5 High-Risk Investments With Low Potential Returns

Investing always involves some level of risk, but not all risks are worth taking. High-risk investments with low potential returns can lead to significant losses without offering the reward that typically justifies taking such risks. Understanding these high-risk low-return opportunities can help you identify and avoid these pitfalls.

A financial advisor can help you analyze investments to determine whether the risk is worth it for your portfolio.

What Are High-Risk Low-Return Investments?

High-risk low-return investments are financial products or strategies that carry a greater chance of losing value or failing to provide expected returns. These investments are known for their significant volatility, meaning that their prices can fluctuate dramatically in a short period. While they can offer the potential for substantial returns, these returns are not guaranteed and investors may experience significant losses.

Several factors contribute to the high risk of these investments. Market volatility plays a major role, as prices can be influenced by a range of factors, including economic conditions, geopolitical events, and shifts in investor sentiment. This unpredictability makes it difficult to forecast the value and performance of high-risk investments.

Lack of information or transparency can further increase the risk. Investors might not have access to complete or accurate data about the investment, complicating efforts to assess its true value or potential for success. Low liquidity is another factor, as it can make it challenging to buy or sell the investment without affecting its price or experiencing delays.

Additionally, high-risk investments often involve speculative strategies that depend on market timing or predicting future trends, which can be inherently uncertain. These strategies may include betting on the success of a new company or product, engaging in complex financial instruments like derivatives , or investing in emerging markets with unstable political or economic conditions.

5 High-Risk Low-Return Investments

While some investments can seem like the opportunity of a lifetime, the risk could be high enough to make you think twice before putting your money in. Here are five that you may want to consider carefully and perhaps avoid:

1. Penny stocks are shares of small companies that typically trade for less than $5 per share. These stocks are highly speculative and often lack liquidity , making them challenging to buy or sell without affecting the price. Additionally, they are prone to manipulation and fraud due to the lack of regulation and transparency. The potential for growth is low compared to the risk of significant loss, especially if the company does not perform as expected or goes bankrupt.
2. Junk bonds, also known as high-yield bonds , are issued by companies with poor credit ratings. While they offer higher interest rates to compensate for the increased risk, the chance of default is much higher than with investment-grade bonds . Investors may face substantial losses if the issuing company fails to meet its debt obligations, leading to a situation where the returns do not justify the risks involved.
3. Leveraged exchange-traded funds (ETFs) aim to amplify the returns of an underlying index, often by using financial derivatives. While they can provide impressive gains during favorable market conditions, they are highly volatile and unsuitable for long-term investing . The compounding effect of daily rebalancing can lead to significant losses over time, especially in unpredictable or sideways markets, making them a high-risk investment with uncertain returns.
4. A binary option is an options contract that allows an investor to make a wager that will either net them a fixed amount or result in a loss of the entire investment. Due to their simplicity, binary options attract many novice investors, but the reality is that they are more akin to gambling than investing, with a high likelihood of loss and low potential returns.
5. Venture capital in startups involves investing funds into early-stage companies with high growth potential in exchange for equity. While investing in startups can be lucrative, it is also inherently risky due to the high failure rate of new businesses. Many startups do not survive beyond the first few years, and venture capital investments may yield little or no return if the company fails.

Why Should You Be Cautious of High-Risk Low-Return Investments?

Investors should be cautious of high-risk low-return investments because these can lead to significant financial losses that may outweigh any potential benefits. One of the main reasons for exercising caution is capital preservation . High-risk investments can quickly erode your principal if they perform poorly, leaving you with diminished savings and fewer resources for future opportunities.

Lack of predictability is another factor that makes high-risk low-return investments dangerous. Their outcomes are often uncertain, influenced by volatile market conditions, economic shifts and company-specific issues. This unpredictability can lead to stress and anxiety, particularly for investors who rely on their portfolios to meet specific financial goals, such as retirement or education funding.

Moreover, emotional decision-making can play a significant role in high-risk investing. The promise of high returns can lead to impulsive decisions and irrational behavior, causing investors to overlook the potential downsides. This cognitive bias can result in poor investment choices that jeopardize long-term financial health.

High risk low return investments should be approached with caution and limited exposure within an investment portfolio. Diversifying your assets across various investment types with different risk levels can help mitigate potential losses and achieve a more balanced portfolio.

Bottom Line

High-risk investments with low potential returns can be a major challenge for investors aiming to build wealth and achieve financial stability. Though they may seem appealing, they often involve high risk and uncertainty. Understanding these investments and their potential drawbacks is important for making informed decisions about where to invest your money.

Tips for Investing

• A financial advisor can help you create a financial plan that can balance both risk and return. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you want to figure out how your portfolio will perform over time, SmartAsset's investment calculator can help you get an estimate.

Photo credit: ©iStock.com/Pinkypills, ©iStock.com/Liubomyr Vorona, ©iStock.com/fizkes

The post 5 High-Risk Investments With Low Potential Returns appeared first on SmartReads by SmartAsset .