Risk is by definition an inherent part of investing. Even U.S. 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 can carry much higher levels of risk. In some cases, risk is foolhardy, leading to devastating losses that can be irrecoverable. In other cases, though, risk simply goes hand-in-hand with reward.
Some so-called “risky” moves can actually be the right play if you do your homework, hedge your risks and invest prudently. Just be sure to consult with a financial advisor so you fully understand what your own personal risk tolerance is and how it might weigh on your financial situation as a whole.
With that in mind, here’s a look at four potentially “risky” plays in 2023 and an examination of what exactly the risks are and what potential rewards might lie on the other side.
Loading Up on US Stocks
A multitude of factors took down U.S. stock markets in 2022, with the S&P 500 falling 19.4% and the NASDAQ dropping 33.1%. But many analysts and economists are calling for further carnage in 2023, as inflation remains high, a recession seems likely and the Fed has indicated that it might keep interest rates high all year.
While history has shown that it’s a good time to load up on U.S. stocks after bear markets, there’s a very real question about whether or not the bear market will extend throughout 2023.
Risk: The U.S. falls into a strong recession, and stocks fall by another double-digit amount.
Reward: The major U.S. stock market indexes have never failed to recover from bear markets and have ultimately always gone on to hit new all-time highs.
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Betting on a Crypto Rebound
For years, naysayers have been calling out cryptocurrency as an asset class with nothing backing it up. Unlike stocks, which have real-world, verifiable earnings and profits, crypto is essentially valued on its projected future utility. It has no inherent value.
Due to a combination of factors, crypto collapsed in 2022, with even “name-brand” coins like Bitcoin dropping by more than 60%. As even in the best of times cryptocurrency is a volatile investment class, it’s by definition risky to bet on a crypto rebound.
Risk: There’s a very real risk that many cryptocurrencies will fall to zero, or at least much lower levels. No matter how much they’ve fallen, you can still lose 100% of what you put in now.
Reward: Bearish sentiment toward crypto has rarely been higher, with many investors and analysts finally throwing in the towel. However, if even some of the promised potential of cryptocurrency is realized, there could be a significant bounce back.
Risking All Your Money on One Investment
If you have limited funds — or are a speculator by nature — it can be tempting to put all of your money into a single investment. After all, if you invest in the S&P 500 index, you will by definition be earning an average return, whereas if you pick a winning stock, you could be the outlier.
Concentrating your efforts on a single investment seems like a way to get the most bang for your buck, as you’ll only have to monitor one stock and you will have a reasonably sufficient amount of money invested in it, rather than having to spread out your money across 20 or 50 stocks. But this is definitely a gunslinging type of investment style.
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 gains significantly larger than the market as a whole.
Leveraging Your Account
Leveraging your account simply means borrowing money against your existing assets to buy even more. For example, if you have a portfolio worth $10,000, you may be able to borrow $5,000 against it and use that money to buy additional stock. Also known as trading on margin, leveraging your account is an inherently aggressive strategy that requires a special account and broker permission.
Risk: Leverage multiplies the losses in your account. If you’re leveraged 2:1 and the market moves against you by 25%, your account will lose 50%. That will require a 100% gain simply to break even.
Reward: Leverage works both ways. If markets cooperate and recover, a 20% bounce in your investment could result in a 40% gain in your account.
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