The Factors To Consider Before Making A Risky Investment

Invest your money the right way, and your overall risk should be minimal. However, there are reasons for taking on riskier investments. Maybe you want to beef up your alternatives, for example. Whatever your reason, consider these factors beforehand.

Australian money photo by Shutterstock

Over at The Simple Dollar, Trent Hamm specifically talks about investing in collectables. Any kind of collectable is probably going to be a risky investment, simply because the market for any specific item can be fickle.

But there are a valid reasons why people decide to invest in things such as beanie babies, baseball cards, or even gold coins. For one, they might enjoy collecting these things as a hobby. Also, the return on these items can be incredibly tempting.

But before diving into any kind of risky investment, you should consider some important factors. Hamm offers a few solid bits of advice:

don't invest anything you're not comfortable completely losing. If losing that money that you've invested would put you in any sort of financial difficulty, don't invest... This should be money that, if it were to completely vanish, wouldn't upset your life...

don't invest more than 10% of your total investing money into anything risky. That way, if you take a total loss, your overall investments are only dropping 10% at most.

never, ever invest in anything risky if you plan to just buy-and-hold. This type of investment only really works if you buy and sell due to constant changes in the market. A baseball player dies or is elected to the Hall of Fame? It's a good time to sell their card... Economic news indicating a spike in inflation down the road? You may want to buy some gold.

Like any investment, you want to give it some thought. Consider the decision from a few different angles, and then do what's right for you. Hamm offers more advice at the link below.

Some Thoughts on Riskier Investments [The Simple Dollar]


Comments

    When considering investments, be aware of risk asymmetry.
    This means that the opportunity for making more money doesn't increase in proportion to the risk. For example the share market can crash very fast and hard. However it doesn't experience the reverse: equally dramatic and sustained upward surges.
    You should be conscious of this when obtaining professional financial advice. It is mathematically difficult to analyse asymmetrical risk, so it is common practice in the financial industry to assume symmetrical risk. For example the share market is assumed to be symmetrical, despite the above example. And the advisors you meet are likely to assume symmetrical risk.
    Taking on a risky investment on the assumption that this comes with a matching opportunity for large payoffs has cost a lot of people a lot of money.

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