When putting together a financial portfolio, it should contain low-risk investments, such as short-term certificates of deposit. You can bank on these investments, providing consistent returns.
It should also contain high-risk investments. By practicing proper risk management, you can swing for the fences without risking too much money.
Just make sure you use asset protection in high-risk investments. You can keep your assets safe and minimize risk by taking this approach.
Discover how and why to use asset protection in high-risk investments below.
What Are Considered High-Risk Investments?
Before we discuss utilizing asset protection in high-risk investments, you need to understand what high-risk investments are. These investments are more volatile than low-risk investments. At the same time, they offer the potential for astounding growth and may eventually offer an incredible return on investment.
Here are several examples of high-risk investments:
- Stocks in foreign emerging markets
- Real estate investment trusts
- High-yield bonds
Cryptocurrency is another great example of a high-risk investment. Even though a 2023 study found only about 0.02% of cryptocurrency investors become millionaires, many people have begun to buy into the crypto craze.
Importance of Asset Protection for High-Risk Investments
High-risk investments are called high-risk investments for a reason — there’s a decent chance those who make them won’t earn great returns. By the same token, people continue to make these investments because, every so often, one will pay off in a huge way.
If you’re someone who enjoys the feeling of hitting home runs while investing, you’ll love high-risk investments. However, you’ll also need to know what makes using asset protection in high-risk investments important.
For starters, asset protection can prevent you from losing the astronomical returns you’ll sometimes earn on high-risk investments in lawsuits. The chances of you facing lawsuits when you have a high net worth are greater than when your net worth is on the lower side.
Using asset protection for high-risk investments can also make it difficult for creditors to attempt to seize your assets. This will provide the creditor protection you need to keep your net worth intact.
Legal Structures for Asset Protection
The good news for anyone interested in protecting high-risk investments through asset protection is that there are several ways to do it. You can set up a few legal structures to ensure your hard-earned assets don’t end up in the wrong hands.
Limited Liability Companies (LLCs) and Corporations
Americans have been creating limited liability companies in the U.S. since the late 1970s to protect their prized possessions. They remain popular among those who wish to keep their personal assets separate from their business aspirations.
If you’re in the business of making high-risk investments, creating a limited liability company (LLC) could work wonders for you. This LLC will essentially build a wall between your personal assets, including high-risk investments, and your business.
Depending on your situation, you might also want to consider setting up a corporation for asset protection purposes.
Trusts
Trusts have become powerful tools for those who want to provide asset protection for their high-risk investments. When you create a trust, you turn over your assets to an appointed trustee to manage them.
Using trusts can create separation between you and your assets, making you less likely to lose them if someone takes legal action against you. Since you won’t technically have possession of these assets, you won’t run the same risk of losing them in a lawsuit.
Consider filling a Cook Islands Trust or another type of trust with assets like cash, real estate, and even high-risk investments like cryptocurrency.
Offshore Entities
Offshore entities are another solid option for those taking asset protection in high-risk investments seriously. You can use offshore trusts for investments to minimize the risks involved.
You can also use them to ensure legal compliance when making high-risk investments that are unavailable to Americans under normal circumstances. You can set up an offshore trust as a separate legal entity that isn’t subject to the same U.S. laws as you.
Insurance As an Asset Protection Tool
While choosing the right legal structure for asset protection is an effective way to hang on to the assets you’ve earned by making high-risk investments, it isn’t the only way to do it. Insurance can also serve as an asset protection tool, especially for high-net-worth individuals who are at risk of facing litigation.
Types of Insurance Relevant to High-Risk Investments
Homeowners’ insurance policies, auto insurance policies, and life insurance policies are a few of the types of insurance you can take out to protect assets and high-risk investments. To provide more comprehensive coverage, consider taking out an umbrella insurance policy. This can extend liability coverage, providing extra protection..
How To Determine Adequate Coverage
You shouldn’t simply sign up for the first insurance policy you can find when searching for one to protect your assets. It must deliver the complete coverage you need. Determine adequate coverage by:
- Calculating assets
- Considering litigation risks
- Comparing insurance costs
Pros and Cons of Insurance in Asset Protection
The pros of using insurance for asset protection are:
- Can cover legal fees and other costs associated with lawsuits
- Can soften the blow of an adverse legal judgment
- Can provide peace of mind
The cons, meanwhile, are:
- May not cover an entire legal judgment
- Will not create separation between you and your assets
- Can cost too much money if you choose the wrong policy
- Certain claims will not be covered
Asset Allocation and Diversification
Your financial portfolio shouldn’t include all low-risk investments or all high-risk investments. Instead, it should feature a nice mix of many different types of assets, including a combination of low- and high-risk investments along with investments that land somewhere in the middle.
Spreading Risk Across Different Asset Classes
If you put all your resources into low-risk investments, they will not earn you much in terms of returns over the years. If you put them all into high-risk investments, you might lose all your money before it begins to grow.
You can spread your risk across different asset classes and minimize it through asset diversification.
Geographic Diversification
If you only make investments in the U.S., what will happen to your financial portfolio if the American economy crumbles? It isn’t too hard to see why taking this approach to investing is so dangerous.
Rather than investing solely in the U.S., you should engage in geographic diversification by making investments in other parts of the world.
Importance of Rebalancing
Do not allow the same investments to sit in your financial portfolio for years on end. This could prevent you from making better investments and lead to taking on too much risk later in life.
By rebalancing your financial portfolio every few years, you can ensure you’re always taking on the right amount of risk.
Tax Planning for Asset Protection
Estate Planning can do more than just protect your assets and any high-risk investments you’ve made. It can also help when it comes to issues like tax planning and tax efficiency.
Tax-Efficient Asset Structuring
You can limit your tax responsibilities by structuring the assets in your financial portfolio properly. In many cases, you can secure a better tax rate while providing yourself with access to tax breaks.
Estate Planning for Asset Transfer
When you leave your assets behind for your family one day, do you want them to have to pay high taxes? Of course not, which is why you should consider estate planning.
Proper estate planning can minimize the tax hit your beneficiaries will take when they claim your assets.
Minimizing Tax Liabilities on Asset Appreciation
The whole point of creating a financial portfolio and adding the right mix of low- and high-risk investments is to make money in the long run. But as your assets appreciate, you may find yourself owing more taxes than anticipated. Minimize these by using asset protection in high-risk investments.
Call Us To Learn More About Asset Protection in High-Risk Investments
Are you interested in obtaining more information on how to effectively use asset protection in high-risk investments? Blake Harris can help protect your assets such as cash, stocks, bonds, cryptocurrency, businesses, intellectual property, investment portfolios, precious metals, and real estate. Contact Blake Harris Law today.
