Risk vs Return Basics
Educational only — not financial advice. Updated 2025-11-12.
Understand volatility and drawdowns so you size your allocation realistically and stick with the plan.
Volatility, Drawdowns, and You
Risk is the range of outcomes, not just the chance of loss. Investors experience risk as drawdowns—peak-to-trough declines.
ASCII Drawdown Sketch Price : ████▇▆▄▂▁▂▄▆▇██ Drawdn : ▃█▇██▇█▃
Measuring Risk (Plain English)
| Measure | Meaning | Use Case |
|---|---|---|
| Std. deviation | How much returns vary | Compare funds in same category |
| Max drawdown | Worst peak-to-trough fall | Stress test your tolerance |
| Sharpe ratio | Return per unit of risk | Risk-adjusted comparisons |
Behavioural Risk Is Real
Most shortfall comes from buying high and selling low. Use automation, rules, and rebalancing to reduce emotional decisions.
Setting Expectations
- Equities can fall 30–50% at times; bonds can fall when rates rise.
- Plan for rough patches; your mix should anticipate them.
Checklist
- Know your max tolerable drawdown.
- Use diversified funds.
- Automate contributions.
- Rebalance on schedule.