The Clever Investor Part 3 – The Risky

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In this three-part mini-series we are focusing on various ways you could invest your money. In the Good, the Bad, the Risky we aim to unpack different investments. We will look at the pros and cons of these investment options, as well as, what's best to focus on. This article is focused on "the Risky" investments.

The Risky Investments

Risky investments are just like the name suggests… risky. Your perception and definition of risk is likely to determine whether you see these potential investment options as good or bad. For us these investments take on too much risk and consistent returns do not seem possible. In short, we define these risky investments as ones that require an element of luck as well has a high level of knowledge and insight.

 

Unlike the ‘good’ investments we mentioned earlier on in the series, we don’t entirely recommend making use of these investment products. Reason being that there is a good chance that the odds are stacked against you. However, with thorough research, practice and luck the risk can be lowered, but can it be lowered enough to produce consistent results.

Types of Risky Investments

Gambling

Considered as art to some, sport to others and just plain fun to the rest, gambling falls into our Risk category.

Gambling is a form of investment as you’re putting money in with the hope to get larger amounts out. Whether you’re strategically gambling or just having fun, you’re running the risk of going home with less than you came with.

With the odds firmly against you over the long term the house will always win. Which means at best this is high risk over the short term and at worst over the long term it should be in the category of a bad investment.

There are both legal and illegal forms of gambling. The legal options are casino’s which host games such as poker, blackjack, slot-machines and roulette, as well as, national lottery system. 

Online gambling platforms are becoming increasingly popular due to the convenience. This poses a higher risk to people with gambling problems as there are fewer barriers to access the platform and essentially losing your money becomes easier.

Illegal forms of gambling include underground casinos, poker and animal fighting which are usually held in secret due to the nature of the events happening and the evasion of tax on the winnings.

Gambling is not an ideal investment form because the odds are generally stacked against you. There is no true way to calculate or measure the amount of risk you are taking on. The opportunity cost of losing money and time usually exceeds that of making a decent return. We believe gambling is basically investing in your luck or skill and even the most skillful gamblers tend to lose their fair share.

Sports Betting

This is one if the fastest growing forms of gambling in the world. There are some many things to bet on, you can bet on the winning team, the most points in match or race, the points difference in a match, first to score in soccer.

Almost every sport out there can be betted on by just predicting the outcome of the game so this appeals to almost many people. Sport betting usually takes place online where people can make bets from the comfort of their home. However there are place such as bookmakers and totes where you can go to place bets.

Like casino gambling, sport betting is a huge risk because you are trying to predict the outcome of an event that hasn’t happened yet.

Many people try and bet strategically by trying to look at statistics and past performances of the game they are betting on. If you have insight, knowledge, or inside information you may stand a better chance at betting but that being said, all sports are full of upsets. This form of investing is unreliable and inconsistent compared to unit trusts, retirement annuities and share portfolio’s which are less risky and can consistently provide a return over a specific time period.

Forex

Forex (short for foreign exchange) is a marketplace where national currencies are traded. One can place trades by buying one currency against another.

Essentially, you are attempting to predict the rise and fall of a currency’s buying power. Forex is a popular form of investing as it is one of the quickest ways to make some money.

Exchange rates are affected by the change in inflation, interest rates, amount of public debt and economic performance to list a few. These factors are constantly changing and thus impacting the buying power of the currency.

The high volatility of this makes it very risky for one to invest in Forex. Besides having plentiful knowledge about Forex, one would need to be constantly looking at the news and markets in order to have some chance in growing their money. There is also the added issue of fees and tax.

Stokvels

Stokvels are group saving schemes that allows individuals to invest small amounts and earn returns due to the economies of scale.

Stokvels are quite popular in South Africa as it’s a fruitful form of saving for a short period of time. Funds are pooled together and are either saved, invested or used to buy an asset that increases in value over time.

There are many different types of stokvels around these days, some more risky than others. Old school stokvels where a community of people contribute money in order to get a lump sum at a specific time of year is less risky than a ‘WhatsApp’ group stokvel. Stokvels require immense trust in people as it is essential a scheme with no legal grounds or protection.

Peer Funding

Peer funding is a form of investing in someone’s business venture.

Providing a friend or family member with capital in order to get a business off the ground is not only a kind gesture but it can also be a long-term growth option.

The risk comes from whether or not that person will be able to repay you with growth, either in cash or shares. You are placing your trust in a venture that may or may not succeed.

Making sure that there is a good business plan and structure in place is important to note before  investing your funds.

"Building wealth is a marathon, not a sprint. Discipline is the key ingredient." - Dave Ramsey

Bitcoin and Speculation

Bitcoin is a virtual currency that can be used anywhere in the world to buy goods and services.

The currency is universal so there is no difference in buying power between someone buying an Xbox in South Africa and someone buying one in the US. They will both pay the same amount of bitcoin.

Investing in bitcoin is risky as it is strictly speculative. Someone would buy bitcoin in the hope that the price of it increases due to market fluctuations and then sell it at a profit. This is tricky because just like share trading, it is very volatile. 

Furthermore, the bitcoin exchange is unregulated by any government and so there aren’t any laws to protect you against hackers and thieves who could potentially steal your money.

An investor wanting to make use of the above investments needs to understand what they are getting themselves into. They need to understand the opportunity cost of winning against that of losing.

Warren Buffett once said, “Risk comes from what you don’t understand”. This saying perfectly outlines one of the major factors that differs these types of investments to ones that are considered good. The good ones are understandable and calculated whereas the risky ones are hazardous and immeasurable.

Look out for our final article in the series where we will be looking at some of the riskier investments options.

Live Trust Grow Matter

The information provided is not intended to address the specific circumstances of an individual and is for information purposes. Should you require financial advice please contact us info@growmatter.co.za

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