THE MAGICAL INVESTMENT TRIANGLE
The magical investment triangle. In times of historically low interest rates, private investors in particular are increasingly asking themselves how they can invest their money sensibly. Whether time deposits or overnight deposits, savings accounts, corporate or government bonds, stocks, ETFs or real estate – each type of investment has its own advantages and disadvantages. For investors, it is important to choose the asset class based on personal expectations of income or returns, security and availability. Since there is a natural conflict between these criteria, making the right decision is not always easy. The so-called magic investment triangle illustrates this conflict and helps to make an informed investment decision. In this article we will go into the meaning of the magic triangle for investors, give examples of tension conflicts and show you how you can use the magic triangle of financial investments in a meaningful way for your investment decision.
What is the magic investment triangle?
The magic triangle of financial investments offers investors an important point of reference for assessing asset classes by describing the 3 factors “yield”, “security” and “availability”. In finance, these factors are visualized in the form of a triangle: the magic triangle of financial investments.
The magical investment triangle allows investors to assess types of investment and to weight them according to their personal risk and expectation profile. One thing is particularly important: every form of investment always represents a compromise between the various factors. None of them meet the requirement to meet all goals, that is, to guarantee security and at the same time guarantee maximum yield and round-the-clock availability. The 3 desirable factors of the magic triangle at a glance:
- The income factor
- The security factor
- The availability factor,
That is why the factors of the magic triangle are in conflict
The 3 corner points of the magic triangle are fundamentally in conflict with each other. For investors, this means: No form of investment reflects the optimum of the 3 factors. In order to achieve personal financial goals, different asset classes should therefore be sensibly combined with one another.
The following examples show the tension between the factors using various types of investment:
1. Security and yield:
2. Security and liquidity:
3. Income and liquidity
How high is the risk of different asset classes?
The question of the risk of an investment cannot be answered with precise figures. There are considerable differences between industries and companies, especially when it comes to financial products such as stocks. Investors are therefore well advised to combine various investment products with one another.
In this way – depending on your personal goals and your own willingness to take risks – a sensible middle ground can be reached between the corner points of the magic triangle: yield, security and availability.
With the magic triangle for a successful investment
The most important finding of the magic triangle is that investors have to accept limitations with every form of investment. If the return is the focus of an investment, the risk inevitably increases and you have to forego security. Which focus makes sense for you personally cannot be said in general terms and depends very individually on your goals and your situation.