How to Calculate Risks Before Making Investments

All investments carry some degree of risk. Yes, even “sure thing” investments carry risk. Regardless, the fact is that many investors too often fail to calculate investment risks before making investments. This is a major problem that can hinder if not completely derail an individual’s financial portfolio, setting goals back or even putting them out of reach.   The last thing you want as an investor is to go into a new opportunity without first calculating investment risks. Calculating investment risks should be one of the first steps you take toward committing to new investments, whether that is in the form of a stock, property, or some other type of asset. If you want to know how to calculate investment risks before making investments, follow these steps.  

Look for Legal Warnings

You have probably seen legal warnings for investment risk  before. These are common, especially among riskier investments, so that investment firms and brokers can protect themselves down the road. Pay attention to these warnings. Before you even begin down the road toward committing to an investment, take these legal warnings as the first sign that you need to think about calculating investment risk. 

Tap into Your Experience

If you are not learning from your past, then you are not seizing the opportunity to grow as both a person and as an investor. Everything you have done in the past should help inform what you will do in the future, for better or worse. When you need to calculate investment risk, tap into your experience so that you are making the best decision possible. Also look to people who are close to you—friends, family members, professional colleagues—and try to learn from what they have done also.  

Understand Your Risk Tolerance

Risk tolerance, or “the level of risk an investor is willing to take,” according to Charles Schwab  , is important to understand. This is the step where you decide just how risky you want to be with investments. The general rule is that the riskier the investment, the higher the reward. But not everyone's portfolios or current life situations allow them to make risky investments. For example, most financial advisors would recommend gradually moving away from risky investments  the closer you get to retirement.

Analyze the Amount of Risk Present

Once you understand your risk tolerance for investments, it is time for the final step in how to calculate investment risks before investing: analyzing the amount of risk present. This step may seem obvious, but without first tapping into your past experiences and fully grasping your risk tolerance, the exercise of analyzing the amount of risk present is not nearly as effective. In general, bonds carry the least amount of risk , followed by things like cash and personal real estate investments. Once you start getting into individual stocks and index funds, the risk also increases.

Invest (Or Don't)

Ultimately, after you calculate investment risk you will need to decide whether or not to invest. All of these steps should come into play before doing so. Look for legal risk warnings, tap into your past experiences, do a full audit of your risk tolerance, and then conduct an analysis on the amount of risk that is present in your current opportunity. Remember, not all investments are going to be successful, but by calculating investment risks beforehand you can help yourself to make smarter, safer investment decisions.    For more information from trusted industry experts about calculating risks before making investments, visit our Insights Page.