What risks come with investing? The basics

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

At the lower end of the risk scale are cash funds. These are designed to help preserve the value of your money by investing in cash-like assets such as bank deposits and short-term loans. They’re generally considered lower risk, but returns are usually modest and may not keep pace with inflation over time.

Next come bond funds, which invest in loans made to governments or companies and pay interest over a set period. Bond funds usually carry more risk than cash funds, but are typically less volatile than shares. Their value can rise and fall, particularly when interest rates change or if the borrower’s financial position weakens.

Moving further up the risk spectrum are diversified equity funds, which invest in shares across a wide range of companies, sectors, and regions. By spreading investments, these funds aim to balance risk and return, but their value will still fluctuate with stock markets.

Higher-risk options include thematic, emerging market, and smaller-company funds. These focus on specific trends, regions, or types of companies and can offer stronger growth potential. However, they’re usually more volatile and can experience larger swings in value.

Towards the highest end of the scale are individual shares (where you own a piece of one company) and more specialised investments, such as cryptocurrencies or venture capital. These can deliver significant gains, but they also come with a much greater risk of sharp losses.

Understanding where different investments sit on the risk spectrum can help you choose options that match your goals, time horizon, and comfort with ups and downs.

2. Risks that are less in your ‘control’

Volatility

Volatility refers to how quickly the value of your investments can change. 

Some assets are more reactive than others. For example, cryptocurrencies can rise or fall dramatically in a single day, while gold is usually more stable. 

Market risk

Market risk refers to how external events can affect the value of your investments.
Government decisions, such as new regulations on certain sectors, can push stock prices down, potentially damaging the prospects of companies operating in that industry. While political tensions or a pandemic can slow the world down, disrupting entire industries.

Liquidity risk

Some investments can be harder to sell quickly if you need your money. For example, property or specialist funds may take time to convert back into cash.

Default risk

If you invest in bonds or bond funds, there’s a risk that the borrower may not be able to repay what they owe or make interest payments. And if a company or government were to go bust, you could lose some or all of your money.

Market fraud

While rare in regulated markets, market fraud does exist. Some companies can overstate their value, making shares seem worth more than they are.

As rare as this is, you should watch out for investment schemes offering huge returns. Regulatory authorities like the Financial Conduct Authority (FCA) work to combat fraud - but it’s worth staying alert to protect yourself.

Time horizon risk

The shorter your time frame, the riskier investing feels. If you need your money soon, a sudden market fall could have a bigger impact. But if you can leave your money invested for the long term, there’s more chance markets will recover.

Emotional risk

When markets fall, it can be tempting to panic and sell. This can lock in losses. Managing your emotions and sticking to a plan is just as important as choosing the right investments.

Focus on the risks you can manage.

While some risks - like market movements or global events - are outside your control, many aspects of investing are within your power to control. 

And just because there are risks beyond your control, it doesn’t mean you shouldn’t invest. The key is to focus on taking the right risks – the ones that suit your goals, timeframe and appetite for ups and downs. For example, a well-diversified portfolio spreads investments across different risk levels, giving you a better chance of achieving growth while cushioning you from heavy losses.

How can I reduce risk?

In a perfect world, there would be no risk when investing. Even though you can’t remove risk completely - there are a few things you can do to minimise it:

• Hold a mix of investments: don’t put all your eggs in one basket. Different assets (such as equities - shares and funds, bonds and alternatives) often perform differently in the same economic conditions. By investing in different assets, sectors and regions, you spread the risk - which can help give your portfolio a smoother ride over time.
• Do your homework: research before you invest, understand the risk involved. And be wary of any opportunity that sounds too good to be true.
• Invest within your comfort zone: avoid putting too much into high-risk assets. Think about how much you’d feel comfortable seeing fluctuate in value without it affecting your everyday finances.

Read more on our principles for good investing here.

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Can someone help me with a personal financial recommendation?

Managing a portfolio isn’t everyone’s cup of tea. If you’ve got over £100k to invest (including pensions) you might like to think about taking financial advice. It’s a paid-for service for both one-off or ongoing support. The first discussion is a no-obligation, free chat to see if financial advice would suit you. So, you’ve got nothing to lose. Read more about financial advice here.

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