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Which Financial Products Are For Me?

Home News Which Financial Products Are For Me?

 As an investor, especially an amateur, it can be pretty difficult to figure out which investment to pick. The investment universe keeps growing with new and innovative investments coming out each passing day. This only adds to the confusion and so, the question always remains, how do I figure out what to invest in? 

The concept we recommend to judge investment opportunities is the magic triangle of investing. 

This triangle combines three important qualities that investors look for in investments: 
  • High return – needs no explanation 
  • Low Risk – low chance of losing your money 
  • Liquidity – your investment can be quickly converted to cash 

Now, the first thing you must understand is that no investment exists that actually offers high return, low risk, and also high liquidity. Anyone who offers you something like this is probably conning you and here’s why: 

High returns are usually associated with high risk. For example, start-up stocks. They offer high returns but also the chance of the startup failing is also quite high. Less than 50% of startups make it to the end of their first year. Hence, to get investors to invest, they offer high returns because of the high risk involved. 

High liquidity on the other hand is associated with low returns. Think of it this way, if I asked you to give me Ksh1m and told you I'd pay it back Ksh1.5m in one year or Ksh3.5m in five years, which option would you take? Definitely the one-year option, right? Well, for you to give me the Ksh1m for a longer period of time, I’d have to give you a much higher return. (Perhaps offer you Ksh5m after 5yrs.) That way, the only way to justify the low liquidity (i.e. you not having access to your money for longer) is by offering you a higher return. 

This makes the triangle quite complicated since getting high returns means accepting high risk or low liquidity. If you want low risk, then you either have to accept low returns or high liquidity. And if you want high liquidity, then you must either accept high risk or low returns. 

A good investment is one that has two of these elements: high return, low risk, and high liquidity. Though, it's still not easy finding an investment that has two elements. As an investor, you need to think about what matters most to you because it’s not just always about high returns. Sometimes, you need to look at the risk level and the liquidity levels of your investments. 

You don’t want to find yourself in a situation where you are getting high returns but cannot access your money for the next 20yrs. Or in a situation where you are getting high returns but then the investment defaults because of high risk. It is only wise that you look at all three elements and think very carefully about what you are willing to give up: 
  • Give up high return so you can get low risk and high liquidity 
  • Give up low risk so that you can get high returns and high liquidity 
  • Give up low liquidity so that you can get high returns and low risk 

At the end of the day, choose wisely. And if it gets too hard, be sure to contact your trusted financial advisor a.k.a. Private Wealth Capital LTD. 

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