Things You'll Need:
- Financial advisor
- Knowledge of investment types
-
Step 1
Work with a certified financial advisor to help you determine your personal risk tolerance and to help you analyze the risk factor of investments you are interested in making.
-
Step 2
Consider the purchasing power risk of cash investments, such as Treasury Bills or government bonds. In broad terms, purchasing power risk is the chance that future inflation will advance at a rate beyond the interest rate you're getting on your cash investment. Should that happen, the purchasing power of your future dollars will be compromised, not going as far as they would have at lower inflation rates.
-
Step 3
Take financial risk into account when dealing with volatile assets such as stocks, company bonds or mutual funds. Especially when dealing with less established companies, there is a chance the company you invest in is financially insecure or will become insolvent. Either scenario could mean losing a significant portion of your investment.
-
Step 4
Take the time to pick up some good books that will teach you how to read stock charts and analyze a stock's investment risk. Learn how factors such as price-to-earnings (P/E) ratios, a company's financial history and current trends in the marketplace affect a company's potential for profitability--or the opposite.
-
Step 5
Remember that interest rate risk is a significant factor when dealing with bonds. At periods when interest rates are fluctuating, a bond investor can miss the boat by committing at lower rates and missing out on a better premium once interest rates have risen. Such an investor may also have a hard time selling his bonds to reinvest the locked-up capital at the new, higher interest rates.
-
Step 6
Follow the financial markets closely so you have an idea how to assess market risk at any given time. Market risk refers to trends in the marketplace that may affect the future demand--and, with it, the sale price--of your market investment, such as stocks or bonds. Work with your financial advisor to assess the market risk attached to any stock purchases you're considering making.
-
Step 7
Follow current events. They have a significant impact on the performance of the entire world's financial markets. Learn about the world's production patterns and monitor any changes that take place in them. Currency investors in particular are affected by day-to-day events in global politics.
-
Step 1
Apply as many of the preceding principles for evaluating risk as you can to every investment you're considering. Seek investments that offer a manageable degree of risk with the potential for worthwhile returns.
-
Step 2
Use any investment-specific risk analysis tools that are available to you. For example, check a stock's 52-week high and low, review its financial statements, analyze its cash flow-to-debt ratio and the stock's P/E ratio. Real estate investors will want to consider things like the neighborhood a property is in, zoning by-laws and a building's structural soundness.
-
Step 3
Trust professional judgment, and avoid making investments beyond your risk tolerance.
