When we decide to invest the money we've worked so hard to earn and save, we must be very careful. It's often said that you shouldn't invest what you're not prepared to lose, and that's very true, but it's only part of the equation. Because let's not kid ourselves, nobody wants to lose, no matter how things turn out; in the end, it always hurts. Investing is based on three very simple yet complex and interconnected principles: profitability, risk, and liquidity.
Image AI
Profitability is what everyone looks for in an investment, but it's curiously the least important of the three. Even so, it's very important. Profitability can be variable or fixed, and we can largely choose it. It's, let's say, the way we measure our investment.
Risk is the most difficult to measure since we often have hidden risks that we can't calculate, or circumstances change, and our risk changes with them, making our investment no longer what we wanted.
Liquidity is undoubtedly the most important of the three factors, and also the most underestimated. Without liquidity, there's nothing, but when you've been investing in many different products for some time, you realize its importance. Many people believe that stocks are a high-risk asset and real estate a low-risk asset. But the subprime mortgage crisis showed us that this isn't the case. If the stock market falls, you can lose a large percentage of your investment, but you can exit the position. However, if you own a home and the market dries up, you won't be able to get out for years. You still own a house, but if you can't sell it, its value is zero.
Something similar happens in the bond market, which has low liquidity, and if you need money urgently, you might not be able to sell that high-yield bond that matures in a few years unless you lose a lot of money.
The ability to manage these three investment factors will determine whether the final result is the desired one.
Disclaimer.
This is not a purchase recommendation. I am not a regulated financial analyst. Under no circumstances should this information be construed as a recommendation to buy, sell, or hold a position. You should be aware of the risks involved in investing and conduct your due research. The information described here may not be accurate or may change at any time, so you should always check it.