Investment Risk

What "capital at risk" means

When an investment says your capital is at risk, it means the value can fall as well as rise and you may get back less than you put in — possibly much less. Unlike money in a savings account, invested money is not a guaranteed sum. Past performance is not a reliable guide to the future.

There is a general relationship between risk and reward: investments that offer the chance of higher returns usually carry a greater chance of loss. There is no such thing as a high return with no risk, and anyone who tells you otherwise should be treated with great caution.

The main types of risk

Investment risk comes in several forms, including:

• Market risk — prices fall because of wider economic or market conditions
• Inflation risk — returns fail to keep pace with rising prices, so your money buys less
• Company or credit risk — a specific company underperforms or cannot repay what it owes
• Liquidity risk — you cannot sell an investment quickly, or only by accepting a lower price

How to manage risk

You cannot remove investment risk, but you can manage it. Diversifying — spreading money across different investments, sectors and regions — means a fall in one is cushioned by others. Investing for the long term gives your money more time to recover from short-term dips.

It also helps to match your investments to how much risk you can afford to take and how you would feel if their value dropped. If you are unsure, regulated financial advice can help you understand your own attitude to risk before you commit.