Venturing into the world of investing can be just as exciting as it is confusing. What to invest in if I do not want to take risks – and what should I bear in mind in that case? How do you choose between a higher return, lower risk and high liquidity? The investment triangle will show you how. Let's take a look at how to make your investment decisions easier with the help of this simple, yet very helpful concept.
What is the investment triangle?
The investment triangle, or also the magic triangle of investing, is a model that links the three basic factors of every investment: return, risk and liquidity.
All three are always somehow related to one another – if you strengthen one of them, another may weaken. However, their mutual relationship is not absolute, and so the individual aspects influence each other, but it cannot always be said that a higher value of one pillar automatically means precisely defined changes in the others.
For you as an investor, it is important to find a balance that matches your goals, time horizon and tolerance for risk.
Reading tip: The basics of investing, or How to start investing
What does the so-called magic investment triangle consist of?
1. Return, or How much can you earn?
The return on an investment expresses the expected profit from the investment. This factor motivates investors; however, the amount of the return will depend on the type of asset and the associated risks.
Examples of return expectations:
- Real estate: The investment has the potential to bring returns from rent as well as an increase in the property's market value. The rental yield usually reaches 3–6 % per year, while the value of properties grows over the long term.
- Stocks: They offer a higher return (8–10 % per year), but with greater volatility.
- Bonds: Government bonds carry a lower return (1–3 %), while corporate ones may be more profitable, but riskier.
2. Risk, or How much uncertainty can you handle?
Investment risk expresses the uncertainty of whether the investment will bring you a profit or a loss.
The general rule of investing says that higher risk is associated with a higher potential return. However, as we mentioned, this is not always absolute. Higher risk does not guarantee a higher return, and lower risk does not necessarily guarantee a lower return.
Proper diversification of your investments can minimise the unpleasant impacts.
Types of risk:
- Market risk: The fact that asset prices on the market fluctuate.
- Liquidity risk: The possibility of difficulty in selling an asset at the market price.
- Credit risk: The risk of a loan or bond not being repaid.
3. Liquidity, or How quickly do you get your money back?
Investment liquidity expresses how easily you can convert your investment into cash, and that without a significant loss in value. The speed of this process differs according to the type of asset.
For example, real estate typically has low liquidity; a sale takes weeks to months. On the other hand, stocks and ETFs are highly liquid, because you can commonly sell them on the stock exchange within minutes.
Again, the general rule is that less liquid assets (for example real estate or bonds with a long maturity) tend to be considered riskier, because selling them in a short time can mean a loss of value.
Likewise, more liquid assets usually offer a lower return than less liquid assets.
Reading tip: Small investments: How and where to invest small amounts?
Example: Investing in a rental apartment
Investment goal: Buying an investment apartment in a city where demand for rentals is steadily growing, for the purpose of long-term renting and a future sale at a profit.
Profitability
The investment has the potential to bring returns from rent as well as an increase in the property's market value:
- Annual rent: CZK 150,000
- Assumed annual growth of the property's value: 3 % (e.g. CZK 75,000 per year)
The total expected annual return is therefore CZK 225,000. This return can be affected by the market, for example if the supply of apartments increases or an economic crisis occurs.
Risk
This investment carries risks:
- Empty months without tenants, which reduce income.
- Unexpected expenses for repairs and maintenance.
- Market risk, where the value of the apartment may fall, for example due to changes in laws or an economic crisis.
You as an investor should weigh these risks before investing and possibly minimise them – for example by arranging insurance or choosing a stable market with high demand.
Liquidity
Real estate is generally not quickly liquid. If you needed cash, selling the property can take months and involves additional costs (real estate services, taxes). Moreover, you may not get the desired price in a short time.
Optimisation through InvestBay
InvestBay, our platform through which you micro-invest in real estate, differs from a regular investment property, among other things, precisely in liquidity. Selling your piece of a property tends to be easier than buying or selling a whole investment property. Your share in a property is still less liquid than, say, stocks, but definitely more liquid than whole apartments or houses.
- Accessibility from a low entry investment (e.g. CZK 2,500), which increases flexibility and reduces risk.
- Property management by InvestBay eliminates the worries of tenants and maintenance.
- Risks are shared among several investors, which limits the impact of any losses.
All in all, when making a decision it is crucial to analyse all aspects of the magic triangle and make use of the available tools, such as the investment calculator, so that you can tailor the investment as well as possible to your own goals and possibilities.
Take a look at our current offer of investments. In the description of each of them we are very detailed and transparent.
How to balance the pillars of the investment triangle?
Balancing all three pillars of the investment triangle is the foundation of a successful investment strategy, but it builds on the basis of your investment strategy. The key factors that influence this balance include the time horizon, the investment goal and the tolerance for risk.
- If you plan to invest only in the short term, focus on assets with high liquidity and low risk, such as government bonds or money markets.
- By contrast, long-term goals allow you to invest in riskier assets, for example stocks or real estate, which offer higher potential returns.
Investment goals play an equally important role – building capital calls for dynamic instruments with higher risk, while protecting value requires a more conservative approach.
Every investor should also assess their tolerance for risk, which determines how large fluctuations in profitability they are willing to accept.
The key to optimising the investment triangle, however, is diversification. Spreading investments across various asset classes, geographical areas and investment styles helps minimise risk while maximising potential returns.
For example, a combination of stocks, bonds and real estate provides both stability and growth, while investing across regions protects the portfolio from the specific risks of a single economy.
Properly set-up diversification will allow you to achieve a balance between profitability, risk and liquidity, whether you are a conservative investor or are aiming for dynamic growth of your capital. Learn how to diversify properly in our guide.
More practical examples of the investment triangle for the most common types of investment
With each type of investment these pillars manifest themselves differently. We covered real estate above; let's look at practical examples for four other popular assets:
1. Stocks
Return: The average annual return on stocks is around 8–10 %. For example, shares of companies such as Apple or Microsoft grow over the long term and pay dividends.
Risk: High. The stock market is volatile; prices can change daily.
Liquidity: High. You can sell stocks almost immediately through the stock exchange.
Example:
- Buying stocks for CZK 100,000.
- Annual return (including dividends): CZK 10,000 (10 %).
- Risk: A 20 % drop in the value of the stocks during a crisis.
- Liquidity: The option to sell within a few minutes.
2. Bonds
Return: Government bonds have a lower return (1–3 % per year), while corporate bonds offer a higher return (3–7 %).
Risk: Government bonds are considered safe (or rather more conservative), corporate ones can be riskier, especially if the issuer goes bankrupt.
Liquidity: Medium to high, depending on the type of bond and its tradability on the stock exchange.
Example:
- Investing in a government bond for CZK 50,000.
- Annual return: CZK 1,500 (3 %).
- Risk: Very low for government bonds.
- Liquidity: The option to sell on the stock exchange, but not always immediate.
3. Mutual funds
Return: It depends on the type of investment fund. Equity funds may offer higher returns (6–8 %), bond funds less (2–4 %).
Risk: Diversifying the portfolio reduces risk, but protection against a market decline is not guaranteed.
Liquidity: Medium. Selling shares usually takes several days.
Example:
- Investing in an equity fund for CZK 100,000.
- Annual return: CZK 7,000 (7 %).
- Risk: A drop in the fund's value during a market correction.
- Liquidity: Payout within 5 business days of the request.
4. Micro-investing in real estate with InvestBay
Return: The estimated annual return is around 8 % and more; specific values are listed for each project separately.
Risk: Thanks to shared ownership and professional property management, the risk is lower than with direct ownership. However, it is not possible to completely avoid factors such as property vacancy, market swings or unexpected maintenance costs.
Liquidity: Better than with traditional property ownership – InvestBay makes it easier to sell your share. Even so, the liquidity is lower than with stocks or ETFs; selling a share may take several weeks.
Example: A real estate investment of CZK 100,000 through InvestBay.
- Annual return: At an estimated return of 8 % you get CZK 8,000.
- Risk: Possible factors affecting the return include property vacancy or market swings.
- Liquidity: The option to sell the share back through the platform; the process may take several weeks.
Micro-investing with InvestBay combines accessibility, lower risk and attractive returns. Start investing from as little as CZK 2,500 and grow your finances smartly! Register via the button in the top right corner.
Tips for beginners: How to use the investment triangle
The investment triangle is not just an insignificant theory that could not be put into practice. On the contrary. Grasping it properly will help you find a balance between the growth of your assets and the safety of your finances – and save you a lot of stress and money.
Summary of the basic points:
- The basic rule is to set yourself a clear investment goal, for example saving for retirement or buying a property abroad, and adjust your approach accordingly.
- Plan with the help of tools. Investment calculators will help you with calculating expected returns.
- Also, never forget about diversification – by spreading investments across various asset classes you can significantly reduce risk and increase the stability of your portfolio.
- Start with small amounts. Micro-investing with InvestBay is an ideal start.
What, on the other hand, to avoid?
- Excessive focus on return and ignoring risk.
- Insufficient diversification of the portfolio.
- Not knowing your own investor profile.
Gain confidence when investing
The investment triangle provides you with a clear framework for making investment decisions. The balance between return, risk and liquidity is the key to achieving your financial goals. Focus on diversification, consider your priorities and do not forget about the available tools, such as the investment calculator.
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