Six types of risk every investor should understand

By Staci West on 2 March 2026 in Basics

Every investor must embrace some risk to achieve a return. It’s virtually impossible to generate decent returns without encountering a degree of stock market volatility. But it’s important to understand the risks being taken, as there are plenty of potential problems that can adversely affect their portfolios.

Here, we examine the main threats facing investors and how the various risks they pose can be mitigated through careful fund selection.

Style risk

Style risk is one of the biggest, if not the biggest, risk in an investor’s portfolio. Investment style refers to the type of stocks a fund manager favours. Typically, this is determined by company size (small-cap to large-cap) or by stock type, either growth or value. A fund’s style shapes the companies it invests in and therefore how it performs in different economic conditions.

When one style is in favour, the other is often out of favour, and these trends can last for years. If your portfolio is heavily weighted to the same style, your investments are likely to move together. Should that style fall out of favour, your portfolio can take a hit.

Chasing last year’s top-performing fund is rarely the best strategy. Even the best managers go through periods of underperformance when their style isn’t in favour. Holding a mix of styles and funds helps create a balanced portfolio and reduces the impact if a single style underperforms.

On FundCalibre, you can filter funds by style to help make more informed decisions when building your portfolio.

Market risk

This is something that affects the entire stock market – or at least a significant portion – and can devastate a portfolio’s value almost overnight. A prime example is the COVID-19 crash of 2020, when global stock markets plunged by more than 30% amid pandemic restrictions*. That’s why it’s not advisable to put all your money into equities.

Diversifying into bonds, property and commodities can help dilute this risk. This can be achieved by choosing individual funds or opting for a multi-asset portfolio with a maximum pre-agreed exposure to equities.

The WS Canlife Diversified Monthly Income fund is in the IA Mixed Investment 20-60% Shares sector. It aims to deliver monthly income from dividends, interest payments, and rental income.

The fund contains a mix of international equities, sterling and global corporate bonds, UK equities, property, alternatives, high-yield holdings and cash.

Sector risk

When one area is booming – such as technology in recent years – it can be tempting to invest as much as possible in the pursuit of bumper returns. However, it only takes a change in sentiment or a major company to post a profit warning for every stock in the sector to see valuations hit. The technology sector famously experienced the dotcom crash in 2000, while the financial sector suffered badly during the 2007-2009 crisis, sparked by overzealous lending.

Investors need to know the sector exposure of their chosen funds to ensure it aligns with their goals and risk appetite. This information is detailed in the monthly factsheets.

For example, the Rathbone Global Opportunities fund currently has 26% of assets in consumer discretionary names, 20% in technology, 18% in industrials and 14.5% in financials. Healthcare, consumer staples, real estate, utilities, basic materials and telecommunications are also represented, but each accounts for allocations of less than 10%**.

Credit risk

We have highlighted equity risks so far, but there are also pitfalls within fixed income. The main issue is when issuers fail to pay interest or return the capital. Past examples include Enron, the US energy giant, which filed for Chapter 11 bankruptcy in late 2001. Bondholders didn’t receive back all that was owed to them***.

The likelihood of companies honouring their commitments is assessed by credit ratings agencies, so it’s important that investors are comfortable with the risk being taken. It’s why strategic bond funds, capable of investing across the fixed-income spectrum, can be popular, as their managers make the asset allocation calls.

One such portfolio we like is Invesco Tactical Bond. Its active style enables risk to be continually adjusted according to market conditions and the level of return on offer. Currently, the fund has 43% in government/agency bonds, 39% in investment grade bonds, 6.3% in US treasuries, and 6% in sub-investment grade corporate bonds****.

Inflation risk

One of the biggest risks for investors is posed by inflation. This is the percentage by which the price of goods and services increases each year. In the UK, the Bank of England is tasked with keeping inflation at 2%. However, it was 3.4% in December 2025 and hit a peak of 11.1% in 2022 in the wake of COVID-19^.

If money tucked away in a savings account isn’t generating a return at least level with inflation, then its buying power is decreasing. It’s the same with investments. Having too much invested in low-return, lower-risk assets can lead to a decline in your portfolio’s value.

Of course, no funds can guarantee protection from rising prices, but funds such as Jupiter Gold & Silver are often used as an inflation hedge. This fund invests in both physical gold and silver bullion, as well as shares of gold and silver mining companies. This enables it to adjust its positioning to suit market conditions.

Linked to this is interest rate risk. Banks use rates to help regulate inflation. However, rising interest rates reduce bond prices as they make them less attractive to potential buyers.

Personal risk

Although, not all risks come from markets or economic forces. Some are far closer to home. Personal risk relates to changes in an investor’s own circumstances that can derail even the most carefully constructed portfolio. This could include loss of employment, illness, relationship breakdown, or an unexpected need for cash.

This risk is often underestimated, particularly during periods of strong market performance, when liquidity can feel like an afterthought. Mitigating personal risk is less about chasing returns and more about planning. A portfolio should suit not just an investor’s risk appetite, but their life circumstances too.

Conclusion

While each of the risks we’ve outlined poses different threats, ensuring you have a diversified portfolio will help protect your overall portfolio. The rules remain the same: be clear on your investment objectives, decide your attitude to risk and revisit your portfolio decisions to ensure they’re delivering the expected returns.

*Source: IMF, 3 November 2020

**Source: fund factsheet, 31 December 2025

***Source: The Guardian, 30 November 2001

****Source: fund factsheet, 31 January 2026

^Source: Bank of England