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Investment Dictionary


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High Return Investments

 

High-return investments (or high-yield investments) are investments that can provide the higher return than average investments, and of course such investments are riskier. The reality is that people have different understanding of what the high return is. Some investors even imagine that if investment won’t make 50% annually, then such investment is not worthy their attention. However, in the reality such numbers are not possible over long period. Of course, it is possible that during bull market stocks will grow 50% or even more, but real investing does not depend on some short-term fluctuations while it would be a speculation but not investment. 

 

So how much is that real high return? I would say that real average annual long term return on risky investments could be somewhere between 13%-15% (in low inflation conditions) and if you can do higher return for more than 10 years, then you are really something. 

 

Actually, the term ‘high-yield investments’ is more accurate than ‘high-return’ because returns can be short-term oriented which is unpredictable at all, while yields show the real potential return over long period. Bonds is the best example of this: if you bought a bond at 8% yield to maturity (10 years), that means you will get such return over those years on average, of course if there will be no additional problems with payments. 

 

Let’s look at the main classes of risky high return/yield investments:

  • Growth stocks: stocks of rapidly growing companies always move faster either up either down depending on market conditions. Yet, if chosen wisely, small cap growth stock may award very nice return over long period!
  • Stocks in emerging markets: emerging markets are ignored too much by most of investors. Of course, volatility of such investments is higher but mostly because of fear that emerging markets are very dangerous. It is true that the risks in emerging markets as BRIC or CIS countries are higher, but the reality is that future belongs to emerging markets. Better to be part of it.
  • High-yield bond funds: such fixed income funds usually are consisted of junk bonds and such funds may pay good yield during financial crisis (over 10%) but when markets are cool you should not expect more than 5%-6% on annual basis.

 

Other high-yield speculative investment classes:

  • Leverage / buying on margin: to achieve higher returns you may use debt capital like buying stocks on margin. But in this case you won’t control your portfolio anymore while market will do this for you, so it is speculating. Theoretically, you can buy any investments on leverage: real estate, stocks, bonds and other.
  • Derivatives: financial derivatives as options or futures may allow you to reach enormous returns if you will succeed, but the chances that you will lose your money are higher. 

 

Normal high-yield investments can be a part of a good investment strategy, but one must be prepared for big losses in short-middle period which may continue for years. When investing in such risky investments, it is extremely important that diversification would include as many different sectors and countries as possible. It is highly probable that some high-risk stocks will go down totally, and because of this reason high-risk portfolio should include not less than 20 different securities

 






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