The Illusion of High Returns
Most people chase the headline number: “This stock made 12% last year.”
But returns without context are meaningless.
The real question is:
What risk did you take to earn that return?
That’s what risk-adjusted return measures.
What Risk Actually Is
Risk is not just “losing money.”
It shows up in multiple ways:
→ Volatility – how much the value swings up and down.
↳ A stock that goes +20%, then -15%, then +12% might average 12% annually… but can you emotionally survive the ride?
→ Loss Probability – the chance you never recover from a bad bet.
↳ A startup can promise 50% returns, but if there’s a 70% chance it goes to zero, that’s not wealth-building.
→ Liquidity Risk – how easily you can access your money when needed.
↳ Real estate may yield 8%, but if it takes 6 months to sell in an emergency, that’s a hidden risk.
Risk-adjusted return forces you to consider all these factors together.
Simple Examples
Case 1: High Return, High Volatility
- Stock investment shows +12% annual return.
- But volatility is -30% in downturns.
- Emotionally and mathematically, many investors will bail at the worst time.
- Risk-adjusted return: poor.
Case 2: Steady Yield, Low Volatility
- A real estate property produces +7% rental yield.
- Volatility is low, income is consistent.
- Over 20 years, this compounding beats the stockholder who panic-sold.
- Risk-adjusted return: strong.
Case 3: “Guaranteed” Schemes
- A shady investment promises 15% monthly.
- No regulation, no liquidity, high fraud probability.
- Real return = zero, because capital vanishes.
- Risk-adjusted return: disastrous.
Why Most People Ignore Risk
Because risk isn’t visible.
The headline % return is loud.
The risks are hidden in the footnotes:
- The small print in contracts.
- The fees buried in paperwork.
- The liquidity traps you discover too late.
Most people only realize “risk” after they’ve lost money. By then, it’s education — not return.
How to Use Risk-Adjusted Thinking
→ Always compare investments by return and risk.
Not just “what will I earn?” but “what can I lose?”
→ Split your exposure.
Don’t tie all wealth to one asset class or one geography.
A regional crisis or currency collapse can erase decades of work.
→ Match risk to time horizon.
Short-term funds (3–7 years) → keep them safe (money market, CDs).
Long-term funds (20+ years) → you can ride volatility (ETFs, real estate).
Munawar Abadullah on Risk
“Never compare investments by returns alone. Always ask: what risk did I take to earn this?”
“Always take calculative risk. Split your risk across asset classes and across geographies. That’s how you protect both your downside and your future.”
Final Word
Risk-adjusted return is the difference between gambling and investing.
A disciplined investor doesn’t just ask “what will this pay me?”
They ask:
- What can I lose?
- How long will it take to recover?
- What hidden costs or delays exist?
True wealth isn’t built by chasing the highest number.
It’s built by respecting risk, managing it, and letting compounding do its work.
Before you invest a single dollar, make sure your foundation is strong.
📌 Start with the basics: 11 Fundamental Money Concepts Everyone Should Master
📌 Then secure your base: The Foundation of Wealth: Your Safety Net Strategy
Without these two, every investment decision is just gambling, not wealth-building.
#MunawarAbadullah #WealthWithMunawar #WisdomToWealth #MunawarPlaybook
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