Jasmine Birtles
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The Psychology of High-Risk, High-Reward Investing (and How to Master It)
Ruby Layram
28th Jul 2025
Let’s face it: high-risk, high-reward investing sounds glamorous. Doubling your money on a tiny tech stock or striking gold with a crypto token no one’s heard of? Who wouldn’t want that?
But here’s the truth: the rollercoaster of risk isn’t for the faint-hearted, or the unprepared. Before you dive in, you need to understand what’s going on in your brain when the stakes are high, and how to stay in control when your instincts are screaming “SELL!”.
Let’s unpack the psychology behind this thrilling corner of investing and how you can master it.
Also see: 5 ‘risky’ investment that have outperformed the S&P 500
What Is High-Risk, High-Reward Investing?
High-risk, high-reward investing means putting your money into assets that have the potential to deliver big gains… but also the potential to lose a lot, or even everything!
Examples include:
This style of investing isn’t inherently bad, but it’s not for everyone, and it definitely isn’t for your emergency fund!
The Psychology: Why High-Risk Investing Feels So Compelling
Here’s why high-risk investing can feel like such a rush!
1. The lure of the jackpot
Our brains love big wins. There’s a surge of dopamine (the “feel-good” chemical) when you think you might hit the jackpot, even if the odds are slim. It’s the same chemical reaction gamblers get.
This is all well and good unit you’re chasing the high from a big return and ignoring the actual risks!
See: How to build a portfolio based on your risk tolerance
2. FOMO (Fear of Missing Out)
When everyone’s talking about how they “got in early” on a crypto or AI stock, it’s hard not to feel left behind. FOMO pushes you to jump in, even when you haven’t done the research.
This can lead to buying late into a hype cycle and holding on as prices collapse.
See: How to research stocks like a pro!
3. Loss Aversion
We hate losing money more than we enjoy gaining it. Studies show that losing £100 hurts more than winning £100 feels good. So when investments go red, many panic and sell, locking in losses.
This can lead to selling in a dip instead of sticking to your strategy and benefiting from long-term recovery.
4. Overconfidence
After one or two lucky wins, it’s easy to start thinking you’re the next Warren Buffett. Confidence rises, risk management falls.
How to Master High-Risk Investing (Without Losing Your Mind)
Here’s how to stay cool, calm, and calculated:
1. Know Your Risk Tolerance (Really Know It)
Before you buy anything, ask yourself:
- How would I feel if this investment dropped 50% overnight?
- Would I panic sell or calmly hold?
If you can’t stomach wild swings, high-risk investing probably isn’t for you, or it should be a very small slice of your portfolio.
2. Use the “Play Money” Rule
Set a limit. Many savvy investors cap high-risk investments at 5–10% of their total portfolio. That way, if it all goes wrong, your future isn’t wrecked.
This is your “Vegas money”, exciting, but disposable.
NEVER invest using money that you will need to use at some point in the near future!
3. Build a Core Portfolio First
Before chasing growth, get your foundations in place:
- Diversified index funds
- Dividend stocks
- Bonds or fixed income (if needed)
The key is to build a diversified portfolio that will protect you from market volatility.
4. Ignore the Noise
Tune out social media hype, Reddit tips, and TikTok “stock bros”. If a “guaranteed” 300% return sounds too good to be true… it is.
Instead, research the fundamentals, understand the market, and set rules for when you’ll sell or take profit.
5. Automate Where You Can
Consider using automated tools like stop-loss orders or recurring investments into riskier ETFs (like thematic or emerging tech funds) to remove emotion from your decisions.
A lot of the best UK investment platforms allow you to set up monthly recurring investments to take the emotion out of investing.
Final Thoughts
Every investor has to deal with risk. The trick is knowing what kind of risk you’re willing to take, and staying true to your plan even when things get bumpy.
High-risk investing isn’t about being fearless. It’s about being smart, strategic, and self-aware.
And remember: boring portfolios build wealth. The high-risk stuff? That’s the cherry on top, not the whole cake.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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