a better choice since it will allow you to minimize risks.
With effective risk management and the right knowledge, you’ll have better chances of reaching your money goal on time.
