Understanding risk – risk vs reward
When you invest, risk and reward go hand in hand.
In investing, risk means the value of your investments can rise and fall, and you could get back less than you put in. These ups and downs are often called volatility – when prices move quickly over short periods of time.
Taking more risk can offer the potential for higher returns over time, but your investments are also likely to rise and fall more along the way. Taking less risk usually means smaller ups and downs, but typically lower growth potential.
It’s also worth remembering that no financial choice is completely risk-free. Keeping money in cash may feel safer, but if inflation rises faster than your savings grow, then your money will buy less than it did to start with.
The level of risk that suits you depends on your goals, how long you plan to invest, and how comfortable you are with changes in the value of your investments.
Key takeaways
Higher potential returns usually come with bigger ups and downs
Choosing the right risk level helps you stay invested
Risk should match your goals, timeframe and comfort level
Choosing a level of risk
Before choosing a risk level, consider:
How long you plan to invest
How you might react if the value of your investments fell for a period of time
Whether you’d feel comfortable staying invested when the market drops
Being clear on these points can help you choose a level of risk you’re more likely to stick with.
Whatever your risk level, investing typically demands a longer time horizon – around five years or more – to give you more time to move through market ups and downs. If you need your money more quickly than that, investing might not be right for you.
Understanding risk ratings
Most funds and investments are given a risk rating using a 1–7 scale. This is a standardised scale used across the investment industry. You will see it referred to as the Synthetic Risk and Reward Indicator (SRRI), or the Summary Risk Indicator (SRI).
This rating is based on the investment’s past volatility – in other words, how much its value has moved up and down over time.
1 indicates lower volatility, where prices tend to move more steadily
7 indicates higher volatility, where prices tend to rise and fall more sharply
The rating can help you understand how much an investment’s value may change over time. However, it looks at past behaviour, so it cannot predict what will happen in the future.
What to keep in mind
Higher potential growth usually comes with bigger ups and downs. Lower risk may feel steadier, but returns are typically more modest.
What matters most is choosing a level of risk that matches how long you plan to invest and how comfortable you are seeing the value of your investments change.
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).
