Risk capital

Risk capital is basically money you can allocate to speculative and risky but potentially high-return investments. You should be willing to lose all your risk capital and that is why it should only form a small portion of your entire portfolio. Don’t use your rent as risk capital! Risk capital is typically allocated to investments like startups and unproven business ideas. Some people use it for day trading in stocks, crypto, and forex. Some speculate with complicated investments like derivatives and options. Others simply gamble and bet.

An average investor does not need the additional risk and returns associated with deploying risk capital. A simple strategy of buying unit trusts, treasury bills and bonds, and cheap land is sufficient for most people. The unit trusts provide short-term liquidity. The treasury bonds and bills provide passive income. The land gives you a solid asset with price appreciation over time. This is more than sufficient for the average person who does not want to spend so much time looking for additional returns. These investments should also form a bedrock for the more adventurous types.

Risk capital should not exceed 15% of your overall portfolio. As you approach retirement it is in your best interest to get out of risky asset classes. A young person still has time to experiment with different ideas. An older person requires far more certainty which can’t be obtained from risk capital.

So have some fun with risk capital, but be prepared to lose all of it. Otherwise stick to safer things like unit trusts, treasury bills and bonds, and cheap land.

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