Risk vs. Return: What every investor must know

By Ephraim Ofori NUMOSUOR

When it comes to investing, one truth stands above all: there is no return without risk. In the world of money, “risk” refers to the possibility of losing part or all of your investment, while “return” is the profit or the reward you gain for taking the risk. Every Ghanaian who wants to grow wealth must understand this delicate balance.

Let’s break it down with practical examples.

Imagine you place your money in a treasury bill (T-bill). The Government of Ghana issues T-bills as a way of borrowing short-term funds. They are widely considered one of the safest investments because government default is rare.

But here’s the catch—the return is relatively modest. For instance, while T-bill rates have hovered between 25percent and 30percent per annum in recent years, inflation in Ghana has also been high. If inflation is, say, 23percent, your “real return” is much lower than it looks on paper. The risk is minimal, but so is the reward.

Now compare that with buying shares on the Ghana Stock Exchange (GSE). For example, MTN Ghana has rewarded investors handsomely since its listing in 2018. Early investors who bought shares at the IPO price of GHS 0.75 saw the stock climb above GHS 1.30 within a few years. That’s a significant gain compared to T-bills.

However, stocks can also swing downward. Some stocks that were once popular, have struggled with falling share prices, leaving some investors disappointed. This is the essence of risk vs. return: higher potential profits come with greater uncertainty.

To make it even more relatable, let’s consider the story of Kwame and Akosua.
Kwame, a young banker in Accra, chose to put all his savings into a fixed deposit at a commercial bank. His money was safe, and he slept peacefully at night. But over time, rising inflation eroded his purchasing power—what could buy him a plot of land five years ago now barely covers half.

Akosua, on the other hand, decided to diversify. She placed some money in T-bills, invested in MTN shares, and even bought a small plot of land in Kasoa. The land value appreciated, MTN shares paid dividends, and her T-bill gave steady cash flow. While her shares dipped during COVID-19, her land value went up, balancing her risk. Today, Akosua is financially ahead of Kwame—not because she avoided risk, but because she managed it wisely.

Here’s the key lesson: risk is not something to fear, but something to manage.

Globally, the same principle applies. In the United States, investors in the S&P 500 index have enjoyed an average return of about 10percent annually over the long term. Yet, there are years when the market falls by 20percent or more.

Those who panic and sell at a loss miss the recovery that often follows. The same psychology plays out in Ghana—when markets wobble, many investors rush to pull out, only to miss the rebound.

So, what should the everyday Ghanaian investor keep in mind?

• Know your risk appetite – A young worker with time on their side can afford to take higher risks in stocks or real estate. A retiree, however, may prefer the stability of bonds and T-bills.
• Diversify – Don’t put all your eggs in one basket. A mix of safe and growth-oriented investments spreads risk.
• Think long-term – Short-term price swings can be scary, but wealth is built over years, not weeks.
• Beware of ‘too good to be true’ schemes – From Menzgold to other fraudulent schemes, many Ghanaians have lost money chasing unrealistic returns. Always ask: “What is the risk behind this promised return?”

Ultimately, understanding risk vs. return is like understanding life itself. Every choice has consequences. Just as crossing a busy Accra road requires weighing the danger of traffic against the benefit of getting to the other side, investing requires weighing potential losses against potential gains. The wisest Ghanaian investors are not those who avoid risk entirely, but those who learn how to live with it—and make it work for them.

>>>The writer is a Financial Economist, Research & Policy Analyst. He can be reached via O248803710; [email protected]

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