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:

• By spreading your investments across different asset classes: for example, your portfolio could include some bonds, gilts, deposits and, possibly, a property fund.
• By spreading your investments within an asset class: for example within an asset class like equities, you spread risk by investing in a range of companies in different sectors.

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.

1. Five steps to establish your investment goals 2. Your attitude to risk and reward 3. The major asset classes 4. Which type of manager? 5. Your investment assessment kit 6. Is past performance a guide to the future? 7. Easy access deposits for emergencies 8. Fixed income products 9. A rising income 10. The choice of collective equity funds 11. Pensions and ISAs 12. Tax efficient but may be very risky 13. Selecting your shares 14. Your stockbroker 15. Buying your shares 16. Ethical Investment 17. When to sell 18. How to keep your portfolio on track 19. Do you need an adviser? 20. Conclusion

• First Steps in Shares
• How to Read the Financial Pages