How to Balance Risk and Reward in Your Investment Portfolio

According to Unbiased, 23% of UK adults actively invested in the stock market in 2024. As more and more people begin to invest and take control of their financial futures, understanding how to balance risk and reward in your investment portfolio has never been more important. Rather than chasing returns or avoiding risk altogether, successful investing is all about finding the right balance for you. 

Here’s everything you need to know about balancing risk and reward in your investment portfolio.

What Does Balancing Risk and Reward Actually Mean?

Put simply, investment risk refers to the uncertainty around returns and the possibility that your investments may fall in value. On the other hand, investment reward is the potential return you could receive for taking that risk. Generally speaking, higher-risk investments offer greater potential for long-term growth, but they also tend to experience more volatility along the way.

Balancing investment risk and reward is all about constructing a portfolio that gives you a realistic chance of meeting your financial goals, without exposing you to more risk than you are comfortable with. You also need to take a long-term view when investing. It’s expected that markets will fluctuate in the short term – but it’s important that you don’t hold too much cash, as inflation can steadily reduce what that money can actually do for you. 

Understanding Your Personal Risk Tolerance in Investing

To effectively balance risk in your portfolio, you’ll need to determine your risk tolerance. This has two parts: your risk capacity (your financial ability to absorb losses) and your risk appetite (how comfortable you feel when markets rise and fall). 

For example, two investors that hold identical investment portfolios could experience a market downturn very differently depending on their circumstances. Someone that has a secure income and longer time horizon might be able to comfortably stay invested, while someone else may feel panicked and pull out at the worst possible moment.

Financial advisers (like Piercefield Oliver) use professional risk profiling tools such as structured questionnaires and scenario-based assessments to help bring clarity to the process, ensuring that your investment strategy risk level is aligned with both your finances and your mindset.

How to Determine the Right Risk Level for Your Portfolio

There is no “correct” level of risk that works for everyone. The risk level that is right for you all depends on your individual circumstances and long-term goals. 

If you’re looking to build up your wealth over a longer period or you’re planning for retirement, your portfolio may have a different risk profile than someone who is seeking income or needs shorter-term access to funds. For example, money you won’t need for many years can tolerate more short-term ups and downs than funds that are needed sooner. Other factors such as liquidity needs (how easily you can access your money), employment stability, existing savings, and wider financial commitments also play an important role in determining the most appropriate level of risk.

Risk categories are often described as cautious, balanced, or adventurous. These can be useful starting points, but it’s important to remember that they are not one-size-fits-all labels. At Piercefield Oliver, we take the time to understand your wider financial picture, before recommending a strategy that supports your goals for saving and investing your money.

Strategies for Balancing Risk and Reward in Practice

To have a well-structured investment portfolio, you need to be able to effectively manage risks and diversify your investments where appropriate. Spreading your investments across different asset classes (shares, bonds, cash) allows you to reduce your reliance on any one single area of the market. This helps to lessen the impact if one part of the market performs poorly.

The way you allocate your assets is also important. Having a mix of growth-focused and defensive investments will influence how your money performs when markets rise or fall. Make sure you regularly review and rebalance your portfolio when needed to ensure it remains aligned with your chosen risk level.

Research by Barclays shows that half of British investors have admitted to making an impulsive investment decision due to excitement, impatience, or fear. We recommend avoiding emotional reactions during periods of volatility and taking a step back when your emotions start to cloud your decision-making, as this could significantly undermine your long-term returns.

When to Seek Professional Investment Advice

Balancing risk and reward in your investment portfolio is an extremely personal process. While online tools and generic guidance can be helpful, they don’t capture the full complexity of your situation.

At Piercefield Oliver, we offer expert financial investment advice to individuals in Cheltenham and the Cotswolds. Our financial planners will take the time to understand what matters most to you (including your goals and personal priorities), before developing an investment approach that fits around your lifestyle and future ambitions. We’ll also regularly review and adjust your portfolio to ensure it remains aligned with your wider financial plan. 

Book your free consultation with one of our financial advisers to discover how we can support your financial goals.