If I'm confident my psychology is strong enough to endure sharp volatility, should I prioritize the higher-return strategy and not worry about risk-adjusted return?
Even if you're confident your psychology is strong enough, two practical limits are still worth considering: first, "I think I can handle it" and "actually staying calm while facing a large paper loss" often turn out to be different things — most people who underestimate volatility's impact only discover their actual tolerance is lower than they imagined after genuinely living through a sharp loss; second, even if your personal psychology genuinely is strong enough, a highly volatile strategy can still suffer a permanent loss due to extreme market conditions (not "temporary paper loss that recovers," but "genuinely never coming back") — risk-adjusted return, to some extent, also reflects the probability of that kind of permanent loss, not just a temporary psychological stress issue.
If, after careful evaluation, you genuinely believe you can tolerate high volatility and have confidence in this strategy's risk-control mechanisms, choosing a higher-return, higher-volatility strategy is a reasonable decision — but that decision should be an active choice made after fully understanding the concept of risk-adjusted return, not simply being drawn in by a return figure without ever having looked at this metric at all.
Is maximum drawdown, beyond the return figure, the only risk indicator worth checking?
Maximum drawdown is one of the most intuitive and easy-to-understand risk indicators, but it's not the only one worth checking. It only tells you how deep a fall has historically gone — it doesn't tell you how long it took to recover after falling. Two strategies can both show a 40% maximum drawdown, but one might pull back within a week while another takes half a year slowly climbing back to its original point — the actual impact on your holding experience differs enormously between the two, even with an identical maximum drawdown figure.
A more complete evaluation should also factor in the Sharpe Ratio (the overall ratio between return and volatility), drawdown duration (how long it took to go from peak to trough and back to the original level), and how often drawdowns occur (a single extreme event in the strategy's entire history, versus something that recurs regularly). Looking at maximum drawdown alone is like judging someone by their height while ignoring their weight — it provides some information, but not enough for a complete judgment.
If a strategy doesn't publish any Sharpe Ratio or maximum drawdown data at all, how can I estimate the risk myself?
If a product team doesn't proactively publish this data, you can try rough estimation using whatever historical transaction records are available — most on-chain-executed DeFAI strategies have transaction records that are publicly queryable. You can log the daily or weekly change in net asset value over some period and visually observe whether there have been any large single-day or single-week drops. Even without being able to precisely calculate a Sharpe Ratio figure, you can get a rough sense of how volatile the strategy really is.
If you can't find even basic historical transaction records, or the recorded time span is too short (only live for a week or two, say), you simply don't have enough information to assess the risk in that case. The safer approach is to treat that uncertainty itself as a risk, testing with an amount so small you'd be fine losing it entirely, rather than committing a large amount just because the return figure looks appealing.
This concept sounds like it's encouraging everyone to pick conservative strategies — does it mean highly volatile strategies should never be touched at all?
No, that's not the point. This article's point isn't "high volatility is always bad" — it's that volatility should always be factored into your decision before choosing any strategy, rather than looking at return alone. A more volatile strategy can still be a reasonable choice for a user who can tolerate it and understands the associated risk, especially if this portion of capital only makes up a small slice of your overall assets — even if the maximum drawdown scenario genuinely occurs, it wouldn't affect your overall life.
What should genuinely be avoided is deciding with no awareness of volatility at all, based purely on the return figure. Consciously choosing a more volatile strategy (because you've evaluated it and can tolerate it) is completely different from being drawn in unconsciously by a high return figure while underestimating the actual risk — the former is informed risk-taking, the latter is blind following under information asymmetry.
Faced with two DeFAI strategies — one showing a 50% annualized return, the other 25% — most people's instinct is to pick the former. But if you decide based on return figures alone, you might be missing a more important question: how much risk did each of those returns actually cost to achieve. The concept of risk-adjusted return exists precisely to answer that question. This article walks through a concrete scenario to explain why a lower-return strategy can sometimes offer a genuinely better real-world experience.
Suppose Strategy A has a 50% annualized return, but at one point during the year showed a 45% paper loss before gradually recovering and turning positive by year's end; Strategy B has a 25% annualized return with smooth volatility throughout, and a maximum drawdown of only 8%. Looking at the final return figure alone, Strategy A appears to win by double. But if you were the one actually holding Strategy A, at the exact moment it was showing a 45% paper loss, could you genuinely stay calm and keep holding, trusting it would eventually recover? Most people, at that point, would very likely have already panicked and cut their losses — never even making it to that final positive return. This means Strategy A's "theoretical return" and "the return you'd actually get" can be two completely different things.
The return figure on a marketing page describes the outcome under an idealized scenario: holding the position from start to finish, never withdrawing along the way. But in reality, most people's holding behavior is heavily influenced by paper swings along the way — the sharper the volatility, the higher the odds of withdrawing midway, and the wider the gap between the return you actually get and the strategy's theoretical performance. This is exactly why professional institutions evaluating a strategy almost never reference return alone — they look at the ratio between return and volatility together, essentially asking whether this return was achieved in a way an ordinary person could genuinely endure.
Next time you compare two DeFAI strategies, beyond the return figure, always check the maximum drawdown number (the deepest paper loss it's historically shown). Once you have that figure, ask yourself a concrete question: if my invested capital showed a paper loss of that magnitude at some point, could I genuinely leave it alone and keep holding? If the answer is uncertain, or even imagining it feels stressful, that means this strategy's volatility already exceeds what you can actually tolerate — no matter how attractive the return figure looks, the return you'd genuinely end up capturing could fall far short of what's shown on the marketing page.
When choosing a DeFAI strategy, instead of asking "which one has the higher return," you should be asking "which strategy's return is one I could actually stick with to the end and genuinely capture." A strategy with a lower return but smooth volatility, if it lets you comfortably hold to the finish, might actually deliver more in your pocket than a strategy with an enticing return figure that spooks you into withdrawing midway. Risk-adjusted return, at its core, is about helping you find the option you can actually follow through on — not the one that simply looks best on paper.