In today’s economic climate, it’s easy to be tempted by the promise of high-return investments — ones that promise to double your money in a short period of time.
But you should be aware that when an investment is advertised as “high-return,” the message between the lines is that it’s also high risk.
In other words, not only is the high return on your investment not guaranteed, but you’re actually more likely to lose your money than double it.
Although high-risk-high-return investments may appear attractive, it’s best to approach them with caution — especially if you’re new to investing.
If you’re considering jumping into a high-risk investment, you’ll need to understand the potential risks and pitfalls. As well as the inherent risks involved in high-risk-high-return investments, the global economy remains unstable in the wake of the COVID-19 pandemic and the Russian invasion of Ukraine.
African economies bounced back from the pandemic in 2021, but the African Development Bank expects the ongoing fallout from the Russia-Ukraine conflict to hinder growth in African markets in the coming years. This could make high-risk investments even riskier.
This article will cover the main types of high-risk investments and offer advice for would-be African investors.
What is a high-risk investment?
As a potential investor, you need to be able to quantify the risk you may be running before putting money into an investment.
There are certain characteristics that will help you determine the level of risk an investment carries. Here are three of the most common.
1. They promise higher returns
When an investment opportunity promises to double your investment within a short amount of time, you know it’s high risk.
While it is possible to double an investment quickly, it’s far from the norm. While lower-risk investments may double over longer periods of time, it can be tempting to jump on an opportunity that promises high returns quickly.
Be aware that if you do so, there’s no guarantee that you’ll get the promised return on investment. In fact, you’re more likely to lose all your money than to double it — which is why these opportunities are considered high-risk and are most suitable for experienced investors.
2. It’s hard to access your money
In general, high-risk investments offer lower levels of liquidity than mainstream investments. This essentially means that your money is tied up in the investment, and it’s difficult to access it — especially at short notice.
Some investment providers even charge fees or penalties for withdrawal, so you could lose even more than just your original investment. This means even if you see your returns plateauing or falling, there’s often little you can do to prevent your losses.
3. They lack regulatory protection
In each country, regulatory bodies exist to protect investors from loss. For example, in Nigeria, the Central Bank of Nigeria is responsible for regulating banks and financial institutions, while in Uganda, the Capital Markets Authority regulates market activity.
But high-risk investments are often not covered by these regulatory bodies because they fall outside traditional financial institutions — for example, investments in cryptocurrency, commodities, wine, and student accommodation.
Before making a high-risk investment, check to see if it’s covered by your country’s regulations. If not, you should only invest what you can afford to lose — because there’s a good chance you will.
Popular types of high-risk investments
Forewarned is forearmed, so now, let’s take a look at three of the most common high-risk investments and how to spot them.
1. Mini-bonds
Mini-bonds allow you to invest in a company that pays you back at a fixed interest rate after a set time period.
The companies offering mini-bonds are usually startups or early-stage companies that are having trouble securing investments from traditional investors — making this type of investment high-risk.
Plus, you’re locked into the investment for a set time frame, so you won’t be able to access your money if you need it.
2. Structured products
Structured products are pre-packaged investments where the return on investment depends on a set of predetermined rules, such as the maturity date, coupon date, or capital protection level.
This means that instead of receiving money when the value of the asset goes up, you only get payouts when the agreed-upon terms are fulfilled.
3. Cryptocurrencies
Bitcoin and other cryptocurrencies are an increasingly popular type of high-risk investment. Cryptocurrency is a decentralized digital currency not owned or regulated by any government or financial institution, and crypto transactions are recorded on a non-editable online ledger.
This online ledger is both the strength and the Achilles heel of cryptocurrencies. Crypto transactions can’t be changed or reversed, meaning that if you accidentally transfer crypto to the wrong person, you won’t be able to get it back.
The value of cryptocurrencies is highly volatile and can fluctuate wildly, which, combined with the lack of regulation, makes it a high-risk investment. You need to know exactly what you’re doing before you put your hard-earned money into crypto.
How to prepare for high-risk investments
If you’re feeling brave and ready to jump into high-risk investments, here are three ways to prepare.
1. Do your research
Before you invest in a product, research everything you can about it. Look up similar products (for example, ones from the same industry) and see how they’ve performed.
Most importantly, don’t rely only on someone else’s opinion — especially if they’re a stranger on the internet. Influencers today endorse all kinds of investments, and while most may be well-meaning, it’s a good idea to verify their claims before you part with your money.
2. Define your goals
Whether it’s a high-risk or low-risk investment, knowing how much money you need and what you’re going to do with it can keep you from going off the rails with your investments.
Are you saving up for retirement? Do you want to pay back your university tuition fees? Whether it’s as serious as paying off a crushing loan or as breezy as saving up for your dream vacation, you should know why you’re putting in your money and how much you hope to get back.
3. Have the stomach for risk
If you’ve made up your mind to invest in high-risk products, you need to be able to tolerate the risk. Research suggests that losing money is psychologically twice as painful as gaining money is pleasurable — this is known as loss aversion in behavioral economics.
Human beings are fundamentally risk-averse creatures, so in making high-risk investments, you’re negotiating with a very stubborn part of your neural wiring.
Make sure you have the fortitude to hold on to your money even when you’re making a loss and set a stop-loss — a point of no return beyond which you sell and cut your losses.
Invest wisely with Chipper Cash
With the ongoing global turmoil set to keep impacting African economies in the coming years, the number of investment providers offering high-risk investments is likely to increase.
These investments can be tempting, especially if you’re facing personal financial challenges. But before plunging into a high-risk investment, make sure you proceed with caution and evaluate all the risks carefully. Ideally, you should practice with lower-risk investments and gain experience before turning your hand to high-risk ones.
And if you’re dead set on investing, it’s important to use a safe, reliable platform — like Chipper Cash — to invest in crypto and other assets.
Chipper Cash is a leading financial tool that helps Africans manage their money quickly, effectively, and reliably. With Chipper Cash, not only can you buy and sell stocks and cryptocurrency, but you can also transfer money instantly to nine countries across Africa and the world. Download the app from App Store or Google Play and start investing today.