The meaning of risk
Risk is about more than the possibility that any shares you buy might fall in value. If you choose a supposedly safe savings option, such as a deposit account, you are accepting risk of another sort: that the value of your savings might be eroded by inflation.

Use the Two Sides of Risk calculator to find out what happens to your savings at various rates of inflation. Even at a low rate of three per cent, inflation cuts the value of your savings by 25 per cent over 10 years. Share investment brings with it the risk of losing money through falling share prices. But the reward for taking that risk is the possibility of returns that beat inflation.

Take calculated risks
It is impossible to avoid risk altogether. Keep your money in cash and inflation erodes its purchasing power. Buy shares and you risk losing your capital. Rather than try to avoid risk altogether, the trick is to take calculated risks, where the upside justifies the downside. Or in other words, the potential rewards make it a risk worth taking. Risk measurement is an underused tool. Investors generally focus on returns, without looking at how much risk was involved in generating those returns. This approach is changing as the emphasis shifts from judging investments by their past performance to assessing them on a risk basis.

Measuring risk
Tools such as FT Fund Ratings gives investors the opportunity to compare the risk level of funds. That in turn allows them either to increase their expected return while maintaining the same risk level, or to keep the same expected return while cutting their risk.

How much risk?
Your attitude to risk is partly down to personality, but your age comes into it too. The longer you have until you will need to spend the money you have saved, the more risk you can take.

• If you are still in your 20s or 30s and saving for retirement, most of your portfolio should be in shares.
• Someone in their 40s would also suit this strategy. But if they have children, short-term investments aimed at providing school or education funding might also make sense.
• As you get close to retiring, the safety of Government bonds might be more sensible.

Minimising equity risk
Building up an investment portfolio need not involve very high risk. To cut the risk, you need to do one or both of the following:

• Spread your risk by dividing your money between a variety of shares and stock market sectors. The easiest way to do this is to invest via unit trusts or investment trusts, collective investment funds that typically invest in 50 to 100 companies.
• Select funds that match your risk profile.

Which products are the riskiest?
Knowing the risk involved in a particular investment is the most critical aspect of creating your own portfolio. Generally, most advisers will rank savings and investment opportunities in the following way.

1. Building society accounts, bank deposits (low risk)
2. Government bond fund, with-profits fund
3. Corporate bond fund
4. High-yield corporate bond fund
5. FT-SE All Share fund
6. European smaller companies fund
7. Major UK shares held individually, eg. BT
8. Emerging markets fund
9. Smaller UK shares held individually
10. Warrants, options, individual biotechnology stocks (high risk)