An investment that returns 12% is not better than an investment that returns 3%: it is paid for a different risk. The whole difficulty lies in identifying that risk before committing your money, not after. Assessing the risk of an investment comes down to answering three questions: what can I lose, with what probability, and what protects me if the unfavorable scenario materializes? Here is the method, the indicators that answer these questions, and those that do not.
How to Assess Investment Risk: Method, Indicators and Limits
Note: this article is intended for educational purposes and does not constitute investment advice or individualized tax advice. Your personal situation (residence, income, amounts and objectives) may change the applicable rules. For significant amounts, consult a professional and check official sources.
What is investment risk?
Investment risk is the probability of losing all or part of the capital committed, or of not obtaining the expected return. This definition seems obvious, but it is regularly confused with another concept: volatility, that is, the magnitude of price variations.
The distinction is decisive. An equity fund that falls 18% in one year suffers a temporary loss : as long as you do not sell and your time horizon allows it, the loss is not realized.
A company that defaults on its debt inflicts on you a permanent loss : the capital does not come back, whatever your time horizon.
A highly volatile investment can therefore be less risky, in terms of capital, than a stable investment backed by a fragile issuer.
Next comes the return-risk pairing.
The additional return an asset offers you compared with a risk-free investment is called the risk premium: it is a compensation, never a gift. The right question is therefore not “is this return high?” but “what precise risk am I being paid to bear, and am I being paid adequately?”.
Three signs that a high return is not free:
You cannot get your money back whenever you want.
The return depends on the solvency of a single counterparty.
No document tells you what happens in the event of default.
The nine types of risk to identify before investing
Before any calculation, the useful exercise is to name the risks present in the investment you are examining. Most unpleasant surprises come from a risk the investor had not identified, not from a risk that was poorly measured.
| Type of risk | What it means | Where it mainly appears |
|---|---|---|
| Market risk | The value of the asset falls along with the market | Equities, ETFs, funds, crypto-assets |
| Credit (or default) risk | The borrower fails to repay, in whole or in part | Bonds, private debt, crowdlending |
| Liquidity risk | You cannot sell quickly at a fair price | Real estate, private equity, unlisted assets |
| Interest rate risk | A rise in interest rates reduces the value of existing securities | Bonds, real estate, SCPIs |
| Currency risk | The asset's currency depreciates against the euro | Assets denominated in USD, CHF, or emerging market currencies |
| Concentration risk | A single issuer, sector or country carries too much weight | All insufficiently diversified portfolios |
| Counterparty or platform risk | The intermediary defaults or mismanages the funds | Investment platforms, brokers |
| Regulatory and tax risk | The rules or the tax treatment change along the way | Cross-border investments, recent asset classes |
| Inflation risk | The real return becomes negative | Savings accounts, euro-denominated funds, long-dated bonds |
This last point is the most underestimated by cautious savers: an investment paying 2% in an environment of 3% inflation causes you to lose purchasing power every year, in apparent complete safety. The protecting savings against inflation is a risk in its own right, not a secondary detail.
Step 1: assess your own risk profile
No investment is risky in absolute terms: it is risky relative to you. Three distinct parameters determine your profile.
Risk tolerance: what you can withstand psychologically
This is your ability to hold a position when it declines.
The test is simple and brutal: if your portfolio lost 30% in six months, what would you do? If the honest answer is "I would sell," your tolerance is low, and a portfolio heavily exposed to equities will make you realize your losses at the worst possible moment…
Risk capacity: what you can absorb financially
This is an objective factor: emergency savings in place (3 to 6 months of expenses), stability of your income, share of your assets committed, fixed charges to meet. One can have a high psychological tolerance and a low financial capacity. In that particular case, it is capacity that must decide.
The investment horizon: the parameter that changes everything
One rule fits in a single sentence: money you will need within three to five years has no place in a risky asset. The horizon also determines which risks are bearable!
Market risk diminishes over time, because listed markets have historically recovered their losses. Default risk, on the other hand, does not diminish: a borrower who does not repay will not repay any more in ten years.
Translate your profile into a maximum acceptable loss. This is the only truly useful figure. Empirically, a portfolio's worst historical loss is between two and three times its annual volatility: a portfolio with 15% volatility can therefore fall by 30% to 40% in a bear market. If that figure seems unbearable to you, the allocation needs to be reviewed—not on the day it materializes, but today.
Step 2: read the risk indicators, and know their limits
The SRI, the 1 to 7 scale in regulatory documents
For any financial product distributed in Europe, the Key Information Document (DIC) displays a summary risk indicator rated from 1 to 7. Since January 2023, this SRI (Synthetic Risk Indicator) has replaced the former SRRI of the DICI: it incorporates not only historical volatility but also the issuer's credit risk. A level of 1 corresponds to a product with very low volatility, a level of 7 to the most exposed funds.
It is an excellent tool for comparing comparable products, and a poor decision-making tool when taken in isolation: it says nothing about your horizon, nor about the product's actual liquidity, nor about what happens in the event of default…
The five risk indicators you should know how to read
| Indicator | What it measures | What it does not tell you |
|---|---|---|
| Volatility (standard deviation) | The magnitude of variations around the average return | Nothing about permanent loss or default risk |
| Maximum drawdown | The worst historical decline, from peak to trough | Nothing about future losses, which may be greater |
| Value at Risk (VaR) | The potential loss over a period, at a given confidence level | Structurally underestimates extreme crises |
| Beta | The asset's sensitivity to market movements | Not applicable to an asset that is not listed |
| Sharpe ratio | The return obtained per unit of risk taken | Equates risk with volatility alone |
The three blind spots of these indicators
They are backward-looking. All are calculated on past data. They describe an asset's behavior under conditions already encountered, not under those to come.
They assume "normal" returns. Volatility and VaR rest on statistical assumptions that crises regularly violate: extreme events are more frequent and more severe than these models anticipate.
They require a daily market price. This is the limitation with the most serious consequences, and the one that leads us to the next step.
Step 3: assessing the risk of an unlisted asset
Fractional real estate, private equity, private debt, crowdlending: these assets have no daily quotation, so their calculated volatility is close to zero, and their Sharpe ratio spectacular.
This is a measurement artifact, not a quality. An asset without an observable price is not a risk-free asset: it is an asset whose risk cannot be seen in prices.
With these investments, the dominant risk is no longer market risk but credit risk, the probability that the counterparty will not repay. It is assessed on four levels, none of which is a statistical indicator. The complete framework of P2P lending risks sets out this analysis in detail; here is its structure.
1. The quality of the borrower
Examine recent financial statements, and above all repayment capacity: it is cash flow that repays a loan, not revenue. Look at how long the company has been in business, its sector, its dependence on a few clients.
Serious platforms publish an internal rating, Maclear uses an AAA to D scale, which summarizes this analysis without exempting you from it. A repeat borrower, who has already repaid, is a favorable signal; it guarantees nothing for the future and concentrates your exposure if you follow them systematically.
2. Collateral and the loan-to-value ratio (LTV)
A secured loan is backed by an asset, equipment, vehicles, inventory, real estate, that the lender can have realized in the event of default. The loan-to-value ratio, or loan-to-value, measures this coverage:
LTV = loan amount ÷ value of the collateral
€400,000 lent against collateral valued at €800,000 gives an LTV of 50%: two euros of assets for one euro lent.
The lower the LTV, the thicker the safety margin. Two checks are necessary before relying on this figure.
First, which value was used in the denominator: a conservative liquidation value, that is, the price actually achievable in a forced sale, bears no relation to a book value or an acquisition price.
Next, what is the legal nature of the collateral : registered and enforceable, or merely a contractual undertaking? At what rank?
A low LTV reduces the expected loss in the event of default. It does not eliminate it: recovery takes time, incurs costs and does not always return the full amount.
For details of the calculation and real-life cases, see our analysis of the loan-to-value ratio in secured crowdlending secured and what actually backs a Maclear loan.
3. Term and repayment structure
The more distant the maturity, the more time the borrower's situation has to deteriorate. Also look at how the principal is returned: interest paid monthly gives you a health signal month after month, whereas an in fine repayment concentrates the entire risk on a single date.
Financing split into successive tranches, by contrast, allows you to reassess before committing again. This trade-off between term and yield is structural!
4. The platform's soundness
You are not only investing in a project, but also through an intermediary.
Four points to check:
The regulatory framework and supervision to which it is subject,
The segregation of accounts, which separates your funds from those of the company,
The protection mechanism in place: a provision fund or a buyback obligation cover neither the same amounts nor the same situations, and none is equivalent to a deposit guarantee,
Transparency on past defaults and recovery procedures. The existence of a secondary market provides partial liquidity, never guaranteed, and at a price that depends on buyers' appetite at the time you sell.
The seven-question analysis framework
Before any investment, whatever it may be, answer these seven questions. If you get stuck on one of them, information is missing, and missing information is itself a risk.
What is my maximum loss scenario? Quantify it in euros, not as a percentage.
Would this loss be temporary or permanent? Market decline or counterparty default.
Am I being paid for this risk? Compare it to the return on a risk-free investment of the same duration.
When can I get my money back? And at what price if I exit before maturity.
What protects me in the event of default? Collateral, seniority, LTV, the platform's mechanism.
How much weight does this holding carry in my overall wealth? No single position should be able to tip the whole.
What will my net return be? After fees, after taxes, after inflation.
The five most common mistakes
Confusing the absence of a listed price with the absence of risk. This is the most costly mistake with unlisted assets, and the easiest to make since the figures appear to prove you right.
Confusing diversification with multiplication. Twenty holdings exposed to the same sector, the same country or the same economic cycle do not make a diversified portfolio. True true diversification spreads across assets with low correlation to one another.
Thinking in terms of gross return. Entry fees, management fees, taxes and inflation can absorb half of a stated performance.
Extrapolating past performance. A track record with no incidents tells you about the period that has elapsed. It does not constitute a probability for the period ahead.
Neglecting liquidity until you need it. The liquidity risk never shows up when everything is going well: it appears the day you have to sell, often at the moment when everyone else is selling too.
FAQ
How do you assess the risk of an investment?
In three steps: identify the types of risk present (market, credit, liquidity, interest rate, currency, concentration, platform, regulatory, inflation), define your personal profile (tolerance, financial capacity, time horizon), then measure the risk with the tools suited to the asset, statistical indicators for listed assets, counterparty and collateral analysis for unlisted assets.
Which risk indicator is the most reliable?
No single indicator is enough on its own. Volatility measures variations, maximum drawdown the worst historical loss, and the SRI provides a comparative scale from 1 to 7. Combine several of them, and above all check that they apply: on an unlisted asset, they are mechanically flattering.
What does the SRI in a Key Information Document mean?
The SRI (Synthetic Risk Indicator) ranks a financial product from 1 to 7 based on its historical volatility and the credit risk of its issuer. It replaced the SRRI in January 2023. It is used to compare products with one another, not to decide on an investment by itself.
Is an investment with low volatility necessarily low risk?
No. Volatility measures the amplitude of price variations, not the probability of permanently losing your capital. An asset without daily pricing shows volatility close to zero while carrying a very real risk of default.
What is a good LTV ratio?
The lower the LTV, the more the collateral covers the loan: an LTV of 50% means two euros of assets for one euro lent. The acceptable level depends on the nature of the collateral and its liquidity, and the quality of the valuation used matters as much as the ratio itself.
How can you tell whether a double-digit return is justified?
Ask yourself what risk it compensates for: illiquidity, duration, the absence of deposit protection, the risk of default by a small or medium-sized business. A high return is consistent when those risks are identified, framed and documented. It becomes a warning signal when no one can explain to you where it comes from.
Assessing the risk of an investment does not consist in reading a score on a scale from 1 to 7. It consists in naming the risks present, comparing them with your actual situation, then choosing the right measurement tools: statistical indicators for listed assets, counterparty and collateral analysis for those that are not. An investor who knows precisely what they can lose makes better decisions than an investor who hopes to lose nothing.
About Maclear
Maclear AG is a Swiss peer-to-peer (P2P) lending and crowdlending platform, headquartered in Switzerland. The company acts as a financial intermediary in the non-banking sector and is a member of PolyReg SRO, in accordance with Swiss financial regulations, particularly regarding AML, KYC, and GDPR. Maclear provides individual and qualified investors access to carefully selected business loan opportunities, with integrated risk assessment, a Provision Fund, and a Secondary Market for liquidity.
The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. Peer-to-peer (P2P) lending and crowdlending investments carry a risk of partial or total loss of capital. Past performance does not predict future results. Liquidity on a secondary market is not guaranteed. Readers are encouraged to conduct their own research and consult qualified advisors before making any financial decisions. The availability of products and services may be restricted in certain jurisdictions.