The magic triangle of investing – or the fine art of compromise

Why does one investment deliver an attractive return while another barely beats inflation? The answer lies in the magic triangle of investing – and in a trade-off that nobody can escape. In this second lesson of our finance guide, you’ll find out which three factors are decisive when you build wealth, how they interact, and which goals you can achieve at the same time – and which you can’t.

< Lesson 1 | Overview | Lesson 3 >

What is the magic triangle of investing?

The magic triangle of investing describes the three competing goals of investing your money: return, availability and security. Availability – how quickly you can get at your money – is also called liquidity in the specialist literature. In the figure below, each of these goals forms one corner of the triangle.

Return: what does the investment earn?

Return describes what an investment earns and is the most important starting point for many investors. Typical sources of return are dividends, interest payments and price gains.

As a rule, the higher the return you aim for, the greater the risks you take on – there is no such thing as a consistently high return without corresponding fluctuations. This is exactly where the trade-off in the magic triangle of investing begins.

For building wealth over the long term, it is crucial to reinvest your earnings wherever possible. The compound interest effect means your wealth can grow exponentially over time.

What also matters is the return after costs, taxes and inflation: fees and rising prices can eat significantly into your real return. Especially with long-term investments, it pays to look for low-cost, efficient products – such as broadly diversified ETFs that track an entire asset class like equities at very little cost. Which ones stand out is shown in our article Best ETFs in Switzerland and globally.

 

Availability: how liquid is the investment?

Availability – often also called liquidity – describes how quickly an investment can be turned back into cash or bank deposits. The shorter this period, the more liquid the investment.

It’s not only the time that counts, but also the cost of conversion. Selling fees, spreads or any early redemption charges can reduce the amount you actually have available.

Liquidity depends heavily on the asset class: exchange-traded securities such as ETFs or shares can be sold on any trading day, whereas real estate or private equity holdings are much less flexible.

In the context of the magic triangle, this means: high availability often comes at the expense of return or security. If you want quick access to your money, you usually have to accept compromises on one of the other two factors.

Security: how safe is my capital?

Security means preserving the wealth you have invested. It describes how strongly an investment fluctuates and how high the risk of a permanent loss is.

An important way to increase security is diversification. Spreading your money across different asset classes, regions and sectors can reduce risk.

At the same time, there is no such thing as absolute security with return-oriented investments. Even broadly diversified portfolios are subject to short-term fluctuations.

In the magic triangle of investing, security is in tension with return and availability. Greater security often goes hand in hand with lower expected returns or reduced flexibility.

You can only achieve two goals at a time

The magic triangle of investing makes it clear that the three goals – return, availability and security – cannot all be maximised at the same time. If you put two of them first, you inevitably have to compromise on the third. This basic rule applies regardless of asset class or market environment.

In concrete terms, you have three options to choose from:

Option 1: high return + high availability = low security

Shares are the classic example of this combination. They can deliver an attractive return over the long term and can be sold at any time during trading hours. At the same time, they are sometimes subject to considerable price swings – temporary losses of 30% or more are historically nothing unusual.

How secure they are depends heavily on how broadly the investment is diversified. If you bet on individual shares, you risk a total loss in the worst case – for example if a company goes bankrupt. With a globally diversified equity fund – such as an ETF on the global stock market – a total loss is practically ruled out, because thousands of companies would have to become worthless at the same time. So diversification reduces risk considerably – but it does not remove the trade-off in the magic triangle.

This category also includes commodities such as oil, grain or precious metals – although gold is seen more as a store of value and an inflation hedge than as a classic return-generating investment – as well as real estate shares and REITs (exchange-traded real estate funds). Particularly speculative are cryptocurrencies, which are among the most volatile asset classes of all.

Also strong on returns, but with a significant default risk: P2P crowdlending. Investors lend money directly to private individuals or companies and receive higher interest than on a savings account in return. The expected returns are attractive, but the credit default risk is real – deposit insurance does not apply here. Find out more in our article Crowdlending: P2P in Switzerland is soaring.

Option 2: high availability + high security = low return

The classic bank account combines maximum flexibility with a high level of security: in Switzerland, balances of up to CHF 100,000 per person and bank are protected by deposit insurance, and your money is available at any time. But because the bank can’t plan with the capital over the longer term, the interest rate is correspondingly low. In the current interest rate environment, the return is barely enough to offset inflation – at best, the real value of your capital is preserved; it may even erode gradually.

So if you go for maximum security and availability, you take on a different risk: a gradual loss of purchasing power and missing out on real growth in your wealth.

Option 3: high security + high return = low availability

This combination is typical of investments where your capital is tied up for a fixed term. In return, you get a higher interest rate than on a classic bank account, which can at least preserve the real value of your money. However, the return is usually well below that of investing in shares.

Medium-term notes are fixed-income securities issued by banks. Investors lend their capital to the bank for a set term – usually between two and ten years – and receive regular interest payments in return. Because the bank can plan more reliably with the capital, it pays an interest premium compared with a savings or private account. Deposit insurance also applies up to CHF 100,000 per person and bank.

A fixed-term deposit works in a similar way: here too, an amount is invested for an agreed term and earns a fixed interest rate. The key difference from a medium-term note is that a fixed-term deposit is not a security – it is simply a bank deposit, which is also covered by deposit insurance.

The price you pay with both is limited availability: if you need your money early, you depend on the bank’s goodwill or have to accept losses.

Note: in the current low interest rate environment, the rates on medium-term notes and fixed-term deposits are modest too. Comparing providers is still worthwhile, as conditions can vary noticeably from bank to bank.

Your individual risk profile shapes your magic triangle of investing

What your personal magic triangle looks like is not an abstract question – it depends directly on your individual risk profile. This is made up of your risk tolerance and your risk capacity.

Your risk tolerance: how much risk do you want to take?

Risk tolerance describes your psychological attitude towards fluctuations and possible losses. If you can sleep soundly even when your portfolio temporarily loses 20% or more of its value, you have a high risk tolerance. If, on the other hand, you panic at every market dip, you should invest more conservatively – regardless of what would be possible on paper. Risk tolerance is subjective and is shaped by things like experience, personality and financial literacy.

Your risk capacity: how much risk can you afford to take?

Risk capacity describes your objective financial situation. It depends on how much capital you have, what obligations you have and when you are likely to need the money you’ve invested. If you have high fixed costs or will need the capital in the foreseeable future, you simply have less room for risk – regardless of your personal attitude.

How risk tolerance and risk capacity work together

Together, these two factors determine which of the three goals in the magic triangle should take priority for you.

An example: if you’re planning a major expense in the next two to three years – such as buying a home – you should focus your money primarily on high availability and security. Even if you’re generally willing to take risks and stay calm when prices swing, it would be unwise to invest riskily in this situation. Your risk capacity – reduced here by the short investment horizon – sets a clear limit that overrides your risk tolerance.

In short: risk tolerance describes what you want – risk capacity describes what you can afford. For a solid investment strategy, the two need to be in line.

– Partner offers –

Still looking for the right financial solution? Our recommendations – with attractive sign-up bonuses.

——

Conclusion

The dream of a highly profitable investment that is available at any time and also 100% safe is over. Sadly. As in other areas of life, there is no getting around compromises when it comes to investing.

Which combination is right depends on your personal situation: on your risk tolerance and your risk capacity – which also includes your investment horizon. There is no universally best answer – only the one that suits you.

In Lesson 3 we take a closer look: how can smart diversification improve the risk-return ratio – and what does that mean for your portfolio in practice?

You can find an overview of all the lessons here: Learn to invest – in eight lessons.

You might also be interested in

Updates

7 July 2026: Introduced “liquidity” as the technical term for an investment’s availability.

12 June 2026: Text and figures adjusted in places.

5 April 2026: Text and figures completely revised.

Disclaimer

Disclaimer: Investing involves the risk of loss. You have to decide for yourself whether or not you want to bear these risks.

Errors excepted: We have written this article on the magic triangle of investing to the best of our knowledge and belief. Our aim is to give you, as a private investor, information on finance that is as objective and meaningful as possible. If we have nevertheless made mistakes, overlooked important aspects and/or if information is no longer up to date, we would be grateful if you let us know.