You Can Only Have Two
Don’t you wish that’s what your mother had said when she made the freshly baked cookies? For me, it was always “just one”.
Well when it comes to investing you have only have two, but which two?
Look at this little triangle of interrelated aspects of a typical investment.
You can only ever have 2 of these at any one time.
You want a high return – you then must choose what you are going to give up. Do you want liquidity (i.e. the ability to get out quickly if things aren’t working out)? Then you must give up low volatility – you must be able to stomach the ups and downs. Think stocks, over time good quality stocks give high returns but there is lots of volatility along the way. Can you stomach that?
If you can’t and you want a high return and low volatility, then you must give up liquidity. Think quality real estate. Over time it also has given strong returns and with little volatility. However, you must give up liquidity. You can’t sell it quickly and if you are in a private real estate fund, you must accept that the manager may even freeze redemptions until they can sell building to meet redemptions.
What if you want both low vol and liquidity? Wouldn’t that be great! No ups and downs and the ability to get your money at any time. Well you must give up higher returns then. Think corporate bonds. They don’t fluctuate a lot and you can sell easily but what sort of return do you earn on them today? 3% or 4%?
Life is full of choices.
It’s the same with investing. You must choose your priorities. Studies consistently show that the biggest factor in determining individual investors long term returns is their own emotions. Do you panic and sell at the wrong time? Then you should choose low volatility but recognize that you then must give up either higher returns or liquidity.
In the big picture 2 cookies isn’t a bad thing. Just make sure you know which 2 you want!