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High Yield Investment: A Look at Risk and Reward

 

By Daniel Asikpo Sep 14, 2023

 

Investments seem to be the best strategy to deploy when one aims to double his earnings or expand his means. Of course, it comes at a risk. Though all investments may be risk-affirmed, some have stood out to be riskier than others with substantial returns on investment(ROI).

 

 

As the case may be, this investment has continued to gain massive adoption by investors who wish to rip greater profit from their investment capital. This article aims to educate on high-yield investments, the risk involved and the potential rewards if certain strategies are implemented.

 

Meaning of High Yield Investment

 

A high-yield investment refers to an investment with high potential risk that offers a relatively higher rate of return or a good return on investment (ROI) compared to the usual lower-risk investment like bank savings, government bonds or blue-chip bonds.

 

It is an exchange of high risk for high rewards involving assets or opportunities that provide above-average interest rates, dividends, or capital appreciation potential. While some boast of overturning risk through their financial education level to always make this profit, I can also add that high-risk investment is 30% against a 70% chance of success.

 

Asset class related to high-yield investment

 

Stocks:  This asset class has high-growth stocks and dividend-paying stocks that offer attractive returns but carry higher volatility.

 

Bonds: Mostly referred to as junk bonds due to their high yield offer of higher interest rates but are riskier than investment-grade bonds.

 

Peer-to-Peer Lending: Involving in peer-to-peer lending platforms can be a good investment as they offer higher interest rates. Here, one needs to be weary of borrowers' default risk associated with such platforms.

 

Options and Derivatives: This high investment requires expertise. Though they can be highly profitable, the complexity of options and derivatives can pose a big risk.

 

Real Estate Investment Trusts (REITs): Most are high-yield investments that can provide good returns through dividends and property appreciation but are prone to changing economic situations.

 

Dividend Funds: You can also find some Mutual funds or ETFs that focus on dividend-paying stocks that can provide income and potential growth.

 

Startups or Private Equity: Investing in startups or private companies can be very lucrative with high-yield returns. The uncertainty of a startup business reaching its peak makes it riskier as it requires huge capital.

 

Risk Associated with High Yield Investments

 

Market Volatility: Many high-yield assets are known to be very volatile, high-yield stocks and bonds, can experience significant price fluctuations, which can affect the overall value of the investment.

 

Default Risk: Companies associated with high-yield bonds have a higher likelihood of defaulting on their debt, potentially leading to loss of principal.

 

Interest Rate Risk: Rising interest rates can negatively impact the value of high-yield bonds and other interest-sensitive investments.

 

Lack of Liquidity: Some high-yield investments constitute a slower market due to lower trading volumes. This makes it challenging to buy or sell such assets at desired prices.

 

Credit Risk: Low credit risk is already a red-flagged investment. Lower credit ratings increase the risk of credit downgrades or bankruptcies.

 

Inflation Risk: Inflation tampers with the market flow of High-yield investments as they may not be able to keep pace. This inflation erodes the potential purchasing power over a period of time.

 

Recommended  Strategies for High-Yield Investments

 

Though they are already of high risk, investors are advised to always make strategic decisions when venturing into these set of assets; 

 

Interest rate strategy: A good investor should be sensitive as high-yield bonds are sensitive to changes in interest rates. They rapidly fall in response to a rise in interest rates. Be mindful of the interest rate environment when investing in high-yield bonds.

 

Credit Risk strategy: There is always a high chance that the borrower ( High-yield companies in this context) may not be able to pay their credit obligation. Understanding the issuer's creditworthiness and the likelihood of default before investing is key.

 

Diversification: Avoid putting all your investment in one asset class, especially one showcasing higher yield. Your quest for a substantial compounding result may bring a compounding loss. By spreading your investments across various asset classes, sectors, and geographic regions, you can reduce the impact of poor performance in one area on your overall portfolio. Diversifying your high-yield investment portfolio is crucial for managing risk to mitigate losses

 

Liquidity strategy: Most high-yield investments lack liquidity. This makes it challenging to buy or sell these assets quickly. The flexibility of such a market is key to investors. Check to know the liquidity characteristics of your investments and the potential impact on your ability to access your funds, especially in times of uncertain market conditions.

 

Risk Tolerance: Assess your risk tolerance and align your high-yield investments accordingly. Due to its volatility, it's essential to only allocate a portion of your portfolio to them that you can afford to lose.

 

Market Conditions strategy: Strive to know certain market conditions that can tamper with the investment returns. High-yield investments can be influenced by economic conditions, market sentiment, and geopolitical events. Stay updated about broader market trends.

 

Income vs. Capital Appreciation: Though high-yield investment is not an advised long-term investment, channel your strategy to your financial goals, whether it's to generate regular income or seek compounding returns in a long-term run. High-yield investments can provide income through dividends or interest payments, or they can focus on capital appreciation.

 

Active Management: Be on guard at all times by constantly monitoring your portfolios. Active management can be crucial when dealing with high-yield investments. Do well to make regular reviews and adjust your portfolio to respond to changing market conditions.

 

Professional Advice: High-yield investment requires genuine financial advice from professional bodies. Tap into this experience by consulting firms who know the pros and cons of such asset classes. Their expertise helps to dilute the complexity behind this asset class.

 

In conclusion, I will say, that though every investment has its potential risk, some are riskier than others. We all know the rules, invest what you can afford to lose. Your pursuit of financial stability can be a success if you strategize or lead to your impending doom. It is always advisable to trade high-yield assets with caution to it's ocean of risks.