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September 04, 2008 |
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Seven ways to get rich faster |
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If you want a high return, you'll have to accept a high degree of risk.
Maybe you're in the lucky position of making a little more money than you need to live on. Or maybe you've just received some cash you're not planning to spend for a long time, allowing you to stomach the ups and downs of, say, a tech investment.
In either case, putting a portion of your resources into a high-risk investment may make sense. Just make sure you're ready for the downside as well as the upside.
If you want to take on risk, we have seven strategies for you to consider:
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1) Concentrate
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Diversification is great because it reduces risk. But at some point, you might want to build on your nicely diversified core with a big chunk of risk concentrated in one sector. |
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"If you're looking to do better than the average return, the only way is to reduce your diversification," says Jordan Kimmel, author of Magnet Investing and president of Magnet Investment Group in Randolph, N.J. |
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Concentration will increase your risk, and Kimmel says that's good, in the right circumstances. |
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"You have to be willing to accept short-term volatility as the prerequisite for making money," he says. "The investments that have the smallest volatility also have the smallest end returns." |
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2) Leverage up |
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One quick way to increase your risk and your potential return (as well as your downside) is to borrow money for your investment, usually through a margin account at a brokerage firm. |
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Tim Phillips of Phillips & Co., a wealth-management firm in Portland, Ore., suggests that moderate leverage is a way for clients to enhance their returns. But they need to be careful. |
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It's true that leverage can generate a return on money you don't have, but it generates an outsized risk as well. Pay attention now, get-rich-quick fans: Users of margin loans need to be keenly aware that a drop in the value of an investment can result in a margin call, requiring additional capital. Investors who can't pay can be wiped out.
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3) Hunt for bargains |
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As Chicago Cubs fans know, loving the underdog can be painful, but sometimes it pays off big. (Maybe this year? Nah.) That's why Phillips recommends that investors consider distressed securities, such as bonds issued by companies near bankruptcy or, right now, stocks in banks that have heavy real-estate exposure. |
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"We try to find counterintuitive opportunities that take advantage of extreme emotional responses," he says. |
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This is risky because sometimes an investment is cheap for a reason. But if the low price is a function of feelings instead of fundamentals, the payoff can be huge. |
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4) Be above brands |
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Many investors feel safest with something they know. But just because you have never heard of something doesn't make it a bad investment. Kimmel recommends that investors screen for companies that are growing revenues by 20% or more each year while increasing profit margins by 5% or more. |
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Only a handful of companies will fit these criteria at any one time, he says, and they probably won't come up in cocktail party chatter. |
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"You've got to be willing to own companies that are less known," Kimmel says. The underlying profitability gives you more cushion than any brand name ever could. Are you looking to make conversation or money? |
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5) Explore emerging markets |
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It's a big world out there, and much of it is growing faster than the United States and Canada. |
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"All the demographics point to opportunities in six countries: Brazil, Russia, India, China, Mexico and South Korea," says Pran Tiku, the president of Peak Financial Management in Waltham, Mass. |
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There will be risk in all these markets as their citizens feel their way into modern economies, but Tiku says it's worth it. |
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