Investopedia: How To Construct A High-Risk Portfolio

A lot of investment advice centers on producing as much return as possible for as little risk as possible. But what about the other side of the coin? What about embracing the possibilities of risk and actively seeking to build a high-risk investment portfolio? Such a portfolio could hold considerable promise for market-beating returns, but investors need to keep a few ideas in mind when approaching this type of investment portfolio.

Why Seek Risk?
The linkage between risk and reward is not always perfect or predictable, but there is a time-tested correlation between risk and reward. If investors want higher returns, they have to be willing to take on higher risk. Said differently, though, if an investor can accept higher risk, he or she can also potentially realize considerably higher returns.

A low-risk/high-return portfolio is more often about fantasy (or fraud) than reality. Moreover, not all risk is bad for an individual investor. The key, then, is taking on the right risks. After all, risk only becomes problematic if, or when, an investor is wrong. There are also different ideas of risk; holding an all-cash portfolio is actually quite risky if that cash is being eroded by inflation. (Learn more about inflation in Coping With Inflation Risk.)

Large institutions cannot afford the risks that go with low liquidity, but that threshold is much lower for an individual. Even a small fund may be unable to invest in a $20 stock that trades 50,000 shares a day, but there is no reason that an individual investor cannot take on that liquidity risk. Likewise, many institutional investors cannot invest in low-priced stocks, pink sheet/bulletin board stocks or stocks in certain industries (particularly for certain ethical funds), but individuals have no such statutory restrictions.

To read the full column, please click the link:
http://www.investopedia.com/articles/stocks/11/construct-high-risk-portfolio.asp