The magic triangle of investment

Security means preserving the invested capital

The security of an investment refers to the preservation of the invested capital. This depends on the risks to which it is exposed, such as economic risk, inflation risk, country risk, or currency risk. Greater security can be achieved through a balanced allocation of assets (asset allocation = diversification).

Liquidity refers to the possibility of selling

The liquidity of an investment describes the extent to which an investor is able sell their assets at any time at market-driven prices. This is typically the case when an investor can sell securities without an average-sized sell order causing noticeable price fluctuations and without the order having to be executed at a significantly lower price level. In this context, liquidity should not be confused with the lock-up period of an investment.

Profitability indicates the return

The profitability of a securities investment is determined by its return. A security’s returns includes interest or dividend payments and other distributions, as well as increases in value (in the form of capital gains). Depending on the type of investment, such returns may be paid out to the investor on a regular basis or – instead of being distributed – may be reinvested. They may also remain constant or fluctuate over time. To compare the profitability of different securities, the yield is a suitable metric. The yield is the ratio of the (annual) return to the capital invested. Furthermore, the term or lock-in period of the investment must be taken into account.