There are lots of potential benefits to making some high-risk investments as they can yield larger than normal profits, however this also means that there can be larger losses and even more likely chances of such in some cases. ICOs for example are extremely high-risk investments due to the lack of custody and auditing of project funds. Although professional institutions are taking all measures to control ICOs and boost their transparency, there is still much to be done in the industry.

While the potential returns are high, so are the potential risks. For example, the prices of equities are volatile compared with other investment vehicles and can fluctuate erratically. Investments such as digital assets are considered risky because there’s no guarantee on your capital, or the prices of the underlying investments can fluctuate wildly at times based on factors beyond your control as an investor.

The threat posed by cyber-attacks, cyber terrorism, and cyber war to our increasingly complicated, technologically dependent financial system is surging by the day. Banks have been hacked; stock exchanges attacked, and critical infrastructures have been infiltrated in recent years. A notable example is perhaps the Bloomberg (2014) report of a Malware detected in the system of the Nasdaq exchange. There is also the alleged hacking of Sony Pictures by North Korea, and suspected malicious attacks on Facebook, Instagram and Tinder in 2015, as well as other more recent events.

Initial Coin Offering

An ICO is an unregulated means by which funds can be raised for a new cryptocurrency venture. When a startup firm intends to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, the amount of money needed to undertake the venture, the virtual tokens the pioneers of the project will keep for themselves, the length of the ICO’s campaign, among other info. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency.

Early investors in the operation are usually motivated to buy the cryptocoins in the hope that the plan becomes successful after it launches, which could translate to a higher cryptocoin value than what they purchased before the project was initiated. An example of a successful ICO project is the smart contracts platform called Ethereum with Ether as it’s coin token.

ICOs are poised to be disruptive innovative tools in the digital age. Investors are cautioned to be wary as some ICOs are actually fraudulent. Because these fund-raising operatives are not regulated by financial authorities like the Securities Exchange Commission (SEC), funds that are lost due to fraudulent initiatives may never be recovered.

Portfolio Diversification

It is crucially important to consider the impact that diversification can have on the risk of an investment portfolio.

Investors confront two main types of risks when investing:

  • Undiversifiable – This type of risk is not specific to a particular company or industry, and thus cannot be eliminated or reduced through diversification. Causes are things like inflation rates and exchange rates.
  • Diversifiable – This type of risk is specific to a business; it can be reduced through diversification. The most common sources are business risk and financial risk. Thus, the aim is to invest in various assets so that they will not all be affected the same way by market events.

Under normal market conditions, diversification is an effective way to reduce risk. If you hold just one investment and it’s performance plummets, you could lose all of your money. But if you hold a diversified portfolio with a variety of different investments, it’s much less likely that all of your investments will perform poorly at the same time. The profits you earn on the investments that perform well offset the losses on those that perform poorly.

For example, bonds and stocks often move in opposite directions. When investors expect the economy to weaken and corporate profits to drop, stock prices will likely fall. When this happens, central banks may cut interest rates to reduce borrowing costs and stimulate spending. This causes bond prices to rise. If your portfolio includes both stocks and bonds, the increase in the value of bonds may help offset the decrease in the value of stocks. The reason for including bonds in a portfolio is not to increase returns but to reduce risk.

Diversifying by asset class

One way to diversify your portfolio is to invest in several asset classes, i.e. Cash and cash equivalents, fixed income investments and Equities. Combining equities and fixed income investments within a portfolio helps to smooth out it’s returns because these asset classes have different risk and return characteristics.

Diversifying by industry

To diversify, you need to select stocks whose prices do not move together. Variations in the returns of one stock should offset variations in the returns of other stocks. Stocks within the same industry generally have prices that move together. Industries that can be combined to diversify portfolios include financial services and energy industries among others.

The limits of diversification

Diversification becomes less effective in extreme market conditions. Generally, conditions become extreme when something unexpected occurs. Examples are a market crash or government default. When this happens, markets can become illiquid and the prices of most investments drop.

Investment Rules

There are several guides today that detail investment rules. A popular guide, Rich Dad’s Guide by Robert Kiyosaki , is a long-term guide of the following basic investment rules:

1: Know what kind of incomes you’re working for whether they are ordinary earned income, portfolio income, or passive income derived from real estate, royalties, and distributions.

2: Convert ordinary income into passive income

The path to building wealth starts with understanding that there are other types of income and then converting your earned income into the other types of income as efficiently as possible.

3: The investor is the asset or the liability

A good investor loves to follow behind a risky investor because that is where the real investment bargains can be found.

4: Be prepared

A true investor is prepared for anything to happen. Focus on what you want, keep your eyes open to what is happening, and respond to opportunity. This is done through continual education and application.

5: Good deals attract money

If you are prepared and you find a good deal, the money will find you or you will find the money.

6: Learn to evaluate risk and reward

As you become a successful investor, you must learn to evaluate risk and reward.

Capital Management and Risk Mitigation

Bodies like the A.T. Kearney helps financial institutions with end-to-end risk mitigation and capital management. Typical capital management and risk mitigation projects include:

  • Enterprise risk management (ERM) and strategic asset allocation. Aligning a financial institution’s ERM model with its global strategy can lead to better allocation of scarce capital, increase return on capital, and reduce the probability of regulatory intervention and funding difficulties.
  • Credit risk. A.T. Kearney works with its clients globally to develop innovative approaches to credit management in each stage of their business processes and value chains. Examples include industrializing loan origination and processing, coordinating credit management for multinational corporations, and optimizing consumer finance. The teams have helped financial institutions improve credit management and credit monitoring, identification security impairment early, manage credit recovery, restructure and dispose non-performing loans, and build bank management practices in individual countries, product lines, and new acquisitions.
  • Market and operational risk. Managing market and operational risks requires quantifying threats in the day-to-day business, using value-at-risk (VaR) estimations and operational risk measurements, and stress-testing techniques to comply with changing regulatory requirements.
  • Basel III impact, implementation, and compliance. A.T. Kearney works with clients to help them meet Basel III requirements and to integrate all risks into an economic capital model. Superior risk management will increase investors’ valuations, help to raise money at a lower cost, and contribute to a strong reputation and superior branding, which can create a critical competitive advantage, reduce the risk of funding and liquidity difficulties, and make it easier to retain customers.

In closing

When investing in high risk investments, make sure that you are first a competent investor, and that you have a good grasp of the investment you are getting into. Make sure you are wisely looking at risk and money management of your investing capital. Also, if you’re into using and trading digital assets, we’ve created one of the most advanced multi-asset digital wallet apps on the market.

To start utilizing multiple digital assets, including digital gold, and to see our many other advanced wallet features, sign up for the blockchains.my wallet app here. The app is currently available at the Google Play Store with the referral code: 279408. Currently compatible with Bitcoin and Ethereum, other digital assets coming soon. Please visit our page to find out more.

Disclaimer:

The Information and content in this article is solely for informational purposes only. We make no guarantees, whether express or implied, that the content on the site is accurate,  complete, or are best practices. We are not investment specialists or financial advisors, and should not be taken as such. Any investments a person may decide on after reading this article is strictly at their own volition, and any results are 100% their responsibility.


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