Reframing risk: five points to clear the fear

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

Helping British savers get the most from their money seems to be a big goal for the UK government, and it’s a welcome one too. Part of that means shifting some of the £430bn [1] sitting in cash that might be able to provide UK savers with a better return in the stock market instead.

While there’s a bit of back and forth over how this aim might affect cash ISA limits, ultimately we need to look at why that step from cash to investing has felt too daunting for many savers. Even if new allowances come in, it’s unlikely to change how savers feel about investing their money and it’s that psychological element that came up a few times in our recent Freedom to Invest survey.

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In particular, the inherent risk involved in investing seemed to be a real barrier but there was a bit more nuance to it than the staid old ‘some people understand it, some people are scared of it’ perception. So, while the step into investing should always be your own personal choice, it feels like we need to frame the concept of risk better to enable people to make an informed choice rather than a nervous one.

Here are five points to clarify what we mean by investment risk and help overcome some of the less well-understood hurdles savers face when they think about investing.

If we don’t equip ourselves with a solid understanding of what risk actually means in investing, to a wary UK ear it might sound like it’s all about blindly throwing a dart at a board full of stock market tickers while juggling a few crystal balls. It’s not. This isn’t about crossing the street with your eyes closed and neither is it about taking a punt on a stock that may shoot up the page or crater completely.

When we talk about risk in investing, we’re thinking about the chance of the money we have invested going down, possibly to zero. That’s usually the worry.

However, the flipside of risk is potential return and there tends to be a correlation between assets’ risk levels and their possible performance. A crude spectrum might put cash at the low-risk end, as you are very unlikely to lose money stockpiling banknotes, and shares at the other, as a company failing would likely ruin your investment. Bonds lie in the middle as, while their prices fluctuate, they pay out a steady stream of interest payments and they don’t tend to offer as bumpy a ride as shares. In the same vein, though, cash savings are unlikely to provide high returns, bonds could generate more and there is much more potential to produce profits on the stock market. This is what we mean by risk/reward.

Importantly, that doesn’t mean every share or bond carries the same risk profile. A company with various revenue streams, consistent earnings, strong margins and a loyal customer base will look very different to a young, untested company with no profits and a fledgling product. It’s why it doesn’t pay to tar the whole of investing with the risky brush - we need to make sure we look under the bonnet and really understand what we’re investing in. if you’re blinded by the opportunity, you might not be paying close enough attention to the possibility it goes south. Alternatively, if you’re too risk averse, you might be ignoring a healthy company with promising business metrics.

This leads us nicely onto how we can manage those overall risk levels ourselves. You might have heard of 80/20 portfolios, with 80% of the holdings in shares and 20% in bonds. Other flavours in the risk sweet shop include 70/30, 60/40 and all the other mouthwatering blends. The goal here is to either buy a ready-made version or create one yourself to reflect how much risk you want to take in pursuit of investment returns.

Whether you fancy a DIY approach or an off-the-shelf package, you’ll likely have numerous assets in play to offset each other and stop your journey relying too much on the outcome of a single share or bond. These assets also tend to perform differently to one another, meaning they can pass the baton back and forth to soften short-term losses.

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This means a healthy attitude to risk can also help manage how much your portfolio value fluctuates in the short-term. Volatility is very much part of investing and is the price we pay for the hopeful long-term outperformance of shares over cash, so we have to get used to it. But, by holding a range of assets that reflect our risk tolerance, we can try to minimise volatility if it’s a bit too eye-widening to see big changes day to day.

Diversification can be a useful tool in mitigating those movements and in identifying a portfolio that suits our risk appetite. Remember, we’re trying to spread risk across a range of assets so that we hopefully see growth over the long term and avoid any blips during that time having a big impact on the overall portfolio.

Because we can all touch and hold cash in our hands, there tends to be the distinction between money being ‘real’ and investments existing somewhere in the financial ether. It can make cash feel safer because it’s physical and not subject to the ups and downs of the stock market. And yes, stepping onto the market ladder means adopting a certain level of risk but it doesn’t mean cash is immune to risks of its own.

Inflation is constantly eating away at what those physical pounds in your pocket can actually buy in the real world. The coins and notes stay the same but price rises mean that cash won’t go as far as it used to. If the interest you gain in a cash savings account isn’t at least keeping up with inflation, you’re losing money in real terms.

For reference, while the current Bank of England base rate (which usually informs other savings rates you’ll find among lenders) is 4.25%, the US S&P 500 Index has returned around 10% each year since 1957, with the FTSE 100 delivering a total return of around 8% per year, from its inception in 1984 to 2024 [2]. As we’ve said, investors would have adopted investment risk by stepping into the markets and there’s no guarantee they would have beaten inflation, but history shows us that long-term view would have helped.

Discrete calendar year performance

As at 14 July 2025. Source: FE Fundinfo. Past performance is not a reliable guide to future gains or indicative of future performance.

This isn’t a signal to jump into investing if you are a cash saver - rather, it is a reminder that the risk/reward balance is applicable to all assets including cash and that inflation can erode money sitting on the side lines. It may be worth considering how we factor in diversification to keep risk levels where you want them as well as providing enough opportunity for your money to grow.

An important finding from our survey was that, even when we understand the role of risk in investing, all the bulky disclaimers and complex explainers that come with it can prevent us from actually investing.

We need to remember that warnings are genuinely there to help us make the best choice for our own situations but, admittedly, it can be overwhelming when we’re hit with a wall of text with the odd bit of industry speak thrown in.

It’s why we always try to talk to our users without all the buzzwords and in as clear a way as possible. Hopefully seeing those banners talking about our capital being at risk can actually become a reminder to keep our own risk levels in mind rather than a sign to grab our cash and flee into the distance.

When risk appears to be a binary choice between taking it or not, it’s pretty easy to guess which way most people will go. That doesn’t paint the full picture though. When we’re thinking about investing for the long term we need to factor in our time horizon and how much we have to invest, as well as our tolerance for risk. The whole thing starts to make a lot more sense when we try to find a balance between all three.

For example, if our goal is a £50,000 house deposit and we want to get there in 10 years’ time, saving £250 per month, we’d need a 10% annual return each year. That’s quite a punchy goal and is likely to need a high proportion of stocks to get there, which should start the conversation of where to compromise if that blend doesn’t suit you. Raising those monthly investments to £300 would put less pressure on annual returns, with your portfolio needing a 6.5% yearly return to hit the £50k mark. Lengthening the timeframe or looking for a cheaper house both come into the conversation too.

The point is that we shouldn’t look at risk on its own. It has a relationship with other real-world facets of investing and, as much as we would love all the positives with none of the negatives, it’s risk that also allows reward.

Sources:

[1] The UK investment gap, Barclays, September 2024 [2] officialdata.org, July 2025

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.