Balancing Risk and Return: Exploring Alternative Investment Opportunities for Higher Returns | INVESTED MOM
If you’re trying to figure out how to get big investment returns, you’ve probably asked yourself: What types of investments could offer high returns with low risk? What would need to be true for this to be possible? I sure have.
Generally, it's recommended to diversify your investments across multiple asset classes, including stocks, bonds, real estate, commodities, and more.
In reality, it’s challenging to find investments that offer both high returns and low risk. As a general rule, investments with the potential for higher returns typically come with higher levels of risk.
Some low-risk investments that may offer modest returns include savings accounts, money market funds, and short-term government bonds. These types of investments typically offer relatively low returns but also come with low risk due to the stability and creditworthiness of the underlying assets.
I hate these.
The only time they have some value is precisely now, when you’re stacking cash in anticipation of a recession or when there’s an economic storm on the horizon. As Warren Buffett says, when it’s raining gold, you want to go outside with a washtub, not a thimble. The washtub refers to cash. You need cash to take advantage of a market downturn, as much as you can get your hands on. So storing it somewhere relatively safe and readily accessible is a key part of the strategy. But more on that another time.
If high returns were possible with low risk, it would require a deviation from the traditional trade-off between risk and return. This could occur in a hypothetical scenario where there was a significant breakthrough in investment technology, or a new investment opportunity arose that was capable of producing higher returns with low risk.
Or… you invest the way the most successful long-term investors have done it for decades. You invest in things you’re capable of understanding, with a durable, competitive advantage (also called a moat), and good management, and you buy it with a margin of safety when it’s on sale.
It's important to keep in mind that there is always some level of risk associated with investing, and claims of high returns with low risk should be thoroughly evaluated and approached with caution, but that doesn’t mean that they don’t exist. It is important to carefully consider potential risks and make decisions based on your own circle of competence and risk tolerance.
Let’s look at some real-life examples of where there was a significant breakthrough in investment technology, or a new investment opportunity arose that was capable of producing higher returns.
But first, it's important to note that while new investment opportunities constantly arise, there is no guarantee that they will result in high returns. And, unless you have significant knowledge about the opportunity, a potentially high return can quickly go to zero if you’re going in blind. Stick to things you understand and opportunities where you have a competitive advantage. It's also crucial to remember that past performance is not indicative of future results, and investing always carries some level of risk, even when you’re Warren Buffett.
Here are some examples of investment opportunities that were considered to offer the potential for higher returns:
Alternative investments:
Alternative investments, such as private equity, hedge funds, and real estate, have become increasingly popular in recent years. These types of investments have the potential to offer higher returns than traditional investments, but also come with higher levels of risk depending on who you entrust with your money.
It’s important to note that alternative investments are not suitable for everyone and may not be as liquid as traditional investments such as stocks and bonds. For example, private equity funds usually require a long-term commitment of several years, which may not be ideal for investors who are looking for a shorter investment horizon.
Hedge funds, on the other hand, often employ a more aggressive investment strategy, utilizing leverage and short selling to maximize returns. This can lead to higher volatility and the potential for substantial losses if not managed properly.
Real estate investments, such as real estate investment trusts (REITs) or direct property investments, can offer a combination of stable income and long-term capital appreciation. However, investing in real estate also comes with its own set of challenges, such as property management, market fluctuations, and the time-consuming process of finding the right investment opportunity.
Alternative investments can be a great way to enhance your investment portfolio to help juice up your returns. Just make sure you’ve done your research.
Quantitative trading:
Quantitative trading, also known as algo trading or systematic trading, is a strategy that uses mathematical models and algorithms to analyze and interpret financial data, making investment decisions based on the results. The goal of quantitative trading is to make trades that are expected to generate a positive return, while minimizing the risk associated with these trades.
In contrast to traditional investment strategies, which often rely on human judgment and intuition, quantitative trading relies on a set of objective rules and mathematical models to make investment decisions. This helps to remove emotions from the decision-making process and reduces the risk of human error.
Quantitative traders typically use statistical techniques, such as mathematical modeling and machine learning algorithms, to analyze large amounts of financial data, such as market trends, price movements, and trading volumes. They then use this analysis to inform their investment decisions, such as which securities to buy or sell, and when to make these trades.
Quantitative trading has become increasingly popular in recent years, with many financial institutions and hedge funds relying on these strategies to make investment decisions.
While quantitative trading can offer high returns with low risk, it is not without its challenges and limitations. For example, the models used in quantitative trading can be highly complex and difficult to understand, and may not always perform as expected in changing market conditions.
Additionally, the use of algorithms in trading can also lead to flash crashes or other unintended consequences, making it important for investors to carefully consider the potential risks associated with these strategies.
Some examples of quantitative trading strategies include:
Statistical Arbitrage - This strategy uses statistical analysis to identify pairs of stocks that are likely to move in opposite directions, and then trades on the difference in price between the two stocks.
High-Frequency Trading (HFT) - This strategy uses computer algorithms to execute trades at high speeds, taking advantage of small price differences across various exchanges and markets.
Trend Following - This strategy identifies trend patterns in the market and trades in the direction of that trend.
Mean Reversion - This strategy assumes that prices will eventually revert back to their average, and trades based on that assumption.
Machine Learning - This strategy uses algorithms that learn from market data to make predictions about future market trends.
Fascinating, right? These are just a few examples of quantitative trading strategies, and there are many others that are used by investors and traders.
Cryptocurrencies:
In recent years, cryptocurrencies such as Bitcoin and Ethereum have gained popularity as potential investments. Some investors believe that these assets have the potential for high returns due to their decentralized and secure nature, and low risk because of their scarcity and high demand.
The reality has played out a little differently. Huge market highs, followed by massive declines, make these assets (if you can even call them assets) a volatile investment. Many legacy investors like Charlie Munger are not a fan, saying: “Crypto is an investment in nothing," and added: "I regard it as almost insane to buy this stuff or to trade in it."
Nonetheless, there are plenty of crypto millionaire (and even billionaire) success stories to show that, when you understand something about something, you can do really well. The key? Understanding what you’re buying and having the conviction to stick it out until your returns have materialized.
I can’t even pretend that I’m capable of understanding crypto fully at this stage in my investing practice, so I sit on the sidelines and write about it what I see.
Peer-to-peer (P2P) lending:
P2P lending platforms allow individuals to lend money directly to borrowers, bypassing traditional banks and financial institutions. Some investors believe that P2P lending can offer high returns with low risk because loans are diversified across many borrowers. They are also often back by collateral. What does that mean?
Well, collateral refers to an asset that a borrower pledges as security for a loan. If the borrower fails to repay the loan, the lender can seize the collateral to recover the funds. This provides additional security for the lender, reducing the risk of loss.
In the case of P2P lending, the platform may also use algorithms to assess the creditworthiness of borrowers, providing an additional layer of security. However, it is important to note that P2P lending is not without risks and it is crucial to thoroughly research and understand the platform and its policies before investing.
Real Estate Investment Trusts (REITs):
REITs allow investors to invest in a portfolio of real estate properties, giving them exposure to the real estate market while avoiding the risk of direct property ownership. Some investors believe that REITs offer the potential for high returns with low risk due to their diversification and the stability of the underlying assets.
Doing your own research will be helpful in determining the potential risks and returns associated with this specific investment opportunity.
Investing is a powerful tool that can help you reach your financial goals and secure your future. There are many different strategies and options available to you, and the best one will depend on your individual circumstances and investment objectives.
Whether you choose to invest in traditional stocks and bonds, alternative investments, P2P lending, or quantitative trading, it’s important to have a solid understanding of the market, the risks involved, and your own personal investment philosophy. With knowledge and a smart strategy, you can turn your savings into a lifetime of financial stability and security.
So, don’t wait any longer, start investing today and watch your wealth grow!
Need help getting started on your investing journey? I have some options to help get you started.