Risk and Return


2684925599_e3f1673f49_o

Whenever I considered doing anything major in my life, my Baba (Dad) would tell me that I needed to do a “cost-benefit analysis” first. I understood the gist of what he meant and often thought a great deal about anything I considered doing, though this usually resulted in me over-thinking the issue. During my study of finance in grad school, however, I came across the relationship between ‘risk’ and ‘return,’ and believe it or not, this is what really drove home the concept my father was trying to teach.

Clench your teeth through the technical part; it’ll stop hurting in a second. ‘Risk’ is defined as a situation involving exposure to danger. In finance, it’s the possibility of financial loss.

Here’s a scenario: You have some money (principal) that you want to invest in a security. There’s a chance it will grow, and a chance it will shrink. The chance that the security will lose money is essentially the risk associated with it. Returns refer to the amount of interest that you can gain on the money you invest, or how much the money will grow.

In an attempt to keep my promise about reducing the pain, I’ll cut this short.

Investors (intelligent ones) are thought to be risk averse, meaning they avoid risk like the plague. Well, lo and behold, there is a trick to reducing the risk on your investment! It’s called diversification, which essentially means not putting all your eggs in one basket and instead investing the money in lots of different stocks or securities.

By this rule, if one of the stocks you invested your money in goes bust, then it wont hurt as badly because not all your money was invested there in the first place. I think you get the idea.

Back to my Baba: so he said make sure to analyze costs and benefits, pros and cons, risk and return. See the pattern? As Muslims, we should constantly be making this analysis.

I was in a situation where my halaqah (study circle) leader was sitting with me and telling me a story, when all of a sudden she stopped. When I asked her what was wrong, she said “I was trying to see if any benefit would come from telling you that detail or not.” Subhan’Allah (glory be to Allah), it was such a small statement, but it had a profound affect on the way I began to see my actions.

Every little action counts and should be treated accordingly. We have to look at our life in an objective manner to see the bigger picture. We have to check our intentions constantly, and make sure that our principal (our actions) isn’t invested in anything other than pleasing Allah (swt) or bettering our hereafter. Investing in anything else would be the worst decision you could ever make, right?

Allah (swt) discusses this poor calculation in the Qur’an:

“Those are the ones who have purchased error [in exchange] for guidance, so their transaction has brought no profit, nor were they guided.” (2:16)

Muslims, like good investors, should also be risk averse. We should avoid doing anything that angers Allah (swt) and avoid doing anything that will land us in the hellfire. By ensuring our deeds are invested in Allah (swt)’s pleasure, we can’t go wrong. Allah (swt) tells us just this in the Qur’an:

“Indeed, those who recite the Book of Allah and establish prayer and spend [in His cause] out of what We have provided them, secretly and publicly, [can] expect a profit that will never perish…” (35:29)

We should also diversify our investments through doing as many good actions as often as humanly possible. The bitter truth is that achieving sincerity in our actions towards Allah (swt) is neither easy, nor is it guaranteed. There is no confirmation that Allah (swt) accepts our deeds. If we could only be as fortunate as the sons of Adam when Allah (swt) revealed that He accepted from one and not from the other:

“…recite to them the story of Adam’s two sons, in truth, when they both offered a sacrifice [to Allah], and it was accepted from one of them but was not accepted from the other.” (Qur’an, 5:27)

So we have to try our best to do as many sincere acts for Allah (swt), and hope for His mercy and pleasure in order to increase our chances of making it to Paradise, insha’Allah (God willing).

Here comes one last analogy from Baba that, like the other, makes a great deal of sense.

Your life is like a flight. It has a starting point and a destination. You have a flight plan that draws out how to get where you are going, and for any Muslim, that final destination should be Paradise, insha’Allah. So you go about following the plan. You finish high school, start college, go to university, and graduate.

Along the way you go slightly off course: you get so involved with your job that you start to slack off on praying sunnah, fasting Mondays and Thursdays and praying on time. When that happens, you have to catch it, and immediately make a course correction. This will set you gladly back on your way to where you were supposed to be headed in the first place.

In the instance that you weren’t analyzing your actions though, or your plans for the immediate future in that light – would all of the little plans to finish college, get a job, get a promotion put you at the correct final destination?

The point is to highlight the importance of making conscious decisions about what you do with your life. If those decisions are all made based on what’s best for your hereafter, then with the help of Allah (swt) you can’t go wrong.

When I got married, a dear friend and mentor told me to “make Allah (swt) the center of your life, and everything else will fall into place.” That advice stands true in any situation, for any person.

I will leave you with a verse from the holy Qur’an:

“…And whoever relies upon Allah – then He is sufficient for him.” (65:3)

Print Friendly

6 Comments

  1. Nomad78 says:

    Salam,

    What a good way to start my morning. I am sure you make your baba proud.

    Jazaki Allahu khairan

  2. A Sister says:

    Jazzaky Allahu Khair for this valuable advice for life. And may this article earn you reward in the hereafter as a continuous charity toward your readers/fellow people, inshaa’Allah.

    My Baba also says things like that. :)

  3. Haq says:

    Seems like your Baba would make a good Faqih lol…just to add there are several major legal maxims in Fiqh based on cost-benefit analysis, JazakAllah khair for this reminder!

  4. Hamzah says:

    Masha’allah your Baba knows what hes talking about. :)

  5. Amatullah says:

    Jazaaki Allahu khayran, that was wonderful.

  6. Amr says:

    I like this Baba Guy :)

Leave a Reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.

More in Relationships (393 of 441 articles)