We all now follow the cliché of letting our money work for us. This has given rise to countless investment schemes that could be highly risky if not well examined. Over the months, helping people invest their money wisely has helped me realize that human beings naturally want more. However, the first rule of investment is: the higher the risk, the higher the returns. In this post I will share with you 5 basic signs of high-risk investments.
What to consider before investing
Every investment option has a risk component attached which would only vary in plans. Before investing, there are three basic things to first put into consideration.
- Your personal risk tolerance: This is for the sake of your blood pressure. Would you like it low, medium, or high risk? Remember, the higher the returns, the higher the risk.
- The records of that investment: This is why you should never get involved in any new “money-doubler”. At this point, you should also be sure if the institution offering the returns is solid, has a regulatory body, or can be sued. There is something called due diligence, do it!
- Risk and potential return balance: Is the risk worth the potential return on investment (ROI)? There should be a balance in both coupled with the maturity period. This could include measuring your investment’s risk level.
There are several ways to measure your investment risk level, some of which are Standard Deviation, Bond Risk, Beta, Value at Risk (VaR), R-squared, and Conditional Value at Risk (CVaR. They involve various calculations and are unfortunately not the focus of this post.
Identifying High-Risk Investments
Generally, if your investment can drop in actual value by 20-30%, it is a high-risk investment already; asides from the possibility of losing all your funds. Therefore, looking at the most percentage that could be lost with a particular investment portfolio helps you measure the risks.
Below are 5 basic signs of high-risk investments:
- Time Pressure with very high returns: you see that financial advisor that promises you an amazingly high ROI and then tells you to buy now before the offer lapses? Yes, that; just know that something fishy is going down. I rest my case on that.
- Limited slots or investment opportunities: investments are like prescriptions, they should attend to your needs, and not just for keeping and making free money.
- A celebrity bought it: a client’s investment options and its details should be confidential. However, it is okay to buy if a celebrity has tested and trusted it and it’s not just for a sales pitch. Most celebrities have the millions to lose and not you.
- Zero credibility: no background information, no historical data, no regulatory body, no contract document, just run!
- Your instincts are warning: some sales pitches can be so breathtakingly convincing. Have your guards on because we all have that gut feeling that tells when something is too good to be true.
Finally, keep in mind that the inflation rate should not be higher than your annual percentage yield (APY), otherwise, your money would lose purchasing power. Naira, for example, has greatly decreased in value over the past year and the inflation rate for March 2021, according to the Consumer Price Index report from the National Bureau of Statistics (NBS), rose to 18.17% from 17.33% recorded in February 2021. This represents 0.82% points higher than the February figures.
Investment is the way; however, invest wisely and in doing that, I hope that this post helps.