Investors face two quite different kinds of loss: an investment that falls in value, and a firm that fails or gives bad advice. This article explains how the FCA frames investment risk, and where the Financial Services Compensation Scheme (FSCS) does and does not step in.
Why do risk and return travel together?
The FCA’s InvestSmart guidance puts the central idea plainly: the higher the returns you want from an investment, the more uncertainty, or risk, you need to expose your money to. Risk, in this sense, is the chance that something does not go to plan, usually for the worse. For an investment, it means the asset does not perform as expected and may lose money.
The relationship is a tendency, not a formula. The FCA notes there is no standard calculation linking the two, and higher risk does not guarantee higher return. Someone offering a very high rate for your money may simply be more likely not to repay it. That is why an unusually generous promised return deserves more suspicion, not less.
Return itself can be negative. Selling shares for less than you paid is a negative return, and the FCA points out that gains and losses are not final until you sell and withdraw the money.
What kinds of risk should an investor recognise?
The FCA’s guidance mentions several, and they overlap:
- General investment risk: the investment may not perform as expected and can lose value.
- Short-term volatility: returns, especially from shares, can swing widely over short periods.
- Liquidity risk: difficulty selling or accessing the money when you want it, or at a good price.
- Scam risk: the FCA warns that if something seems too good to be true, it might well be a scam.
Savings accounts sit at the other end. The FCA says they carry virtually no risk of losing your money, but if inflation is higher than the interest rate, savings lose purchasing power. So “safe” and “risk-free” are not the same thing. Cash carries its own quieter risk.
Four questions that shape an investor’s risk profile
The FCA suggests thinking about a risk profile through four questions:
| Question | What it asks |
|---|---|
| Purpose | What is the money for: retirement, fees, a wedding, a rainy-day fund? |
| Timeframe | How soon is it needed? The FCA suggests a minimum of five years to help offset short-term ups and downs. |
| Liquidity | Might you need it sooner than expected, for example after redundancy or illness? |
| Capacity for loss | Can you afford to lose some or all of it? |
The last one is the most personal. Two people can hold the same fund and have very different capacity for loss, because one has a secure income and spare savings and the other does not.
A worked example of the 10% rule of thumb
The FCA offers a rule of thumb: consider limiting yourself to no more than 10% of your net assets in investments that carry a real risk of losing a significant part, or all, of your money. It defines net assets as savings, investments, property other than your main home, and cars, minus any debt you owe.
The figures below are illustrative arithmetic, not a recommendation:
- Savings: £8,000
- Investments: £22,000
- Car: £6,000
- Debt: £6,000
Net assets are £8,000 + £22,000 + £6,000 − £6,000 = £30,000. Ten per cent of that is £3,000. On this rule of thumb, the amount placed in very high-risk products would be capped at £3,000, and only if the person could afford to lose all of it.
The rule applies to the riskiest category, not to a diversified portfolio of mainstream funds. It is a guard against concentration, not a statement that everything else is safe.
Why does a loss need a bigger gain to recover?
Losses and recoveries are not symmetrical. In a worked example, a £10,000 holding that falls 20% is worth £8,000. To get back to £10,000 it must rise by £2,000, which is 25% of £8,000. The deeper the fall, the steeper the climb: a 50% fall requires a 100% gain.
This is one reason the FCA stresses time. A longer horizon gives volatile assets more room to recover, though it never guarantees that they will. It is also why how diversification actually works matters: spreading money across different types of investment, such as international shares and bonds, can limit the damage if one market performs badly.
What does FSCS protect, and what does it not?
FSCS is a safety net for failure, not for performance. According to the FSCS investments page, it may protect you if a provider goes out of business and there is a shortfall in the money or assets it held for you, or if you lost money because of bad advice. The firm must have been authorised, and the service and product must have been regulated, by the PRA or the FCA.
The FSCS page is equally clear about the exclusion: poor investment performance is not covered, and investment values can go down as well as up. The FCA repeats the point: protection does not apply simply because an investment performs poorly.
If a share price falls because the company is struggling, or a fund loses value in a market downturn, there is no compensation. If an authorised investment firm collapses and cannot return your assets, or an authorised adviser gave negligent advice, the position can be different.
How much can FSCS pay?
As of November 2026, according to the FSCS investments page, the limit depends on when the firm failed. It is up to £85,000 per eligible person, per firm, for firms that failed after 1 April 2019. For failures between 1 January 2010 and 31 March 2019 the limit is £50,000. Earlier failures have an older formula: 100% of the first £30,000 and 90% of the next £20,000, up to £48,000.
The phrase “per person, per firm” matters. The limit applies to each eligible person at each failed firm, so what counts is the firm that held or advised on the money, not the number of investments. For bad-advice claims, the FSCS says the advice must have been given on or after 28 August 1988.
Savers should not confuse this with bank deposits, which follow separate rules; see how the £120,000 deposit protection limit works for that.
Is every investment regulated?
No. The FCA says not all activities are regulated, and for unregulated activities you may have no access to FSCS or the Financial Ombudsman Service if things go wrong. Its examples of activities that can be unregulated include direct investment in cryptoassets, commodities such as gold, hotel rooms, forestry, land for development, overseas agriculture, parking spaces, student accommodation and wine.
The FCA recommends using its Firm Checker to confirm that a firm is authorised and has permission for the service you need. The FSCS advises asking the firm to confirm that the activity is regulated and FSCS protected. Unauthorised firms are likely to leave customers without either safety net.
Where do wrappers and fees fit?
None of the above changes with the account type, but the account can change what you pay and owe. A stocks and shares ISA, as explained in our guide to how they work, shelters growth from tax, yet the investments inside still rise and fall. Costs are a separate drag on returns, as the worked example in why investment fees matter shows.
The FCA also points to alternatives for people who find high-risk products unsuitable: for instance, increasing workplace pension contributions or saving in a well-diversified fund within a stocks and shares ISA.
Separating the risks you can manage from those you cannot
Market risk cannot be insured away; it is the price of the potential return. Firm risk, scam risk and concentration risk are more manageable: through checking authorisation, understanding how an investment works and how easily it can be sold, and keeping the riskiest holdings to a small share of net assets. Knowing which safety net applies to which loss is the clearest way to avoid assuming protection that does not exist.
This is general information, not personalised financial advice. The value of investments can fall as well as rise, and rules, limits and rates change.
Sources: Financial Conduct Authority; Financial Services Compensation Scheme
