The magic triangle of investment

Letzte Aktualisierung am 13.05.2022

The magic triangle of investment is a useful tool for assessing and comparing different types of investment, such as shares or real estate or bonds, at a glance. The three aspects of the magic tri angle of investment include: 

• The liquidity of a financial investment: How quickly can a capital investment be exchanged for a monetary unit such as euros or USD? Is this possible without further ado or is there a lengthy process behind it, such as when selling a rare work of art?
• The return on an investment: What is the amount in euros or USD that an investment "earns" each year? In the case of a savings book this is the interest, in the case of a share it is the price gain and the dividends. 
• The security of an investment: Is there an increased risk that an investment will no longer have any value after a certain time? One could mention speculative cryptocurrencies here - i.e. small fringe projects apart from Bitcoin and Etherium that perhaps pursue a great idea, but in the end are not economical and the coin therefore no longer has any value.

These three aspects are also known as the three criteria for investments.

Definition: Investment explained simply

The magic triangle of investment: liquidity, security and profitability.

Um das Konzept des magischen Dreiecks der Vermögensanlage zu verstehen, benötigen Sie also keine “Magischen” Eigenschaften. Ein klarer Menschenverstand genügt, um das es  zu entzaubern.
Wer es einzusetzen weiß, erspart sich unter Umständen viel Kopfzerbrechen. Denn beim Thema Investieren lautet das Motto: Wer von Anfang an genau weiß, was er von seiner Kapitalanlage erwartet, kann nicht böse überrascht werden. Bei solchen Überlegungen unterstützt das magische Dreieck der Vermögensanlage mit seiner gut vorstellbaren, visuellen Darstellung und vermittelt schnell einen Eindruck einer Geldanlage-Art. 

But aside with the theory: let's take a look at different investment options and how they behave in the magic triangle of asset investment. Because regardless of whether it's a few thousand euros of investment or a wealthy investor asks himself the question "What is the best way to invest 1 million euros??” - the principles are similar.

Magic Triangle of Investing Examples 

Which investments can we analyse using the magic triangle of investment? In principle, this is possible with all forms of investment. In this guide, we have selected the following four types of investment and analysed them for you using the magic triangle:

• Shares
• Bitcoin/Crypto
• Real estate
• Bonds/savings books

Shares and the magic triangle of investment

Shares and the magic triangle.

Yield: 2/3

The return on an equity investment again depends heavily on the selection of the individual stock. The S&P500 can serve as a reference: Since its inception in 1957, the annual average return has been around 8%, i.e. significantly above the average inflation rate of around 2%. 

Safety: 2/3

When it comes to security, everything depends on the choice of share. A broad-based index fund (ETF = Exchange Traded Fund) provides a relatively high degree of security, whereas an investment in a small growth company is considerably riskier. 

Liquidity: 3/3

A share can be sold on the stock exchange at any time during opening hours, provided there are buyers on the market. No problem with medium-sized and large companies, difficult with micro-caps with low market capitalisation. However, the latter is certainly not the rule, hence three out of three possible points.

Our clients buy perfectly analysed income properties developed by us. Over the years, we have made hundreds of property valuations and find those properties that will still be profitable in 10 and 20 years.

Magic triangle of asset investment in real estate 

Real estate and the magic triangle.

Yield: 3/3

Niedrige Zinsen, geringes Wohnungsangebot und förderliche Demographie sorgen bei Immobilieninvestoren seit Jahren für strahlende Augen. Die erreichten Wertsteigerungen bei Immobilien – teilweise im zweistelligen Prozentbereich pro Jahr – lassen das ansonsten bedrückende Negativzins-Umfeld schnell vergessen. Die Eigenkapitalrendite von Renditeimmobilien liegt i.d.R. bei deutlich über 20% (mehr als doppelt so hoch wie bei Aktien!) und ist bei einer einhundertprozentigen Finanzierung des Immobilienpreises sogar noch deutlich höher. Dazu kommt ein manchmal schon ab dem ersten Tag positiver Cashflow der Immobilien nach Zins und Tilgung. Besser geht es nicht!
 

Safety: 3/3

Beim Thema Sicherheit trumpft die Renditeimmobilie groß auf – Stichwort: Betongold. Dank niedriger Zinsen haben Immobilien seit Jahrzehnten einen Lauf ohne Werteinbruch verzeichnet. Doch auch vor der Phase des Niedrigzinses ab ca. 2008 war eine Renditeimmobilie bereits jahrzehntelang ein sicheres Investment, das in Krisenzeiten stets einen materiellen Gegenwert bewahrt hat. Selbst Kriegszeiten konnten der Bewertung langfristig nichts anhaben. Ein großer Pluspunkt!
 

Liquidity: 3/3

At first glance, a rented property as a capital investment may not look like an investment that can easily be exchanged for cash value. But far from it: 

• The investor's liquidity is protected from the outset with a leveraged property. If only the ancillary purchase costs are paid when buying the investment property and the purchase price is financed by a bank loan, only a small amount of equity is tied up. This is completely different from shares or a savings book.
• If a real estate investor needs liquidity quickly, a mortgage can be placed on the investment property at any time. This is possible in just a few days and ensures immediate liquidity. 
• If a large amount is needed, there is no way around an early sale. But with the selection of a positively developing location and the purchase of real estate at a comparatively favourable price, an income property is hotly sought after on the market in the event of an urgent sale. A sale can be completed in a matter of weeks. 

Magic triangle of financial investment Savings book

Savings book and the magic triangle.

Yield: 1/3

Eigentlich müsste man an der Stelle 0 von 3 Sternen geben, denn die Rendite auf ein Sparbuch ist quasi nonexistent. Anleger dürfen sich glücklich schätzen, wenn die Verzinsung bei über 0% liegt und nicht negativ ist.
 

Safety: 3/3

No interest, but quick liquidation and a high degree of security: at least you can rely on the savings book when it comes to security. 

 

Liquidität: 3/3

A savings book can usually be closed quickly. As an investor, you can therefore access the funds quite quickly. But why one should go to the trouble of investing in a savings account at all if there is no interest anyway remains to be seen. 

Magic Triangle of Investing and Bitcoin

The magic triangle and Bitcoin.

Yield: 3/3

Der mittlere jährliche Durchschnitt der Wertsteigerung von Bitcoin liegt bei knapp über 400%. Eine unglaubliche Zahl, die der Anleger aber mit geringerer Sicherheit und hoher Volatilität bezahlen muss. Dank Decentralized Finance (DeFi) werfen Kryptowährungen wie Bitcoin und Ethereum heute sogar Zinsen ab, wenn diese beispielsweise verliehen oder gestaked werden.

 

Safety: 1/3

Security and Bitcoin in one sentence - difficult. Today, it can hardly be assumed that bitcoin will one day be at 0 euros per bitcoin. If you ask a random person in the pedestrian zone today whether they would buy 100 Bitcoin for 10 euros - the answer is almost certainly yes. Bitcoin is established and still has significant potential to increase in value in the long term. 

But the ride along the way is wild and characterised by massive price fluctuations. An attack on the Bitcoin network, which could jeopardise security, is not impossible, but it is extremely costly. More likely are government regulations or bans that make Bitcoin a rather unsafe investment overall. 

Liquidity: 3/3

Bitcoin can be traded 24 hours a day, 365 days a year. The market capitalisation and trading volumes are now so high that the maximum number of stars can definitely be awarded here. 

The magic triangle of investment: conflicting goals

Ein Ferrari fährt zwar schnell, ist aber nicht billig zu haben.
Viele PS und ein hoher Kaufpreis gehen miteinander einher.
Ein Fiat 500 hat wenig PS und kostet wenig.

One can speak of a so-called conflict of objectives. If one value is high, the other cannot be equally high. A high level of security in an investment never goes hand in hand with a superior return. Otherwise, everyone would invest in this investment, which would lead to a declining return. So the market always finds its equilibrium. This is called a conflict of objectives. 

Conflicting goals of profitability and safety

Rentabilität und Sicherheit verhalten sich wie PS-Anzahl eines Autos und dessen Kaufpreis zueinander.
Eine Geldanlage kann nicht “bombensicher” und gleichzeitig äußerst rentabel sein. Beispiel: 10% Rendite sind in Zeiten von negativen Zinsen auf Bankguthaben nur in Verbindung mit einer hohen Unsicherheit zu haben. Das können “windige” Schiffsanleihen oder riskante Aktien oder Aktienoptionen sein. Das Totalverlustrisiko steigt mit höherer Rendite immer weiter. 

The closest thing is real estate: real estate is quite profitable if a high share of the purchase price is covered by a bank loan. On the other hand, they are relatively safe - it is not for nothing that people have always spoken of "concrete gold". The performance of real estate in recent years speaks for itself. But even before the boom since 2010, real estate was extremely stable in value and a good way to hedge against inflation. 

The value development of real estate in Germany is considerable.

Conflicting goals of liquidity and profitability

Can an investment be convertible into cash at any time and at the same time yield a lot of return? A very rare case. It is much more likely to be the other way round: the longer the fixed term of a cash investment, the worse the chances of getting the tied-up money out early. With cryptocurrencies, one can speak of high profitability and very good liquidity. But the investor pays for this with low security and - on top of that - with high volatility. 

Conclusion: The magic triangle of asset investment and how you can use it

The essential realisation is that there is simply no such thing as an " egg-laying lizard" among financial investments. Even if many dubious "advisors" make dreamlike promises where investments fill all the criteria of the magic triangle of investment - this is not realistic. And certainly not sustainable - because the market regulates imbalances itself over time. 

Those looking for a sustainable investment should pay attention to the following points:

• The fairy tale of the perfect investment with high liquidity, profitability and security does not exist. Only real estate as a capital investment fulfils many criteria, but sometimes there have to be cutbacks in liquidity
• If there is no such thing as the ONE perfect investment, then the logical conclusion is: don't put all your available capital into one and the same investment.
• Diversification is the magic word: those who combine several types of investment spread their risk and fulfil each of the criteria of the magic triangle in the addition of all investments.
• Example: An investor buys an income property with leverage (security + profitability high, but discounts in liquidity); in addition, he invests in an equity portfolio (e.g. a broadly diversified ETF), which has less security, but can be sold on the market at any time and fulfils the liquidity requirements well. Finally, a very risky component could be integrated, which, however, has a lot of potential for high profits (e.g. a crypto investment). 
• The allocation to the various forms of investment then varies from person to person.

We would be pleased to offer you a comprehensive consultation and our special expertise in the real estate sector. Make an appointment now.