How to assess investment risk: questions to ask before you invest

I’ve found that most people are not very good at assessing risk. They either dramatically underestimate it or blow it out of proportion. Two big areas where this shows up are investing and career decisions. Today, I want to focus on the investment side.

I spoke with someone who called me for advice after making a large investment with big upside. Unfortunately, it went to zero. When I asked what percentage of their net worth they put in, the answer was: all of it.

Here’s how I think about assessing risk before making any investment:

Percentage of Net Worth

The larger the percentage of your net worth you’re investing, the higher the real risk. I always ask myself: If this goes to zero, can I live with that? If the honest answer is no, then the investment is too big.

Diversification

Your investments should be balanced across multiple asset classes—and rebalanced over time as they grow. Remember: Your business and real estate are part of your portfolio too.

Holding Period

What is the expected holding period, and what is the projected return? Those two numbers determine true rate of return.

A 20% return is amazing in one year. A 20% return over 10 years…not so much.

Always ask: How do I get my money back, and when?

Liquidity

Illiquid investments (like startups) carry inherently higher risk because you can’t exit when you want to. Public equities offer flexibility you don’t get with private investments.

Economic Exposure

Some investments are far more sensitive to economic cycles than others. Make sure you understand how macro conditions could impact your downside.

Tax Impact

What happens if the investment pays off? What are the tax implications?

Startup payouts may create big taxable events, while equities let you defer taxes for years. There’s no “right answer”, but it’s part of the risk calculus.

Investment Thesis

You need an investment plan grounded in your long-term goals. This framework guides decisions and helps you stay out of trouble. Most people make investment decisions based on short-term circumstances—and end up giving back all the gains they previously made. Don’t do that.

Final Thought

Some people close to me think I’m a risk-taker in business and investing. Nothing could be further from the truth. In business, I bet on myself and people I know and trust. In my investments, I follow the same guidelines I’ve outlined here and remain disciplined.

Combine that with living below your means, and you give yourself the ultimate advantage.

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