How to choose financial assets well?

How to choose financial assets well?


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This particular topic is quite important, because not only do you have to take into account the characteristics that a good financial asset should have, but also vital information to apply in your financial career as investors. But it is vital to ask How to be successful choosing assets? Here we show you.

Characteristics that financial assets should have

This is defined in three letters LRR, which means Liquidity, risk and profitability. These are the three characteristics that all financial assets should have.

Liquidity

It is the ease and certainty to convert a financial asset into money in the short term without suffering losses. In other words, it is the ease we have to get rid of an asset, to sell it.

An example would be in the sale of a house, this could take a long time due to all the paperwork that has to be done, while the sale of an asset can take up to 10 seconds, where it is shown that selling an asset has more liquidity than selling a house, that is, money will be seen in less time.

While there is less time to sell, there is greater liquidity.

Risk

The risk of an asset varies depending on the probability that we have to recover the money, therefore, the greater the probability of not obtaining payment, the greater the risk. For example, if you lend an amount of money to a relative, there are more possibilities that they will pay than to lend it to a friend or a stranger, the situation is the same, but the risk changes.

The same happens with financial assets, where it is not the same to buy a German bond or a 10-year Spanish bond, as it is to buy a bond from a country that has a critical economic situation. For this reason, there are rating agencies or rating agencies; which are agencies that put marks and that way you can Know the risk that exists before investing.

Cost effectiveness

The profitability of a financial asset is the profit obtained in relation to the acquisition cost. To find the profitability of an asset, it is done using a simple formula that states that "Profitability = Profit / Cost of acquisition".

For example, if a profit of 100 has been obtained from an asset that cost 1000, this divided would yield 0.1 as a result, which in percentage terms would be 10%.

Thus, an asset is more profitable as long as it achieves a high level of profit.

How do the characteristics of an asset interact in the realization of a safe investment?

One of the ways to visualize how the characteristics of an asset interact during an investment, is in the realization of a triangle, placing each of these on each side. On the left side the liquidity, the right the profitability and the risk base, and in this way it will be reflected how the different variables affect an asset.

What happens when they are faced with a very liquid asset?

It happens that it can affect the other characteristics, therefore, if you have a very liquid asset or very easy to sell, it penalizes profitability, that is, we have a lower profitability and therefore, if we have a lot of liquidity, it happens that the level of risk is also low, the triangle would move clockwise.

An example would be to acquire the German bond for 10 years, it is a bond that has a lot of liquidity, does not have excessive profitability and the existing risk is almost zero.

What happens if the liquidity of an asset is low?

First, it is very difficult to sell that asset, since the risk rises to a fairly high level, since if we invest in something that later becomes stagnant, the risk of losing the money is very high, and finally, it affects our third variable .

For example, a person as an investor does not risk investing in an asset with little liquidity and a lot of risk if it does not have a high profitability as a reserve, therefore, the profitability variable has to rise. The sense of this situation would go against the needles of the clock.

How can you use the Triangle of Features to prevent scams? It is a very important question and one that every investor who takes this triangle into account must be made.

As we have already expressed, each side of the triangle affects the other sides, but and What if an asset is offered where there is high liquidity, low risk and high profitability? Well, the truth would be too perfect to be true.

If a financial asset with these characteristics is offered, it is advisable to apply the triangle and visualize that the course does not flow in this triangle because the direction of the three sides is uncoordinated and that situation should sound alarms.

A person as an investor must protect himself because in this situation it is clear that something is not quite right, because having a lot of liquidity, a lot of profitability and few risks is not a logical pattern.

It is important to carry out this graph as fundamental tool when investing, in order to study with much more intelligence the assets that are offered and not fall into scams, causing loss of money and low savings.

Image: Depositphotos


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