This article will address what risk-return trade-off is, what risk-adjusted return is, is it still pertinent today, and what is the best risk-return financial vehicle in the marketplace. Be sure you’re sitting down as the answer will surprise you.

What is Risk-Return Trade-off (RRT)

The risk-return trade-off is an investment principle that indicates that the higher the risk, the higher the potential reward. To calculate an appropriate RRT investors must consider many factors, including overall risk tolerance, the potential to replace lost funds and more.

The risk-return trade-off is the trading principle that links high risk with high reward. According to RRT, if the investor is willing to accept a higher possibility of losses, invested money can render higher profits.

As the chart below illustrates, the more aggressive you are as an investor the greater return you should expect for the increased risk you are assuming.

Yes, there is a formula to calculate a risk-adjusted rate of return. Here it is:

Risk-adjusted Return = (Investment Return – Risk-Free Rate (Rf)) / (Benchmark Return – Risk-Free Rate (Rf))

Below I will put it to the test.

For more on RRT chick here

Is RRT still pertinent today?

RRT remains pertinent today. Its hard to see it being used as it’s buried in customer risk profile questionnaires.

The general belief is that you must accept risk to get a decent return. So, many turn to stocks, mutual funds, and exchange traded funds (ETF) because that’s what the media and players in the financial industry tell people they have to do to get decent returns.

Well, that’s simply not true. There are other options that do not get much airplay.

Why? Its math. Financial institutions make more money on stocks, mutuals funds and ETFs than they do on other options, even with lower fees, compared to other alternatives.


Many limit their thinking to inside the box and limit RRT use to investment products. I will share in a moment another product it should be used for to help them make better decisions.

I’m in favour of the stock market, and RRT, when the Whole Picture Planning (WPPBB) Building Blocks are considered.  More on WPPBB in the future. 

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What Is The Best Risk-Adjusted Return Investment Today?

So, according to the RRT definition, the best alternative is the one that offers the highest return for the lowest risk.

The best risk-adjusted return alternative under this definition is not an investment at all. It’s considered a savings vehicle.

Are you sitting down?

When plotted on the risk-return chart below, the best risk-adjusted return alternative is:

Dividend-paying whole life insurance

For many this will surprise you. But stay with me.

Its return vs risk (standard deviation), as accurately plotted in the chart below, makes WL the clear winner. Many will be scratching their heads how you can get long-term aggressive-like returns which such little risk.  The facts speak for themself. Read on for the proof.


Real life evidence comes from a real life in-force 20-pay whole life (WL) insurance policy issued in 1990 and comparing it to the S&P/TSX (TSX) Total Return Index after fees and taxes. WL has over 100 years of history showing consistent decent returns.

Yes, the TSX earned a higher gross return, however, with a very high 16.01% risk level, and before fees and taxes are considered.

So, when applying the RRT formula, WL decisively beats out the TSX 6.3 to 0.2 – its not even close.

At the TSX risk level, the TSX would have to provide a 132% annual return to match the value provided by WL.

The risk-free rate (Rf) used for this calculation was 1.0% representing the estimated average Rf rate for the period 1990 to 2022.

As the chart shows, WL offers additional value – the return potential of recapturing loan interest when you repay the loan to yourself. This ability, which conventional financial planning has no strategy for, is known as the Infinite Banking Concept. I estimated this annual return to be 6%, representing the average loan interest for the period 1990 to 2022.

This policy reflects the returns on old-style WL policies. Todays WL policies are not your grandparents WL policies. Today’s WL policy flexibility and returns are even better.


Lets put some names to this comparison.

John has invested in the TSX since 1990.  His results are shown above.  He describes his experience as riding a roller-coaster as someone who is not found of roller-coasters. 

Michael purchased the WL policy as described above. He describes his experience as worry-free, comfortable, and confident knowing his WL had the best risk-adjusted rate of return.

Michaels’s confidence was also high as he did his research and learned that WL also provided all the features below.


In addition to the risk-adjusted return analysis, WL offers:

  • Decent rate of return, consistent rate of return, safe – safer than the banks (banks have a 0% reserve requirement, WL has a 100% reserve requirement)
  • Liquid, Guaranteed, is tax-exempt
  • No market volatility – adheres to Warren Buffett’s rule “don’t lose money”
  • No hidden fees, or penalties
  • Preferred creditor protection, inflation protection
  • Control, easy to manage, lower fees & lower risk
  • Easily transferable, reputable, private
  • Life insurance
  • Guaranteed borrowing from his cash value “working capital”, that recaptures loan interest
  • Creates more net worth, and more retirement income

To learn more on the research Michael did click here

Bottom line

If you could only choose between a safe asset or a risk asset, as a safe storehouse of wealth, both which provide decent rates of return over the long term, which would you choose?

Well, you don’t need to choose.  You can do both! You see, WL is considered an “And Asset” in that can be diversified with stock market investments. At worst, it’s the best down-side investment protection available in the market.

Its time to rethink your thinking. Its time to include specially designed dividend-paying whole life insurance in your investment portfolio. DM me to do so.

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27 May 2021

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