The Financial Triangle

When it comes to investments, one must realize a few things and learn to learn to deal with them. In my humble opinion, this is the main thing that makes the difference, between a successful investor, and anyone else who is hoping for the government to support him or her, once they get old enough to retire. I don’t put an age number here on purpose, as nobody knows how much further the retirement age will be pushed out in which region.

So what are those essential things? Let me pull it together into 3 major points.

  1. Understanding and accepting the principles of the so-called “financial triangle”
  2. Overcoming the emotion of fear when it comes to investments
  3. Investing time to make informed decisions on investments

In this post, I will discuss only the first point, the financial triangle.

The financial triangle is a basic model that connects 3 keywords with each other. The keywords are:

  • Security
  • Yield on investment
  • Liquidity

Imagine a triangle, with those 3 keywords split for 1 to be in each corner. Now, when you look at an investment opportunity and try to classify it by putting a dot in this triangle, you will notice that it’s actually a tough exercise.

  • If you put the dot close to security, it will be further away from yield and liquidity
  • If you put the dot close to yield, it will be further away from security and liquidity
  • If you put the dot close to liquidity, it will be further away from security and yield

No matter how you try to position the dot, you will never be able to maximize any point without sacrificing on the other two. While modern financial instruments can get truly complicated, this very basic rule applies in almost any case.

The Important Lesson

The important lesson from the financial triangle is, that every opportunity requires sacrifice. You can’t expect high returns on your investments without taking risks. You can’t expect a high security of your investment, without accepting limitations on access to it (liquidity) and reduced potential returns.

No matter what you are reading online about any possible, get-fast-rich-investment scheme. Any company or product that is promising you to be safe, anytime accessible and offering a high yield, needs to be thoroughly researched – if not ignored right away. Chances are high, that it’s not real. Possibly a scam.

The other important lesson, especially for younger potential investors and all those who want to reach financial independence as soon as possible, is the one that without accepting a large amount of risk, early retirement and financial independence will be nothing but a dream.

I seldom quote rappers but let me put it to the extreme and quote Curtis Jackson, a.k.a. 50 Cent here: “Get rich or die tryin’.”

Luckily, the investment world is actually not that cruel, and even better, with the internet on our side, it is easier than ever to reduce risks and make informed decisions. Nevertheless, risk and losses are part of the game and without accepting it, FIRE is difficult to reach.

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