One of the biggest rules of thumb that you can keep in mind when it comes to investing is to look at three different variables in everything that you do. These three variables are liquidity, risk and returns.
- Liquidity is how fast or how easily you can convert an investment that you make back into cash.
- Returns is what you are capable of reaping in comparison to what has been sown.
- Risk is how much of a gamble it is for you to make a certain investment.
Usually if one of these variables is more, then at least one of the other two is going to be less. For example, stocks tend to be a high risk investment, a high return investment and also a high liquidity investment. On the other hand, when you put money into a savings account, you are looking at an investment that is low in risk, low in return and high in liquidity.
When you put money into a fixed deposit, what you have on your hands is an investment that is low in risk, medium in liquidity and medium in terms of return as well. When you put money into a real estate investment, then your investment tends to be low in risk, low in liquidity but high in return. When you invest in gold, what you have is an investment that is low in risk, but that is high in liquidity as well as high in return.
When you lend your money to your friend, what you are dealing with is an investment with a low rate of return, a low level of liquidity and a high level of risk. Keeping your cash stowed away in a safe, a shoebox or your piggy bank is going to be a high risk investment with an infinite level of liquidity and a non-existent level of returns.
These are purely technical risks that are being spoken of above. There are also practical risks that you are going to need to put consideration into. For example, keeping gold in your house is a risky proposition even though it generally wouldn't be as risky to invest in gold. Investing in land could be highly risky if it should happen to turn out that you purchased land from someone that does not actually own that land. So there are numerous risks that you are going to need to consider, not just the risks associated with the type of investment. You need to be practical when it comes to investing, as well as willing to consider the three variables that change the most when it comes to investments. Keep these things in mind any time you are seriously considering an investment of any type, and you will be much more practical in general when it comes to placing investments that will benefit you in the long run.
Photo Credits: assbach
Originally posted 2009-06-22 05:49:05. Republished by Blog Post Promoter
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