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The magic triangle of investing

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The three pillars of success – the magic triangle of investing

For many savers, finding the right investment products is a challenge. It quickly becomes clear that relying on a single financial product is not advisable. The right mix of different investments diversifies risk and increases the chance of attractive returns. This is where the "magic triangle of investing" comes into play: It helps divide your investments into the three essential areas – liquidity, return, and risk – and forms the basis of successful wealth planning.

The magic triangle of investing

The investment triangle is the foundation of successful wealth planning, as it balances the three essential aspects: security, liquidity, and return. It helps savers define the optimal mix of their investments.

No single investment fulfills all three criteria simultaneously. Financial products that offer both security and liquidity often provide only low returns. Therefore, it is advisable to diversify capital – meaning not investing all assets in a single product, but combining different investment options. This ensures that all three aspects are considered, with the weighting varying according to individual preferences.

The three pillars of successful investing

Security
The security aspect describes the risk of capital loss. No financial product is completely risk-free, but some investment options are considered particularly risky, such as stocks and crowdfunding. ETFs and funds fall into the medium risk range, while savings accounts, money market accounts, fixed-term deposits, and precious metals are considered safer.

It's important to know that the safer a financial product, the lower the expected return usually is. Therefore, those who focus on high returns must be prepared to accept a higher risk.

liquidity
Liquidity describes how quickly an investor can access their capital. Products like savings accounts or money market accounts offer immediate access to funds, while investments in stocks or funds offer limited flexibility. Withdrawing capital prematurely can even result in losses. Investments in real estate are characterized by even lower liquidity, as they can be difficult to sell or may result in significant losses.

Savers must therefore decide whether they want to have access to their capital at any time. However, higher liquidity often comes at the cost of lower returns.

return
Those who want to grow their capital efficiently focus on returns. Two factors play a crucial role here: the investment period and the risk. For high returns, it often makes sense to invest money for the long term. Especially with funds, ETFs, and real estate, a period of at least five years should be planned, and for real estate, even 15 to 20 years. However, to achieve higher returns, more risks must also be accepted.

For example, someone saving for retirement who has little time until then should choose security-oriented products to minimize the risk of loss. Conversely, someone with plenty of time and who can better weather market fluctuations has the option of taking on higher risks to maximize potential returns.

The magic triangle in detail

The magic triangle of investing arises from the three pillars of security, liquidity, and return, since only two of these aspects can be considered simultaneously. The third aspect on the opposite side cannot be combined.

Thus, while an investment can offer security and liquidity (e.g., a savings account), it cannot simultaneously generate high returns. On the other hand, real estate offers high returns and security, but is less liquid and requires a long investment horizon.

The combinations in the magic triangle of investing can be represented as follows:

Security and liquidity
Investment options that combine security and liquidity are characterized by a low risk of loss and allow relatively quick access to capital. These include products such as savings accounts, fixed-term deposit accounts, and passbook savings accounts. They offer a fixed interest rate and are easy to plan, making them well-suited as savings accounts. The disadvantage of these investments is that security and liquidity come at the expense of returns.
Security and return
It is more difficult to combine security and return, as capital market products – which offer the greatest return potential – also carry a certain degree of risk. Those who still wish to invest securely while seeking return potential can invest in real estate or government bonds. In both cases, however, the capital must be tied up for a long period and cannot be accessed at short notice.
Return and liquidity
The capital market offers the highest return potential, combining returns with liquidity. Products like stocks and ETFs allow you to withdraw money at any time while simultaneously benefiting from profit potential. However, premature withdrawals can lead to losses, which is why these investments offer little security. With ETFs in particular, it is recommended to invest capital for at least five years to benefit from the return opportunities without taking on excessive risk.

How to use the magic triangle of investing

The investment triangle not only provides you with the foundation for successful wealth planning, but also helps you to invest your capital optimally. It illustrates the relationships between the three essential goals of an investment: liquidity, profitability, and security.

Using the "magic triangle" (investment triangle), you can strike a balance between these goals. This often means investing in different products – a process known as diversification. By spreading your capital, you minimize risk while simultaneously leveraging the full potential of your investments. It's important to be clear about which of the three pillars are most important to you so that you can give them more weight.

For example, if you want to invest with a focus on returns yet low risk, government bonds and real estate funds could be a good choice. These investments have long maturities and are difficult or even impossible to liquidate prematurely. However, to remain liquid and be prepared for unforeseen financial difficulties, you can set up a savings account for reserves. In this case, the focus is on security and returns, which is why the majority of your capital is invested in government bonds or real estate funds.

Define your individual investment profile

To leverage the magic triangle of investing for yourself, you should define your personal investment profile. This will help you identify which aspects of your investments are most important to you and where you want to focus your capital investment. The following considerations are crucial:

Your goalsWhat do you want to achieve with your money? Are you planning to save for retirement, buy a new car, or make another major purchase? Your goals determine the direction your investments should take.
Your needsDepending on your goals, the total amount of money you need to invest will depend on your goals. Someone saving for retirement usually needs more capital than someone saving for a short-term trip.
Your valuesAre you interested in specific values that influence your investment decisions? Many investors prefer to invest in sustainable or ethical investment products or focus on specific sectors that align with their values.
Your financial optionsOne important aspect is how much capital you have available for investments. Do you have a larger sum at your disposal, or would you prefer to save through regular contributions? This also determines how liquid your investment should be. If you already have savings, the focus can be more on security and returns. However, if you have little savings, it might be wise to prioritize higher liquidity when selecting your investments to be prepared for unexpected expenses.
Your risk toleranceAre you willing to take on higher risk to achieve a higher return? Or do you prioritize safer, but potentially lower-yielding investments? Your personal risk tolerance plays a crucial role in choosing the right financial product for your needs.

All these factors are crucial for efficient wealth planning tailored to your needs. Since it's often difficult for laypeople to match their personal values and preferences with suitable financial products, it's advisable to seek support from an expert.