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LSR stands for Liquidity, Safety, Return. It is sometimes called the 3 legged investment triangle.
When you think about it, aren't these what any investor looks for in an investment? If you can find 100% liquidity that was 100% safe paying the highest return, you'd have the perfect investment.
But, sigh!, no such animal exists. High return usually means you've sacrificed safety. Liquidity will impact return. And so the wheel keeps spinning.
This article isn't meant to tell you the right investment for you. It is meant to explain these 3 terms and let you apply them to the degree you see fit in the grab-bag called your investment portfolio.
Liquidity--leg one
Liquidity is simply your money's accessibility. A savings or checking account provides immediate accessibility (in most cases). A three year CD in it's second month is a different story. It still has 2 years and 10 months to maturity. Cashing it in at this juncture may be costly. In some cases, you receive less than what you put on deposit.
Safety--leg two
Safety always involves risk. A good rule of thumb is: the more liquid the investment, the safer the investment. Savings accounts, short term CDs and Treasury (US that is) Bills are considered safe.
Risk also comes in gradations of low, medium and high. I've just mentioned 3 examples in the low end of the spectrum. Medium risk examples would include common stocks and some types of real estate. High risk, on the other hand, are some types of real estate, options and penny stocks.
My personal investment model classifies common stock as low risk. Yours might classify common stock as high risk. Neither one of us is right or wrong. The prerequisite is understanding you, and no one else, classified it that way. If you can understand why you classified it the way you did, you'll be dollars ahead.
Return--leg three
Return is one of those factors that has started many a court action. Think of it as what you expect to earn. For example, a CD with an interest rate of 10% gives you a return on invested dollar of 10%. It is structured that way.
For the nit pickers in the crowd, I am not including tax, inflation, maturity length or alternative use in this example.
A good rule of thumb for computing your return on invested dollar is to take your yield, add or subtract the change in value then subtract investment costs. The math looks like this for an investment you just sold:
Yield is 10%. Change in value is a +2%. Investment costs are 3%. 10 + 2 - 3 = 9%. Yes, there is more to each factor but for now, this formula should satisfy even the purists.
By the way, return is often called yield. In a sense it is, but really it isn't. Keeping the 2 differentiated will give you a better return.
There you have the 3 legged LSR triangle. Ponder them and do your homework before you invest. If these are the only 3 investment terms you ever learn, you'll be ahead of 90% of your peers.
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