High-Risk Investments: Yielding Big Returns Or Big Losses?

High-risk investments are those that may result in significant losses or gains for investors. They are typically associated with volatile industries or new, untested companies. Examples of high-risk investments include stocks, cryptocurrencies, venture capital, private equity, and options. The potential for high rewards also comes with a high chance of loss, so investors must be cautious and conduct thorough research before investing.

High-yield savings accounts

A high-yield savings account is a type of savings account that can pay up to 15 times the national average of a standard savings account. The interest rates on high-yield savings accounts can be 10 to 12 times higher than traditional savings account returns and up to 15 times the FDIC national average. Online banks tend to offer the highest rates.

When shopping for a high-yield savings account, compare factors such as initial deposit requirements, interest rates, minimum balance requirements, and fees. The interest rate on a high-yield savings account is variable and can change over time. It also allows you to withdraw money when you need it, although your bank may have withdrawal limits.

A high-yield savings account will likely comprise only a part of your overall financial portfolio. Determine how much cash to set aside according to your goals and budget. For instance, if your savings account is serving as an emergency fund, consider depositing at least three to six months' worth of living expenses and keeping it there until you need it.

The strategy may differ if you use a high-yield account to save up for a large purchase, such as a house, a car, or a vacation. In that case, you may want to use a high-paying savings account to help you protect your principal while applying interest earnings to your savings goal.

Having multiple savings accounts may help you more easily progress toward goals and keep your funds organized toward specific goals. Many banks allow you to open multiple savings accounts and even give them personalized nicknames.

While a high-yield savings account can be a great way to boost your savings, it's important to remember that the interest rate is variable. If the Federal Reserve lowers the fed funds rate, you might not earn the same interest rate as the previous month. If you want a stable, fixed interest rate, consider opening a certificate of deposit (CD).

In summary, a high-yield savings account can be a great way to earn a higher return on your savings while still having easy access to your money. However, it's important to remember that the interest rate is variable and can change over time. By comparing factors such as interest rates, fees, and minimum balance requirements, you can find the best high-yield savings account for your needs.

Money market funds

While money market funds are generally considered low-risk, there are still some potential downsides to investing in them. The income received from investing in a money market fund can fluctuate based on the yields available on the securities. Additionally, money market funds typically offer low returns compared to other investments, such as stocks or properties. There is also a chance that the returns may fall below the inflation rate, resulting in negative real returns for investors.

In summary, money market funds are a type of mutual fund that provides investors with a low-risk and highly liquid investment option. While the funds offer stability and security, there is still a possibility of losing money, and the low returns may not keep up with inflation.

Dividend-paying stocks

However, dividend-paying stocks are not usually leaders in growth. High-growth companies typically do not pay sizable amounts of dividends to their shareholders, even if they have significantly outperformed the vast majority of stocks over time. Growth companies spend more on research and development, capital expansion, retaining talented employees, and mergers and acquisitions. All earnings are retained and reinvested back into the company instead of being used to issue dividends.

There are two main ways to invest in dividend stocks: through funds—such as index funds or exchange-traded funds—that hold dividend stocks, or by purchasing individual dividend stocks. Dividend ETFs or index funds offer instant diversification, while investing in individual dividend stocks allows investors to build a custom portfolio that may offer a higher yield than a dividend fund.

When choosing dividend-paying stocks, it is important to evaluate the dividend yield, payout ratio, growth rate, and coverage ratio. A payout ratio above 80% or a dividend yield above 10% may indicate that the dividend is unsustainable. Chasing the highest dividend yields can be counterproductive; instead, look for dividends that grow consistently over time.

REITs

Real Estate Investment Trusts (REITs) are an excellent high-yield investment option, providing investors with the benefits of real estate exposure within a regular brokerage account. REITs are companies that own, operate, or finance income-generating real estate properties and are required to distribute at least 90% of their taxable income to shareholders as dividends. This makes them a popular choice for investors seeking regular income, with yields generally higher than the broader market.

There are three broad categories of REITs: equity, mortgage, and hybrid. Equity REITs operate like landlords, managing all aspects of property ownership, while mortgage REITs focus on owning debt securities backed by the property. Hybrid REITs combine these approaches, owning and operating real estate while also holding commercial property mortgages.

Publicly-traded REITs are the most common and offer better governance standards and transparency. They are also more liquid, allowing investors to buy and sell more easily than with actual properties. Public non-traded REITs are not listed on an exchange but can be purchased through specific brokers. They tend to be illiquid and harder to value. Private REITs are generally exempt from SEC registration and have additional risks and higher account minimums.

When investing in REITs, it is essential to consider the quality of the underlying assets and tenants. Well-managed REITs with durable tenants in sectors like grocery, convenience, or dollar stores can maintain high occupancy rates and increase dividends over time.

• Realty Income Corp. (O)
• National Storage Affiliates Trust (NSA)
• Annaly Capital Management Inc. (NLY)
• AGNC Investment Corp. (AGNC)
• W.P. Carey Inc. (WPC)
• Omega Healthcare Investors Inc. (OHI)
• Sabra Health Care REIT Inc. (SBRA)
• Apple Hospitality REIT Inc. (APLE)

Overall, REITs provide a straightforward way to invest in real estate, offering high yields, steady dividends, and potential for capital appreciation.

High-yield bonds

Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios. However, some high-yield bonds are "fallen angels", which are bonds that have lost their good credit ratings. Fallen angels are the bonds of previously investment-grade-rated corporations that have been downgraded due to factors such as high debt-to-equity ratios, missed bond interest payments, or even an accounting scandal.

When interest rates rise, the market value of high-yield bonds can decline as investors seek higher returns with newer bonds. However, rising interest rates can also benefit high-yield bonds as they often indicate an expanding economy, which means issuing corporations can benefit from increased spending and a lower risk of default.

Frequently asked questions