Risk is a part of investing, just as it’s a part of life. And the first and most important thing to realise is that, try as you might, you can’t isolate yourself or your cash from it completely. Trying to assess risk when you’re new to investing or not familiar with what it is can be difficult. But it’s the key to getting the most from your money.

So what actually is risk? A quick look in the dictionary and you could be reaching for your cash and stashing it under the mattress. “The danger that injury, damage, or loss will occur” isn’t exactly the most confidence boosting catchphrase. But it’s important to remember that without risk, the rewards may be limited.

If you’re naturally cautious, you might be more comfortable saving your money in a bank or building society account where you know where it is, you have easy access to your money and you’ll get back at least what you put in.

You might be surprised to know that putting your money in a savings account could also be a risk. If it struggles to keep up with inflation and your money doesn’t grow quickly enough, you might not have enough to support the lifestyle you want. Inflation can reduce the ‘buying power’ of your money and, for instance, you only have to look at the rising prices of petrol over recent years to see that.

Most of us know that shares are much less secure than a deposit account as their value can go down as well as up – every day. But along with the higher level of risk comes higher potential reward.

So is there a happy medium? Well there’s a whole range of products offering different degrees of risk and potential return, and the key to successful investing is finding the right balance for you.

Risk can be affected by all kinds of factors, but by their nature, some investments are more risky than others. To help you understand and assess risk, these factors can increase it:

• Buying shares in just one company – if it hits hard times, you could lose the lot.
• Putting all your money into one type of investment – whether it’s property, shares or a savings account.
• Putting a lot of your money into fashionable investments (remember the dot.com boom?).

To invest comfortably, you need to understand your ‘risk profile’ – the amount of risk you’re prepared to take, ranging from ‘none at all’ to ‘all or nothing’.

To help you choose investments that suit the level of risk you’re prepared to take, many are given a risk rating. There’s no standard way of classifying risk, but as a guide investments that offer higher potential rewards also carry a higher risk of losing their value. This is known as a risk/reward profile.

At Norwich Union, we classify risk into five levels and profiles, these are:

1. Low – “I’m not prepared to take any risk with my capital and realise that this may not safeguard my investments against inflation”.
2. Low to medium – “My aim is to achieve greater returns over the longer term than with interest paying accounts. I’m therefore prepared to accept the risk of possibly losing some of my money and to see some fluctuation in the value of my investment”.
3. Medium – “My aim is to achieve better returns over the longer term than are available on more cautious investments. I’m prepared to accept day-to-day fluctuations in the value of my investments and the risk of a possible loss arising at any stage”.
4. Medium to high - “My aim is to achieve better returns over the longer term than are available on less speculative investments. I am prepared to accept wide day-to-day fluctuations in the value of my investments and the risk of a possible loss arising at any stage”.
5. High - “My aim is to maximise my returns over the longer term. I am prepared to accept significant day-to-day fluctuations in the value of my investments and the risk of a possible loss arising at any stage”.