Understanding Risk and Return in Investments

Every investment involves risk, but not all risks are equal. Risk is simply the uncertainty of returns — the chance that what you expect may not happen. Return is the reward for accepting that uncertainty.

A one-year treasury bill might yield 13 percent with almost no risk. A commercial paper might yield 17 percent but with moderate risk. A start-up investment might promise 40 percent but could also collapse. The higher the potential reward, the higher the risk. That relationship never changes.

In Nigeria, we often see unrealistic “investment offers” promising 50 percent returns in one month. These are not investments; they are traps. A disciplined investor studies the risk-return trade-off before committing capital.

There are several kinds of investment risks: market risk (prices fall), credit risk (borrower defaults), liquidity risk (you can’t sell quickly), and inflation risk (returns lose value). Understanding them helps you diversify intelligently. You can reduce risk by spreading investments — equities, fixed income, real estate — so that if one under performs, others compensate.

A strong example: during the 2020 pandemic crash, the Nigerian stock market initially fell sharply, but government bonds rose. Investors who diversified didn’t lose as much and recovered faster.

The key lesson is this: risk cannot be avoided; it must be managed. And return without risk is a red flag. Smart investors respect both sides of the equation.