How to help manage investment risk
What risk means for your money and how to help manage it.
Key summary:
- Investment risk means your money could fall in value due to market ups and downs.
- Your approach to risk is personal and may change with your circumstances.
- Diversifying across assets can help balance out poor performance in some areas.
- Investing regularly over time may help smooth out market fluctuations.
The Cambridge Dictionary describes risk as "the possibility of something bad happening". It's a definition that we're familiar with in day-to-day life. Most of us try to avoid risk when we can – like wearing a helmet to ride a bike or checking for traffic before crossing the road.
But when we talk about risk in the context of investing, it's not necessarily something you'll want to avoid. We’ll explain why.
What is investment risk?
When you buy equities, also called stocks and shares, you're essentially buying a piece of a company. This means you might earn money if the company does well. In investing, risk refers to the possibility of an investment falling in value.
As a rule, investments which are regarded as riskier, like equities, can have the potential to deliver a higher rate of return over the long term than less risky investments. You'll probably have a bumpy ride along the way, coping with the ups and downs of the market to try and get there - and there are no guarantees.
That might not be for you. Instead, you may want a smoother ride and be happy with a lower, but steadier, return. In that case, an investment with a lower level of risk, such as bonds, might be more suitable for you.
Whether you decide to be riskier or prefer to play it cautiously, the approach you take is a very personal decision – and could change over time with your circumstances.
Whichever suits you, investing will always have some level of risk. Investments can be affected by anything from business performance or the economy to global events that rock the financial markets like the banking crisis of 2008, Covid-19, the invasion of Ukraine, or when the US announced global trade tariffs in April.
The value of your investments can always go down as well as up, so you may get back less than you’ve put in.
Managing investment risk
Whenever you invest, you must accept there's a risk your investments may fall. But there are some things you can do to help manage that.
Try to keep calm
Investment market volatility can be distressing but decisions made in haste or under stress are rarely good ones. We've got some tips to help you during uncertain times, in our article How to keep calm during market volatility.
Focus on the longer term
As mentioned earlier, all investments go up and down over time. But generally, the longer you invest, the more chance there is of your investments being able to survive the ups and downs of the market. That's why investing is suggested for the long term (at least five years).
For example, if you're a pension saver under 45, you're in a great position to invest for the long term and may be prepared to accept more risk. With at least a decade until you can legally access your savings and around 20 years before you may retire, your investment should have enough time to withstand any market dips.
Avoid putting all your eggs in one basket
They say don't put all your eggs in one basket and the same goes for investing. With just one investment, you could make a big loss if it falls in value.
That’s why it’s recommended to spread your investments across different areas like stocks and shares, bonds and even property. It’s called ‘diversification’. So, if some of your investments are doing poorly, the losses could be balanced out by others performing well.
One way to diversify is by pooling your money together with other investors in a fund. Funds can make it less likely to lose some of your money, as all the assets in a fund would need to perform badly at the same time.
Spread your investments over time
Investing small amounts on a regular basis, rather than a lump sum up front, could help to spread your risk. This is known as pound-cost averaging. Buying shares in small amounts over a period of time means sometimes they will be expensive, and sometimes cheaper – so you get an average cost over time.
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