The world felt shocked when the coronavirus pandemic yielded a global oil collapse. Among some investors, the decision to take a speculative chance on the energy market. Many prescribed to the theory the crashed oil prices would rebound, opening a "Buy low, sell high" opportunity. While that represents a common assumption, no one knows what will happen with oil prices. Investments focused on the oil market remain speculative. Can the "average investor" take advantage of the risks associated with oil? Anyone thinking about investing in anything risky should carefully review the risks vs. rewards. Perhaps it is advisable to discuss speculative investment plans with a financial planner. Rushing into an investment strategy with limited knowledge could lead to making significant mistakes.
Risks, Losses, and Mitigating Factors
When exploring high-risk investments, consider asking, "How much can I afford to lose?" By their nature, high-risk investments increase the chances of losing money. If you can part with $1,000 from your portfolio and not worry if the asset purchased crashes, then it might be worth doing. A financial planner could even suggest ways to mitigate that $1,000 further. Canceling a vacation a planned vacation and directing the $1,000 in "already spent" travel money into a risky investment is one such example. Not going on the vacation could save you even more money than the travel fees, as there are food and other expenses. And there may be further ways to mitigate. A financial planner could point to different ways to save money from a budget while moving some portfolio assets into, say, an income fund that pays a high dividend. These strategies could prove workable. Purchasing a risky ETF with substantial portfolio funds, however, might not be a good idea.
Employment, History, Trends, and Realism
Looking solely at an investment opportunity while not considering your overall financial situation may cause trouble. Is your current employment situation stable? If not, are you taking on debt? Not every profession stands on a stable footing. If it looks like income and employment appear unstable, risky investments might not be worthwhile. Some may believe an eventual upswing in the economy, a typical historical result in the aftermath of a market crash would generate enough returns to pay debts. Such an outcome is possible, but not a guaranteed one. And have you looked carefully at the actual historical results? Online summaries of past economic events may be over-simplified or incomplete.
When speculative investments are outside your wheelhouse, consider discussing matters with a financial planner beforehand. A financial professional could look at the complete picture and provide insights worth pondering.