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The Thumb Rule of Investment
The Thumb Rule of Investment
A thumb rule for investing is to look at 3 variables: Liquidity, Returns and Risk.
How fast or how easily can you convert the investment back into cash? That's liquidity.
What will you reap? Compared to what you sow? That's returns.
Is it a gamble? How much of a gamble? That's risk.
- Usually if one's more, atleast one of the other two are less.
- Stocks are high risk, high returns, high liquidity investments, for example.
- Money in a savings account is low risk, high liquidity, low return.
- Money in a fixed deposit is low risk, medium liquidity, medium return.
- Real Estate is a low risk, low liquidity, high return investment.
- Gold is a low risk, high liquidity, high return investment.
- Lending money to your friend is high risk, low liquidity, low return.
- Keeping cash in a safe, high risk, infinite liquidity, zero returns.
Of course, the above are technical risks of. There could be practical risks. Gold could be risky to keep in the house, and you may be fooled into buying land from someone who does not own it.
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