What Should You Pay Attention To When Investing? Anyone planning a financial investment should assess it according to the aspects of risk, return, and liquidity. No general recommendation can be made here, as every investor has their own ideas and requirements with regard to these values.
Basically, however, it can be reduced to this common denominator: The desire for the highest possible return on the investment must be subordinate to the investor’s maximum risk tolerance.
It is well known that the highest returns are bought with a high level of risk and, conversely, that particularly safe investments do not generate particularly high returns. Every investor should decide for himself where the personal pain threshold is to the best of their knowledge and belief – and always consider the possible negative outcome of the investment.
Regardless of the security and return of an investment, the question of capital commitment through the investment also arises. It is usually the case that high returns also require a longer commitment to certain investments, which is only recommended if you, as an investor, do not need the money in the meantime.
If, on the other hand, you want to remain flexible, investments should be chosen that are not time-bound, but this may impact the level of return.
Incidentally, a statement regarding investment security cannot be made based on liquidity alone, since there are short and long capital tie-up times for both safe and insecure investments. The same applies to the return amount, which does not have to be related to the investment period.
Pay attention to balance!
In order to diversify the investment, risk, return, and liquidity should be coordinated. For this purpose, every investor should be able to precisely assess the risk profile and the amount to be invested, including all possible loss effects.
The magical investment triangle clearly illustrates the mutual dependencies. The following graphic shows you the interactions between the three goals that every investor pursues when investing: return, security, and liquidity.
The magical investment triangle shows a simple principle:
Every investor wants to invest his money as safely, profitably and liquidly as possible. But all three aspects are not compatible with each other. This means that the safer and more liquid an investment is, the less return it will generate in the end.
The triangle is intended to illustrate that only two of the three goals are compatible and thus achievable. So you need to decide on the two points that are most important to you.
What Should You Pay Attention To When Investing?