Are you wanting to generate the best possible returns on your investment and aren’t scared of volatility? We look at which products might be suitable to higher-risk investors – and what you need to know.
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What is higher-risk investing?
A higher-risk investor is someone who wants a far better return than they can earn from banks, building societies or other low-risk strategies.
For some, the goal will be to accumulate as much wealth as possible to hit long-term investment goals, such as funding a carefree retirement.
For others, it will be more of a game. They will have already made a fortune and can now afford to take more of a gamble without worrying if they suffer losses.
Then there is a third type of individual who wants to embrace higher risk opportunities but only with a certain percentage of their overall portfolio.
They will generally have the core of their money in safer, income-generating assets, and then look to add in a few more exciting investments.
This is often referred to as the core-satellite approach and can be a good way to balance out the need to make decent returns, with the requirement not to lose everything.
Whichever investor category you fall into, it’s important to acknowledge that higher-risk investing in any form is not for the faint-hearted.
While the potential return from high-risk investments is often much higher than deposits or inflation, there is a greater chance of capital loss.
As the name suggests, this investment strategy comes with an increased possibility of losing your initial investment, without any realistic chance of getting it back.
It means prospective investors need a higher risk tolerance as they’ll be invested in areas that lower-risk investors usually avoid,
They will also need to have a longer-term investment horizon, which is often defined as being at least five to 10 years, according to Darius McDermott, managing director of FundCalibre.
“We believe having a long-term mindset and a focus on regulated investments are crucial to high-risk investing,” he said. “They can also tolerate steep market falls due to their longer time horizon.”
Investment options, possible returns & more
Okay, so now we understand the concept behind higher-risk investing, what asset classes are best suited to these needs?
Theoretically, any investment can be high risk.
For example, you may be tempted to put money into start-up companies or venture capital funds that invest in such businesses.
The risk of losing everything will be high, given the fact that thousands of start-up businesses end up failing. However, pick a winner and you could be in the money.
It’s a similar story with investing in companies that are floating on the stock market, which means they’re making shares available to the public.
Buying its stock at an early stage and holding onto the shares as the company grows can give you fantastic long-term returns.
Putting money into Microsoft or Apple years ago would have seemed pretty speculative and risky – but those early investors have been richly rewarded over the years.
Investing in shares (equities) is the most popular route for higher-risk investors, according to Ben Yearsley, director of Fairview Investing.
“Equities over the long run should deliver 7-10% per annum,” he said. “The more you have in higher risk areas the more you could make over a 5-10 year period, however, the ride will be bumpier.”
Of course, not all equities are the same. For example, some well-established areas closely monitored by analysts won’t see significant price rises or positive surprises.
“Adventurous investors will probably have more specialist and overseas investments, such as tech or biotech exposure, and higher weights to Asia, emerging markets or smaller companies,” he added.
How to get involved: practical examples
You can opt for a gung-ho approach of putting together your own portfolio of exciting companies that are expected to enjoy spectacular growth.
However, a more sensible approach is to opt for an investment fund with a more aggressive style as you’ll also benefit from the manager’s knowledge and experience.
According to FundCalibre’s Darius McDermott, high-risk investors look for asset classes that have been proven to considerably outperform over time or where there is untapped potential.
“Typically, high-risk investments can be found in various sectors and asset classes, including global smaller companies, emerging markets and early-stage technology,” he said.
Among the funds he currently favours is abrdn Global Smaller Companies.
This portfolio invests in smaller companies from around the world in the expectation that they tend to outperform larger companies over the long term.
Another fund suggestion is Invesco Asian. McDermott likes this fund’s focus on companies where the market is underestimating earnings growth.
He also pointed out that the stocks selected by its manager, William Lam, are chosen with a three-year investment horizon. This gives the share price time to appreciate to a fair value level.
Dzmitry Lipski, head of funds research at ii, highlighted the Amati UK Listed Smaller Companies fund as one to consider.
“For investors in UK smaller companies, it has been a difficult few years,” he said. “Returns from this sector have lagged their global counterparts, prolonging the poor sentiment around UK equities.”
However, there are signs of improvement.
“A recent uptick in performance, along with the continuing trend of share buybacks and takeover approaches, suggests the tide may be turning for this unloved area of the market,” he added.
He also likes the Fidelity China Special Situations Trust (FCSS), which could stand to benefit from finding attractive opportunities that have been overlooked.
“The Chinese investment environment has been volatile, due to property sector stress, regulatory environment and weak post-Covid macro data,” he said.
Lipski also believes FCSS has performed well over time.
“FCSS has provided investors an attractive annualised return of 9% over 10 years, twice that of its benchmark and a testament to the trust’s capacity to generate superior returns over time,” he said.
* None of the above constitutes financial advice. Consider taking financial advice before making investment decisions and accept that you should never invest money that you can't afford to lose.