A lot of investors have the mindset that they are have a low, medium or high risk tolerance when deciding whether or not to partake in an opportunity to put their hard earned capital into and be paid back hopefully more than they initially vested. Seldom people will consider themselves as high risk as that particular personality type and the investing mentality differ because the typical investor is likely conservative. That’s why they think of tomorrow instead of just living for today! But in this article I will explain why it may be wise to have some super high risk investments in your portfolio.
High Risk = High Return
In many of my previous articles I have written about ROI, risk tolerance and hedging, so if I will not digress in explaining those concepts again. Simply put high risk pays more, period! So to illustrate an extreme example if you have an ROI of 5% vs 25% the time it takes to double your money compounding that return according to the rule of 72 is 14 years vs 3… quite a contrast! So think of high risk investments are a time booster and a way to supercharging your growth for your portfolio.
Favorable Risk Compensation
A lot of people will say “I’d never take a high risk venture as it has more chance that I will lose my money.” While this is true to some extent I’ll illustrate my point with an analogy with a side bet on the popular game of craps in the casino. The odds of hitting a pair of 1’s on two dice (also referred to as snake eyes) is 1 in 36. Now that is a long shot if I ever saw one, but if someone offered me 50 to 1 on that bet I would take it every time because over the long run I have the odds on my side. And just like the crown molding and marble floors in the casino prove, when you have the advantage of probability on your side the house ALWAYS wins!
Hedging with Knowledge Advantages
When taking on any type of investment I would assess it with a percentage in terms of risk. This process makes it easier to determine if the return is worthwhile after I subtract opportunity cost which I equate to the average return for the safest investment I could alternately put my capital into (usually the GIC rate.) After that I see how else the percentage will be altered via market knowledge, overall analysis current economic market factors (interest rates, economic cycle, ect) and the rationality of the investment. Putting a number instead of a feeling to the risk factor is one of the keys to my investing success, and I’d highly advise any investors to weight decisions based on numbers vs emotional analysis.
In summary there is quite a workload when you are dealing with analysis of capital ventures and potential risk vs return. Higher risk is not necessarily bad risk as long as you view the venture with a probability of success vs amount of return received for undergoing the risk. After the rigorous research, rewards are higher ROI’s vs amount risk taken and that is a coveted prize that any mathematical investor should strive to attain in all avenues of wealth building.