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First principles of investing

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2. Your attitude to risk and reward

It may be said that as a private investor your chief enemies are the risk of capital erosion through inflation and the risk of capital loss through market volatility.

Your investment reward, which should be commensurate with the risk, is the 'total return'. This can be expressed as the percentage increase on your original investment, and it comes in two ways: firstly, from investment income (dividends and interest) and secondly from capital growth (a rise in the stock market price).

You may manage risk in two ways:

The point about the first method is that asset classes generally do not respond in the same way to economic cycles, so while your equities are struggling your bonds and gilts may be doing well. It's all a question of balance.

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