Investment risk and your attitude to risk

Your attitude to risk is, in the words of one provider's own guide, "how much risk you're comfortable taking, otherwise known as your attitude to risk"¹. It is separate from your capacity for loss, which is how much money you could actually afford to lose without it changing your life. Both matter, and both are usually measured before you invest, whether by a financial adviser, a pension scheme or an online platform.

The reason the question is asked at all is that risk and reward move together. It is, as the investment industry's own guidance puts it, "a central principle of investing, the higher the risk, the higher the potential rewards"². Higher risk investments tend to move up and down more in the short term but can grow more over the long term¹. The same principle works in reverse: the same investments can fall further and faster than cautious ones, and in extreme circumstances you could lose all your money³.

What attitude to risk means when you invest

When a provider, adviser or platform asks about your attitude to risk, they are trying to establish how comfortable you are with the value of your investments going down, and for how long. Standard Life's guide defines it simply as "how much risk you're comfortable taking"¹. Which? describes the same idea as your risk appetite, and notes that knowing it makes it easier to pick investment funds and exchange-traded funds (ETFs), which carry a risk rating on a 1 to 7 scale⁴.

Attitude to risk is not the same as capacity for loss. Someone might feel relaxed about a fall in their portfolio on paper, but if the money is earmarked for a house deposit next year, their capacity for loss is close to zero. Good providers and advisers assess both: how you feel about swings in value, and what a fall would actually do to your plans. The Financial Ombudsman Service looks at exactly this when it reviews complaints about investment advice, as the case studies later in this page show.

Your answers feed into the products you are offered. A cautious answer typically points towards portfolios weighted towards bonds and cash; an adventurous answer points towards shares. None of these labels removes risk, they only change its shape, as the next section explains.

Higher risk, higher potential reward, and bigger potential losses

The trade-off at the heart of investing is that the investments with the greatest potential to grow are also the ones that can fall the furthest. The Association of Investment Companies' guidance states the principle plainly: "the higher the risk, the higher the potential rewards"². Standard Life adds the practical detail: "although higher risk investments can make you more money in the long term, they also tend to move up and down more in the short term"¹.

This movement up and down is what people in the industry call volatility. It is not itself a loss: a fund that falls and then recovers has been volatile but has lost you nothing if you stayed invested throughout. It becomes a loss when you are forced to sell during the fall, which is why time horizon and emergency savings matter so much on this page.

Some structures add risk on top of market movement. Investment trusts can borrow money to make additional investments, a practice called gearing, and the guidance is blunt about it: "as a rule, the more an investment trust borrows the more risky it is"⁸. Borrowing magnifies gains when markets rise and magnifies losses when they fall.

There is also a behavioural risk worth knowing about. FSCS research from November 2022 found that 23% of people who described themselves as willing to take risks with their money agreed that the existence of compensation protection encouraged irresponsible behaviour⁹. In other words, some people take more risk than they otherwise would because they believe a safety net will catch them. The FSCS safety net is not designed for that, and it does not cover ordinary investment losses.

Three ways to lose money: falling values, inflation and hard-to-sell investments

Investment risk comes in more forms than the obvious one. Three matter most to ordinary investors.

Falling values. The value of your investments can fall as well as rise, and you may get back less than you put in. NS&I's own ISA guidance says exactly this¹⁰, and Which?'s guide to what you can hold in a stocks and shares ISA makes the same point: "The success of your investments will be dependent on the market, and, as with all investments, there's no guarantee you'll get your money back"¹¹. In extreme circumstances you could lose all your money³.

Inflation. Cash is very secure, but savings in a bank often lose value over time due to inflation¹². MoneyHelper's guidance on fixed-rate savings bonds spells out the mechanism: your original investment will not hold its value in real terms if the interest you are getting is less than the rate of inflation over the investment period¹³. The same risk applies to very low risk investments, which "may not grow enough to keep up with inflation, so won't grow in value in real terms"¹. A portfolio with a greater proportion of bonds and cash is lower risk, but leaves your money vulnerable to being eroded by inflation¹⁴.

Hard-to-sell investments. Some investments cannot be sold quickly, or at a fair price, when you want out. The FCA's rules on high risk investments cover what it calls non-readily realisable securities, and its own risk summary for shares in start-up businesses states: "If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail"⁶. Investment trusts carry a related risk: their share price can stand at a discount to the value of their assets, which is one of the risks the industry's guidance lists as unsuitable for people who cannot accept it¹⁵.

Time horizon: aim for at least five years

The single most consistent piece of guidance across every source on this page is that investing is for money you can leave alone. The Association of Investment Companies says to be prepared to keep your money invested for five to ten years, or longer⁵, and to plan for "five, ten, or even 20 years, especially if the investment is very high risk"³. Which?'s guidance for beginners says to be prepared to part with your money for at least five years, as this gives you a better chance of riding out the ups and downs⁴. HSBC's guide to investing myths gives the same minimum: aim to hold investments for at least 5 years⁷.

The reason is mechanical rather than mystical. Markets fall as well as rise, and the longer you stay invested, the more chance a fall has to be recovered before you need the money. Someone investing for two years has very little room for a bad patch; someone investing for fifteen has a great deal.

Guidance also links time to risk level directly: if you are planning to invest for ten years or more, you may be able to take a bit more risk in exchange for the possibility of higher returns³. The reverse holds too. Investment trusts are described as not suitable for people with an investment time horizon of less than five years¹⁵.

Before you invest: rainy day savings and debt

Before any money goes into investments, the guidance is to build a cash buffer. The Association of Investment Companies' advice is: "Before you invest, make sure you have some 'rainy day' money. Keep an appropriate amount of cash in a bank or building society so you can access it quickly for any unexpected outgoings or emergencies"². HSBC's guidance is more specific: an emergency fund of between 3 and 6 months' worth of expenses before investing⁷.

How much that means in pounds depends on your circumstances. A savings guide for single parents published by the charity One Parent Families Scotland suggests that a reasonable first goal is £100 to £300, built up gradually¹⁶. There is no single official figure; the principle is that the money should be there so an unexpected bill never forces you to sell investments at a bad moment.

The other precondition is debt. The industry's own guidance is explicit: "Remember, investment is not suitable as a way to get out of debt"⁵. If you are carrying expensive debt, the interest you are paying generally works against you faster than investment growth works for you, and investment values can fall while the debt stays the same. The final section of this page covers debt in detail, including where to get free advice.

Spreading risk rather than putting all your eggs in one basket

Diversification means holding many different investments rather than a few, so that one failure does not sink the whole portfolio. Which?'s guide to asset allocation explains that diversification helps lessen what is known as unsystematic risk, such as drops in the value of certain investment sectors, regions or asset types¹⁴. A single equity fund might hold 40 to 60 shares in one country, stock market or sector¹⁴, which is one reason funds are the usual starting point for most people rather than picking individual shares.

Collective funds spread risk in a structural way. Investing in a collective investment fund such as an investment trust gives you access to a broad portfolio of shares, which spreads risk and minimises the impact of any one company going bust or performing badly⁵. The same logic applies to OEICs and unit trusts and ETFs, which hold many holdings inside one wrapper.

Diversification has limits. It reduces the risk of one company or sector failing, but it does not remove market risk: in a broad fall, most share-based investments fall together. It also does nothing for the inflation risk described above, which is why spreading across asset types, including some bonds and cash, is part of the standard approach. The FCA's rules on high risk investments add a rule of thumb for the other direction: not to invest more than 10% of your money in high-risk investments⁶. The dedicated page on diversification and asset allocation covers how to build a spread portfolio.

Cautious or adventurous: matching risk to how long you have

Investments are often described as "cautious", "balanced" or "adventurous", which Which? notes is often a reflection of how far and how fast the value moves⁴. These labels map onto the 1 to 7 risk rating scale used for funds and ETFs⁴, and onto the questionnaires platforms and advisers use.

The guidance links the label to your timeframe. HSBC's guide says that "if you're 5 years from retirement, you may want to select a cautious investment. If you have 10 years or more to play with, you may be able to be more adventurous"⁷. The Association of Investment Companies says the same in general terms: people tend to consider higher risk investments for longer-term goals, as they will have more time to bounce back from any falls¹.

What happens when the match is wrong is illustrated by two Financial Ombudsman Service case studies. In one, a consumer complained about advice from an independent financial adviser; the client, David, "was categorised as having a cautious attitude to risk", and the complaint turned on whether the investments recommended matched that categorisation¹⁷. In another, a consumer complained about the investment funds within a personal pension plan that had been represented as high risk; the ombudsman's reasoning included that "a more cautious investing approach, whilst not offering the same return potential as equities, would have been better suited to Roger"¹⁸. In both cases the question was not whether the investments were good or bad in the abstract, but whether they suited the person who held them.

How your attitude to risk shapes pensions, ISAs and ready-made portfolios

Your attitude to risk does not just describe you; it actively shapes what you are sold and what you hold.

Ready-made portfolios. Most "do-it-for-me" investment services ask you for your investment aims and assess your attitude to risk through a questionnaire, then recommend a tailored portfolio of funds, gilts and bonds¹⁹. The questionnaire is not a formality: it determines which ready-made portfolio you land in, and therefore how much of your money sits in shares versus bonds and cash. The page on ready-made funds and model portfolios explains how these services work.

Pensions. Self-invested personal pensions (SIPPs) are considered riskier than most personal pension schemes, and were created to allow experienced investors the opportunity to take more risks²⁰. At the other end of life, the money in a pension has to be converted into retirement income, and the choices carry their own risk: level annuities can leave you vulnerable to inflation, which might make your annuity income worth less over time²¹.

ISAs. A stocks and shares ISA holds investments whose value can fall as well as rise, and you may get back less than you put in¹⁰. The wrapper protects you from tax, not from loss. The page on where to hold investments compares the options.

Structured and capital-protected products. Even products marketed as capital protected generate complaints. The Financial Ombudsman Service lists common grounds for complaints about capital protected structured investments: the product was not suited to your circumstances, the literature was unclear, the return was lower than expected, the risks were not properly explained, or the amount invested was too high²². If you believe an investment was mis-sold, the page on mis-sold investments and bad investment advice sets out the complaint route.

Where investment risk is not a good fit

Some circumstances and some products are a poor match for investment risk, and the guidance says so directly.

Investment trusts are described as not suitable if you need a guaranteed return, need a guaranteed income, or cannot accept the risks that come with gearing and discounts¹⁵. They are also not suitable for an investment time horizon of less than five years¹⁵. Nothing in investing guarantees a return or an income; if you need either, investing is the wrong tool.

Very high risk investments sit in a category of their own. The FCA's rules require a risk summary that states, for shares in start-up businesses: "If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail"⁶. The same rules carry the rule of thumb not to invest more than 10% of your money in high-risk investments⁶. Mini-bonds, which typically offer bumper returns, come with much higher risk and very little protection, and are usually issued by smaller companies and start-ups²³. The collapse of London Capital & Finance, whose investors' compensation scheme began in 2020, is the standing example of how badly this can end²³. The pages on FCA rules on high-risk investments and investment scams cover the protections and warning signs.

Debt first: why investing is not a way out

The clearest statement on this page comes from the investment industry's own guidance: "Remember, investment is not suitable as a way to get out of debt"². The logic is simple. Debt interest is a certainty that compounds against you; investment returns are uncertain and can be negative. Borrowing to invest, or investing while debts grow, can leave you with less money and the same debts.

The risks of the debt side of the equation are documented across the free advice sector. The Building Societies Association warns that taking out a loan to pay off all your debts means you may end up paying back a lot more than you borrowed, you may not be able to afford the repayments, and the loan may be secured against your home, which you could then lose²⁴. Consolidation loans can add to your debt or take longer to pay off than the original debts²⁵, and some may take a longer time to pay back than your original debt, which can make them more expensive in the long term²⁶. StepChange describes debt consolidation as a risky way to cope if you cannot pay your debts²⁷. Even a debt management plan carries a risk that the total debt you owe could increase, because you are taking longer to pay it off²⁸. In bankruptcy, any valuable assets you have, like houses or cars, could be sold to help pay your debts²⁹. Remortgaging to pay off debt may be possible depending on your situation, but the risks could include longer repayment terms, securing the mortgage against your home, and more interest to repay in total³⁰.

The scale of the problem is measured, not guessed. The Resolution Foundation defines households in "debt peril" as those spending at least half their disposable income on repaying debts³¹. The National Audit Office has identified a cluster of people who are always struggling to meet their repayments, 14% of those assessed as over-indebted³².

The consistent advice from every debt charity is to take advice before acting. It is important not to take action to tackle debts until you speak to a qualified debt adviser, because some debt solutions can have serious long-term consequences³³. Choosing a debt solution involves complex calculations about affordability and how long repayment will take, and there can be significant legal and professional implications to choosing the wrong solution³⁴. A debt adviser will typically talk through options that include sorting out your finances through better budgeting, going on a debt solution, or using assets to pay back or write off debt³⁵. Some debt solutions can put certain assets at risk, and in some cases assets may be used to deal with debts³⁶. One simple rule from Community Money Advice: don't take out any more borrowing to pay off debt³⁶. And keeping debt to yourself can add to stress, lead to conflict in relationships, and make it harder to recover³⁷.

Free, independent help is available. StepChange, National Debtline and Community Money Advice all provide free debt advice, and MoneyHelper offers free guidance on money questions generally. The debt section of this site sets out the solutions and your rights in full.