How Does One Choose The Right Investment?

Have you ever wondered if an investment opportunity was the right one for you? Perhaps a friend introduced you to a great investment or so they say? Should you invest or not?

Today I’m going to give you a simple guideline that will remove a lot of this uncertainty from your investment journey. I’ll give you the tools to choose suitable investments for yourselves.

Much like how Newton’s laws of motion governs the physics of our world, there are three factors that govern legitimate investments. This trinity is Liquidity, Return, and Safety.

The three factors exist in a form of equilibrium. This means that if you want to increase one of them, you have to reduce one or both of the other two factors. For example, if you want higher return, then you would have to sacrifice some liquidity, safety, or both. If you wanted higher safety instead, then you would have to sacrifice some return or liquidity.

• Liquidity is how easy it is to convert the investment back into cash.
  
• Return is how much upside potential there is to the investment.
  
• Safety on the other hand is a measure of risk, high safety means lower risk and vice versa.
  

When you are thinking of investing, it is very important that you first identify your investment needs from the three factors. Which of the three do you need most and which can you do without?

Once you have identified your factors, then the rule of thumb when picking an investment is to choose only two of the three factors, and sacrifice the third.Once you have identified your factors, then the rule of thumb when picking an investment is to choose only two of the three factors, and sacrifice the third.

For example, if I want something safe and easy to withdraw, I’m choosing Safety and Liquidity while sacrificing Return. Then something like a bank savings account or fixed deposit may suit me.

What about if I want Return and Safety but I am willing to sacrifice Liquidity? Then property may be suitable for me. Property can potentially give high returns and has an element of value retention, but selling a property can take a while.

If you wanted Liquidity and Return while being willing to sacrifice Safety instead? Then stocks may be a good investment.

It’s important to remember that there is no perfect investment. All investments have tradeoffs and it is up to us to select those with factors that are most suitable for ourselves. Always identify which factors you need first and then only invest in things that fit those requirements. If you are offered an investment that gives you all three factors, I’d highly suggest you think twice and avoid those.