Understanding investment risk What is investment risk?
Talk to your financial adviser about risk and its implications on your finances
You can't plan financially without understanding investment risk. Many people, when they hear about 'risk', think automatically about the chance of being defrauded or not getting all their money back. This 'capital' risk is important, but it isn't the only type.
Other types of risk involve uncertainty and unpredictability. When you make an investment, it can be difficult to say with any certainty what you'll get back when you finally cash it in.
Share prices fluctuate, interest rates vary, and inflation is a risk too. Just concentrating on capital risk and ignoring these other risks can mean you take too cautious an approach.
Understanding risk means identifying your own attitude to risk and identifying the different types of risk. Then you can pick up tips for minimising the chances of things going wrong.
Some simple rules
- The greater return you want, the more risk you'll usually have to accept
- The higher return you want from your investments, the greater the chance of losing some or all of your initial investment (your capital)
- If you're saving over the short-term it's wise not to take much capital risk. So what you are investing for and when you'll need access to your money will have a big impact on what types of investments are right for you
- If you are investing for the long-term you can afford to take more risk
- Investing in share-based assets has proved to be the best way for providing growth that outstrips inflation. There is a risk attached but, when you invest over the long-term, there is more time to recover your losses after a fall in the stock market.
For more on investing, also see our book Save and Invest.
- For guidance on investing, call our experts on the Which? Money Helpline
- If you're choosing a financial adviser, read our expert guide to help you get the best
- Take a look at our expert guide to risk free investing
