Most investors are content to follow a well-worn path to wealth creation, investing in common stocks and bonds that hold the promise of patient, steady and measured growth over time. For most of us, more exotic investment adventures are the stuff of day dreams. Some investors with a big taste for risk, a hefty chequebook and highly specialized investment knowledge, do take the plunge into more exotic investment realms and “go for broke” in more ways than one. A reality check as well as a chequebook are necessary first steps towards these kinds of investments.
Foreign exchange
The foreign exchange market was once limited to banks and governments, but now retail traders are regularly speculating on the value of currencies. The returns on these speculative investments can be spectacular, but oh the risks! Forex investing is high-leverage investing and depends on making large currency transactions on margin with borrowed money from the investment firm. A small investment can put an investor in charge of a massive foreign exchange transaction that bets on the relative value or exchange rates of two currencies sometime in the future. For Forex investments to pay off big time, the investor needs to be making a lot of very large monetary transactions with various kinds of forward contracts or foreign exchange swaps that change in value and are measured in a thousandth of a cent. Leveraging magnifies the investor’s trading profit or loss and has a direct impact on the investor’s ability to maintain the margin requirements. If the trader can’t make a margin call, the position can be liquidated, turning a paper loss into a real one. Forex investing is not for the faint of heart or casual investor.
Junk bonds
Junk bonds are not all that mysterious or even very junk-like. Some are simply high yielding bonds that are rated below Investment Grade because the corporation issuing them carries a marginally higher risk of default. Sometimes, however, junk bonds are the debt issued by companies that have fallen on tough times and so trade at a significant discount to their face value. These issues often entice investors by offering high yields and potential capital gains if or when they are redeemed or retired by the issuing company. Therein lies the dreamy quality of the ugly duckling turning into a swan. The big unknown is if the company will stay solvent to the maturity date and be able financially to retire the debt. Therein lies the risk.
Rare collectibles
Art, antiques, rare coins and stamps, vintage cars and all sorts of nostalgic, celebrity or sports-related memorabilia is marketed, sold and bought for their potential “investment value.” In all cases that will be determined by an expert appraiser as well as a buyer who will pay the collector the highest bid price at an auction. There is no stock exchange for rare collectibles and little market regulation. Authenticity can be a serious issue and, like all investments, there is no way to predict future market value. Intrinsic quality can easily be overshadowed by periodic fashion crazes or fads that can send a collection’s value up or down, making it an auction darling or another dust-collector in the garage or attic. Collectibles should be bought based on their personal appeal and because an investor enjoys collecting these objects of desire. Of course, the reality is, if the collector loves these kinds of investments for what they are rather than for what they are worth, they won’t be sold at any price.
Gold bullion
Of all the precious metals, gold bullion captures the imagination of investors throughout the world. While most investors are content to buy their gold indirectly by owning gold mining stocks, it’s now becoming more common for some investors to go out and buy bullion through their investment firm. Bullion has proved to be a remarkable investment in recent years, but make no mistake that at $1,500 an ounce, it is a high-priced speculative investment whose value could continue going up or suffer a major correction at any time. That’s the risk: what the future holds for gold, no one knows.
These are all speculative, very high risk investments and not suitable for most investors. Only knowledgeable investors who are capable of handling large financial risks and emotional stress should consider these kinds of high-powered investments. As a group they are no substitute for a well-balanced portfolio of equities and fixed income securities. It’s nice to dream, but talk to your financial advisor for guidance on the advisability of turning any of these summer day dreams into reality.
Judy Poole is a financial advisor with Raymond James, and has spent the last 40 years involved in the financial industry. This article is provided as a general source of information and should not be considered personal investment advice. The views expressed are those of the author and not necessarily those of Raymond James Ltd. Securities offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a member - Canadian Investor Protection Fund.
You can reach her at judy.poole@raymondjames.ca.