A friend asked, are there any fundamental concepts and principles that can help us establish the correct investment concepts, and avoid detours and pitfalls?

Today's article will share two basic principles in investment with you.

1. The principle of equivalence between returns and risks

Investment is fair.

If you want to achieve higher returns, you must be mentally prepared to bear the higher risk of volatility.Do not only see the thief enjoying the meat, but not see the thief getting beaten.

Taking the stock funds, bond funds, and money market funds that we usually come into contact with as examples:

Overall, from money market funds to bond funds, and then to stock funds, the returns are higher one after another.

Of course, the volatility risk also increases one after another.Money Market Funds

The annualized return rate is typically below 2%.

There is almost no risk of decline, so there is no concern about whether the market is good or bad.

Bond Funds

The historical average annualized return rate is around 4%-6%.

Accordingly, the volatility risk is also higher than that of money market funds.During the holding period, fluctuations of a few percentage points may occur. Some bond funds may experience even higher volatility.

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▼ Stock Funds

The historical average annualized return can reach 10%-14%.

Some outstanding fund managers can achieve a long-term annualized return of 15%-20%.

However, the volatility risk of stock funds is also the greatest.

During the holding period, there may be a fluctuation risk of over 50%.Therefore, investing in stock funds requires mental preparation to face the risk of volatility.

II. Principle of Maturity Matching

The term "maturity matching" refers to the one-to-one correspondence between the investment term and the type of investment. In other words, the type of investment should be chosen based on the term of use of the funds. This is also a very important principle.

For example, if money that is needed in the short term is invested long-term, also known as "short-term funds for long-term investment," it may affect our lives.How should one proceed specifically?

Generally speaking,

(1) If the money might be needed at any time, or within a few weeks, one could consider some money market funds or short-term bank financial products (R1 level).

(2) If the money will not be needed for three months, one could consider some short-term bond fund varieties.

Accordingly, if the time frame is extended, one could also consider secondary bond funds, bond-mixed funds, etc., but the risk of fluctuation is also greater.

(3) If the money will not be needed for 3-5 years or more, one could consider some equity assets with relatively higher returns and fluctuations.The volatility risk of stock funds has also increased, making it suitable for investing with idle money that will not be needed for more than 3-5 years, and it is also advisable to invest during the 4-5 star stages of the market.

Summary

Investing is actually about balancing returns, risks, and liquidity.

No single investment can satisfy all three aspects, which is the 'impossible triangle' of investing.

For example:

- Money market funds have good liquidity, allowing for easy access and low risk, but their long-term returns are relatively low;• And stock funds, while offering high long-term returns, also come with high risks and require a long investment period. It is not always possible to redeem at any time in the short term and guarantee a positive return.

Understanding these fundamental concepts is essential for making better investment decisions and avoiding detours.