Risk is by definition an integral part of investing. Even US government securities like treasury bills – which are backed by the full faith and credit of the government and are considered the safest investment in the world – carry inflation and interest rate risk. But speculative investments in volatile instruments like stocks may involve much higher levels of risk. In some cases, the risk is reckless, resulting in devastating losses that may not be recoverable. In other cases, however, the risk simply goes hand in hand with the reward.
Some supposedly “risky” moves can actually be the right play if you do your homework, hedge your risk, and invest wisely. Just be sure to consult a financial adviser so that you fully understand what your own risk tolerance is and how it could affect your financial situation as a whole.
With that in mind, here’s a look at four potentially ‘risky’ games in 2023 and a review of what exactly the risks are and what potential rewards might lie on the other side.
Stock up on US stocks
A multitude of factors have sent US equity markets tumbling in 2022, with the S&P 500 falling 19.4% and the NASDAQ 33.1%. But many analysts and economists are calling for more carnage in 2023 as inflation remains high, a recession looks likely and the Fed has signaled it could keep interest rates high all year.
While history has shown that now is a good time to stock up on US equities after bear markets, there is a real question of whether or not the bear market will extend through 2023.
Risk: The United States falls into a deep recession and stocks fall another double-digit amount.
Reward: Major U.S. equity indices have never failed to recover from bear markets and ultimately have always reached new all-time highs.
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Betting on a crypto bounce
For years naysayers have shouted cryptocurrency as an asset class with nothing to back it up. Unlike stocks, which have real, verifiable income and profits, crypto is essentially valued on its projected future utility. It has no intrinsic value.
Due to a combination of factors, crypto crashed in 2022, even “branded” coins like Bitcoin fell over 60%. As even at the best of times, cryptocurrency is a volatile investment class, it is by definition risky to bet on a crypto rebound.
Risk: There is a very real risk of many cryptocurrencies falling to zero, or at least to much lower levels. No matter how much they’ve fallen, you can still lose 100% of what you’ve invested now.
Reward: Bearish sentiment towards crypto has rarely been higher, with many investors and analysts finally throwing in the towel. However, if even some of the cryptocurrency’s promised potential is realized, there could be a significant rebound.
Risk all your money on a single investment
If you have limited funds – or are a speculator by nature – it can be tempting to put all your money into a single investment. After all, if you invest in the S&P 500 Index, you will by definition get an average return, whereas if you pick a winning stock, you might be the outlier.
Focusing your efforts on a single investment seems like a way to get your money’s worth, as you will only have to monitor one security and invest a reasonably sufficient amount of money in it, rather than having to spread your money on 20 or 50 stocks. But this is definitely a gunslinger style of investing.
Risk: If you choose the wrong investment, you could lose most or all of your money.
Reward: If you do your research and pick a winner, you could earn much bigger gains than the market as a whole.
Leverage your account
Leveraging your account simply means borrowing money from your existing assets to buy even more. For example, if you have a portfolio worth $10,000, you might be able to borrow $5,000 and use that money to purchase additional stocks. Also known as margin trading, leverage your account is an inherently aggressive strategy that requires a special account and permission from a broker.
Risk: Leverage multiplies the losses in your account. If you have 2:1 leverage and the market moves against you by 25%, your account will lose 50%. This will require a 100% gain just to break even.
Reward: Leverage works both ways. If the markets cooperate and rally, a 20% rebound in your investment could lead to a 40% gain in your account.
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This article originally appeared on GOBankingRates.com: Investing in 2023: the riskiest steps to take this year