Five practical tools to manage investing risk

Key takeaways

• Investments always come with some risk: it’s the one thing you can be sure of.

• Five practical tools can help manage that risk: time, research, spreading your investments, keeping a cash buffer, and investing regularly.

• There isn’t a perfect amount of risk that fits all investors – the best approach depends on your goals, your timeline, and how comfortable you are with the value of your investments moving.

When it comes to investing, most people hear the word “risk” and immediately think of something scary. That's understandable – when the market crashes or falls dramatically, it makes news. The reality is often calmer, though. Investing does involve uncertainty. In your account, that might simply look like seeing the value of your investments fall for a while, even if you haven’t done anything wrong. But uncertainty is something you can plan for and manage.

This guide walks through five practical tools that can help.

(An earlier guide covered what investing risk actually is. This one is about what to do about it.)

Why does investing feel risky?

It’s partly because the worst days get all the attention. Big falls, market panics, and bad years are what get reported. The much milder reality – values drifting up and down within a fairly ordinary range – rarely makes the news. Over time, that skews how investing feels before you've even started.

It's also worth saying that investing can look like a world designed to make regular people feel bewildered. There's jargon everywhere, strong opinions flying around, and commentary that swings between euphoric and apocalyptic. The actual activity underneath all that noise is usually much more boring – in a good way.

If you invest in a broad fund, for example, you're buying a small slice of lots of real businesses. The value will move around, sometimes more than you’d like, but you're not depending on one company or one outcome.

Over long stretches of time, broad markets have historically tended to grow, though that’s never guaranteed. Investments can fall as well as rise. The point isn’t that risk disappears: it’s that it’s usually more manageable than it might seem at first.

Don’t I already manage risk every day?

Yes – more often than you probably notice.

Home insurance is risk management. Choosing the excess on that policy is risk management, too. Locking in a fixed-rate mortgage is another one. In each case, you’re not removing uncertainty. You’re planning around it.

Investing feels different mostly because the prices move visibly. You can open an app or a browser window and see the value of your investments change. The numbers on the screen aren't telling you something has gone wrong (or right) – they're just telling you what's happening.

What tools can help me manage investing risk?

There are five, mainly. None of them will get rid of risk entirely – but they can help you manage it.

1. Time

As a rough guide, investing is usually better suited to money you can leave alone for at least five years, and ideally longer. The longer investments are left alone, the more time they have to ride through short-term ups and downs. Prices can move sharply over days or weeks. Over years and decades, though, those moves have historically mattered less for people whose money is spread across different types of investments. That isn't guaranteed, but it's why investing is best thought of as a long-term thing rather than a quick win.

2. Spreading your investments

This is the classic "don't put all your eggs in one basket" move. Investing in lots of different things at once means that a disappointment in one industry or one trend isn’t likely to unsettle the whole bunch. Most people do this by buying into a fund or an exchange-traded fund (ETF). Those are baskets of investments that hold stakes in dozens or even thousands of different businesses, sometimes across different industries and countries. Spreading is sometimes called "diversification". It can't protect you from everything. If the whole market falls together, a diversified portfolio can still fall, too. But it can shrink the severity of the damage that one bad pick can do.

3. Researching what you're investing in

This doesn’t mean becoming a markets expert or reading company reports for fun. It just means having a basic sense of what’s actually inside your investment before you put money into it. Knowing what you own also helps you match the investment to the financial goals you’re trying to hit. Money you plan to use in retirement in 30 years can usually afford more ups and downs. Money for a house deposit in three years probably doesn't have that breathing room. And money you might need quickly in an emergency usually belongs in savings, not the market.

4. Having a cash buffer

Imagine an unexpected bill lands – your washing machine breaks and needs replacing, or the car needs a £700 repair. If all your money is invested and markets happen to be down that week, you'd have to sell some of your investments – potentially turning a short-term dip into a realised loss. A cash buffer – typically, a few months' worth of essential expenses kept in savings and easy to access – can allow you to handle the situation without disturbing your investments.

5. Investing regularly

Investing a set amount in on a regular schedule – regardless of what the market is doing on a given day – is sometimes called "pound-cost averaging". It smooths out the risk of buying a huge amount of one thing at the wrong moment, by spreading your contributions across different prices over time. It also has another benefit: it turns investing into a habit, rather than an event.

What does this look like in practice?

It depends on what your money is for. The right mix of these tools is personal – it shifts with your goals (what the money is for), your timeline (how long until you need it), and how comfortable you are with the value of your investments moving around in the meantime.

A 35-year-old building a pension has time on their side. If retirement is decades away, the ups and downs along the way matter less. In that case, spreading their investments and contributing regularly may do most of the work, with a cash buffer still in place for emergencies.

A 60-year-old who plans to draw an income from their investments in five years has less time to recover from a downturn, so steadiness matters more. The same tools apply, but the balance between the choice of investments may shift.

That’s really the point. There will always be risk, but these five practical tools – time, spreading, researching, a cash buffer, and regular contributions – give you ways to plan for it, in line with how you want to invest.

Next up: See if you’re ready to invest with our quick checklist.

This information is for education only. It’s not financial advice or a personal recommendation.

Moneysupermarket.com Investments Limited is an appointed representative of P1 Investments Services Limited, which is authorised and regulated by the Financial Conduct Authority (FCA FRN 752005).