Risk and return: The building blocks of a long-term portfolio

Every investment carries risk - but it also offers the potential for return. This article breaks down how risks and returns work together, helping you take confident decisions.

Published on 14 November 2025

3 min read

As an investor, you have plenty of market-linked investment products to choose from. While potential returns are often considered, the level of risk involved must also be taken into account.

Your primary objective as an investor should be to achieve returns with minimal risk. But the relationship between risk and return is not straightforward. Understanding how these two elements interact will help you build a long-term investment portfolio that works for your financial goals.

What are risk and return?

First, let us understand what we mean by risk and return.

Risk refers to the uncertainty of investment outcomes. High risk means that while your investment can earn potentially returns, there is also a chance it may not make as much money as you expected. You could even lose money. That is why a high level of risk may not suit everyone.

Return is the gain or profit an investor receives from their investment. It is often expressed as a percentage and is the benefit for taking on risk. A positive return means your investment has made money. If your return is negative, you have lost money.

Let us use an example to understand how risk and return affect each other

Imagine you have four financial products to choose from, such as those stated in the table below.

Product	A	B	C	D
Return (annualised)	12%	18%	10%	22%
Risk	4%	8%	5%	16%
Risk-adjusted return	3	2.25	2	1.38

This is for illustrative purpose only, and not recommendation.

If the figure for annualised returns is the only information available, it is likely you would choose D as that generates the highest return on your investment.

But it is not that simple. You must also consider the level of risk attached to each product. Risk is often expressed as a percentage. The bigger the percentage number, the more likely the product is to rise or fall in value in any given period. This is known as volatility.

In the example above, product A is the least risky, with a volatility of just 4%, while product D is the riskiest, with a volatility of 16%. So, while D potentially offers the highest returns, it also comes with the highest risk.

One way of comparing the four products is to look at their risk-adjusted returns. This is obtained by dividing their annualised returns by their risk. On this measure, A offers the highest risk-adjusted returns and D the lowest.

When risk comes into the picture, the right product will vary from person to person, according to their tolerance for it.

How risk affects return

Risk-return analytics are based on the principle that the higher the risk, the higher the potential return, and vice versa. Understanding this trade-off helps investors balance their portfolios according to their risk appetite and investment objectives.

Managing risk

You cannot completely eliminate investment risk. But basic investment strategies - asset allocation and diversification - can help manage it.

Asset allocation involves blending different asset classes together in differing proportions based on your risk tolerance, investment timeline, and financial goals. That might include a mix of high-risk, high-return assets like stocks with low-risk, low-return assets like bonds and cash equivalents.

Diversification, meanwhile, helps to reduce overall portfolio risk by spreading investments across different assets or sectors. This lessens the effect of any single investment performing poorly, stabilising returns and lowering risk over the long run.

Bottom line: Balance risk and return in a portfolio that’s right for you

Building a long-term portfolio is not just about chasing returns or avoiding risk. It’s about finding the right balance, staying disciplined, and making informed choices that reflect your risk appetite to achieve your financial goals. By understanding key parameters - like asset allocation, diversification, and risk-adjusted returns - you lay the groundwork for building a portfolio that is truly yours.

Disclaimer: This article is for educational purposes only.