When it comes to financial planning, any investor should think about protecting their assets as well as making an investment growth.
Like any other investment, a high-risk investment is a financial opportunity that has a higher chance of providing you, the investor, with higher returns, but also greater uncertainty than mainstream and conservative investments.
However, all investments, whether they are high-risk or not, have some degree of uncertainty. It is just a matter of knowing how to best manage the risks and get the best out of it.
Johnson Nderi, an independent consultant and corporate finance expert in Nairobi says risk is central to the business of investing.
“There are two objectives that we look at when it comes to investing. One is risk and the other is return, they reinforce each other,” he says.
“If you want to invest in shares, you have to do some due diligence in trying to predict exactly what the value of that particular company will do, whether it will go up or down. Similarly, when you invest in company shares, you can only make money if the value of the share goes up, and maybe on the side if it pays dividends,” he adds.
As investors chase short-term gains derived from buying and selling commodities, financial experts explain that they can invest in risky assets either directly through investing in a specific asset or through specialised funds. Passive investing, on the other hand, is a long-term wealth-building strategy.
Does this approach resemble gambling, given that it represents high levels of uncertainty?
“There are some similarities as well as differences, in gambling the probability of loss is high, whereas in investing it’s more often than not a one-way bet because you’re sure to generate returns if you invest in some. For example, if you invest in a fixed income instrument, you are almost certain to generate a higher return, the probability of failure is minimal,” Mr Nderi explains.
Investment risk is related to the degree of uncertainty. There are chances that you will lose your money and the best way to measure, experts insist is to look at prior outcomes of people who have invested in the same thing and see how varied they were.
Belinda Koome, senior investment adviser and trainer Genghis Capital says Gen Zs are not as patient and risk-averse as the older generations.
These young investors have brought a huge shift in their exploration of whatever will give them high returns, from foreign exchange trading, cryptocurrencies and other various unregulated products. However, Ms Belinda advises them to hedge their investments and have a financial balance to minimise their risks.
Similarly, while the return is a critical determinant of investment, many Kenyans, largely retail investors, have not diversified to invest in a large portfolio to hedge their investments.
What are some of the ways to mitigate the risks?
George Njunge, senior portfolio director at Britam Asset Managers, says the most basic thing you can do is to know where the risk is coming from.
“Know how much volatility that investment normally has in terms of returns, and know the cause of the variability so that you can get in at the right price and observe the factors that are affecting the returns. If they are pointing down, you can get out in time and lock in the returns,” says Mr Njunge.
“With a derivative, you can make money whether the price goes up or down. If you combine the derivative with the ownership of the share then you can take advantage of both, so what you are effectively doing is eliminating the risk of the value of the share going down by generating a positive return and making money while the share price is going down,’ Mr Nderi adds.
Derivatives are financial instruments that draw their value from the performance of underlying assets such as equities, fixed-income securities, currencies and commodities.
What sectors pose high risk?
Financial experts say that when it comes to high-risk investments, two things have to be taken into account. The operating conditions, because they change from time to time since different sectors can change in terms of risk due to possible policy changes by the government, while other sectors are naturally variable in terms of performance.
“It is mostly a case of hit and miss with regards to whether you have a good resource. The most increasing sectors are the resource sectors both natural and regulatory, such as primary agriculture which is seasonal,” Mr Nderi says
The common sector that Kenyans have presumed to be safe, experts attest, is investing in regulated companies, because the variability of their return can be termed as stable, and they can be able to predict and guarantee their return. The most popular category is money market funds.
Driven by these high-concentration risks and heightened market volatility, an investor who has no clue of whatever they are investing in has the potential to have variable returns which can be either positive and negative.
“When you get into entrepreneurship then the best thing to do is try to get a bit of knowledge and experience before you risk your money. Know the investment fundamentals and the various categories of investments. One mistake that people make is assuming that because you have interacted with such a business as a customer then you know what happens” says Mr Njunge.