Investment Triangle: Risk, Return and Liquidity Trade-offs

What the Investment Triangle Means and How to Use It

Understanding the investment triangle

When you invest, don't you want the highest possible return, the lowest possible risk and the highest possible liquidity?

But does such a good investment product really exist?

If it does, it must be a money game or scam.

Investing has an underlying idea known as the “impossible investment triangle”, or The Magic Triangle of Investing.

Once you understand it, investing becomes less confusing.

What is the impossible investment triangle?

Most types of investment can be assessed using three main factors: return, risk and liquidity. These are the three corners of the investment triangle.

According to this principle, high return, low risk and high liquidity do not exist together.

For easier understanding, safety in the illustration represents low risk:

• Safety: the probability of losing your principal;
• Liquidity: how quickly the investment can become cash;
• Return: the profit generated by the investment.

How do you use the investment triangle?

First, use the Golden Circle to identify your WHY, or your investment purpose.

To reach that purpose, which corner can you give up?

Then choose the relevant investment tool according to the combination in the impossible triangle.

Repeat these three simple steps for your other financial goals.

The most important part of investing is managing your expectations

Understanding where an investment tool sits in the impossible triangle can help you manage your expectations. You are then less likely to be affected by market movements.

For example, your WHY may be to keep an emergency fund. Emergency use requires high safety and liquidity, so naturally you have to give up high returns.

Suitable tools include savings deposits, fixed deposits and money market funds (MMFs).

Summary

Many people feel confused, anxious and worried because they do not understand what they are doing. They start investing before understanding even the underlying logic.

Learning this framework can at least give you a basic understanding of investing, help you know what to expect and make the decision feel clearer.