The video explains the magic triangle of financial investments, between liquidity, yield, and security. If investors prioritize one of these aspects, they must compensate with at least one of the other two.
Reading Time 2 Minutes
Reading Time 2 Minutes
The “magic triangle” of financial investments
13.05.2019
Investors can have different goals for their financial investments. Investors need to decide which goal is most important for them. There are always three competing goals: liquidity, yield and security. It is impossible to achieve all three at once. The magic triangle of financial investments illustrates this conflict of interest.
The video explains the magic triangle of investment between liquidity, yield and security. If investors value one aspect more highly than the others, they must compensate with at least one of the other two aspects.
A financial investment is always characterized by at least three competing goals: these are liquidity, yield and security. No single investment can offer high yield, a high level of liquidity and the greatest security all at the same time. Investors have to choose one or two of these goals, or rather prioritize one aspect more than the others. For example, a savings account offers high security and high liquidity but little interest and therefore lower returns. Shares, equity funds, or alternative investments like cryptocurrencies, on the other hand, can achieve high returns and have a high level of liquidity, but investors must accept greater risk. And then there’s the example of real estate: while it may be a safe investment, it can’t be sold as quickly. So it has low liquidity. With the magic triangle of investment, investors can have a clear view of the most important aspects of an investment. At the same time, they can also use the magic triangle to prioritize their personal investment goal.