Understanding risk

Whatever we decide to do with our savings and investments we expose them to some element of risk. It’s impossible to eliminate risk completely but you can take steps to manage the type of risks your savings and investments are exposed to.  

The kind of risk you expose your savings and investments to will vary between different types of assets.

For example, money placed in a bank or building society deposit accounts is exposed to a greater inflation risk than other assets. This is because the interest rate earned will often not keep pace with rising prices (inflation). This reduces the purchasing power of this money over time.

By contrast, shares have a greater chance of achieving a return in excess of inflation, maintaining or even increasing the purchasing power of your money. However, they will expose your money to a greater capital risk if the shares are priced lower than the price you bought them for at the time you need to sell them.

There are a number of different risks that you should consider when thinking about saving or investing. A financial adviser can help identify and explain these to you in more detail.

How do I manage the types of risks my savings and investments are exposed to?

Although you can’t eliminate risk completely, you can manage it. You can do this by diversifying your savings and investments across a number of different asset types. This ensures your money is not overly exposed to one particular type of risk.

In order to manage your risk efficiently you need to diversify your savings and investments in a way that’s tailored to your own personal circumstances and that takes account of your attitude to risk, your capacity for loss, your investment objectives and time frame.

We recommend you speak to a financial adviser before making a big decision about your savings and investments. If you don't have an adviser at the moment, don't worry, you'll find impartial listings of professional advisers in your area on thepfs.org or unbiased.co.uk