The investment is affected by four elements that are never consistent. These are risk, return, investment horizon and liquidity.
The basic investment rule is that the higher the return, the higher the risk that the investor will lose his investment.
The magic triangle of property investment is risk, return and liquidity.
Rule 72 applies to determine the doubling of the initial investment. It is sufficient for the investor to divide the number 72 by the estimated annual percentage appreciation and the resulting number is the number of years it will take to double the initial principal.
Example: If an investor chooses to invest $ 100,000, he will double that amount with an estimated annual return on investment of eight percent in nine years. However, the calculation does not work with fees, taxation and inflation devaluation.
The investment horizon depends on the investor’s financial capabilities and expectations. It is true that the longer the investment horizon, the more the investor can invest his money in riskier investments. When investing in money market funds, the investment horizon is around one year or less. It is advisable to invest in bond funds for at least three years and in equity funds for at least five or more years.
Division of the investment horizon according to the length of the investment
A short-term investment usually lasts one year. The most common financial instruments purchased for investment include investments in money markets (eg bank deposits, certificates of deposit, treasury bills).
The medium-term investment lasts between a year and four years, it is advisable to buy government and municipal bonds or bonds issued by private companies.
Long-term investment lasts from five years and longer. The security purchased is shares.
The investment horizon of open-end mutual funds is derived similarly.
Liquidity means the time it takes for an investor to get his money when he decides to sell his investment portfolio or part of it. high liquidity means that the investor gets his money quickly and easily turns it into money that the fund manager pays to his bank account.
On the other hand, for example, term deposits, building savings or supplementary pension insurance are illiquid from the point of view, because it is necessary to meet predetermined conditions for the payment of money. You can get money from building savings only after six years and the fulfillment of several conditions. In the case of supplementary pension insurance, it is possible to apply for a severance pay after 15 years of the contract. It is similar with life insurance.
In the case of early cash withdrawal, the investor loses part of the money, from which he pays various sanctions. In the case of building savings, life insurance or supplementary pension insurance, in addition to the refund of state contributions, there is an obligation to tax interest arising from invested funds and state aid.
For example, you can invest in open-end mutual funds, but also in other investment instruments, such as stocks, certificates or derivatives.