Another thing you need to analyze before you invest is around Liquidity. Liquidity analyses how long will it take for you to convert your investment to cash without major loss of value. Again like with Risk, the most liquid of investments usually do not have a very high return. But the relationship between liquidity and return is not as clear as with risk. For example, real estate is a very illiquid asset, but this year, it has had very bad returns. Similarly, Gold is an relatively illiquid asset, but has had decent return this year.
But it is important for you to understand liquidity as putting all your free cash into a very illiquid asset can actually erase all your investment, when there is some kind of emergency.
There are two important facets to be considered for liquidity
1. Ease of converting an asset to cash
How easy is it to sell a particular asset. For example it is very easy to sell stocks, while it may take a longer time to sell a house.
2. How much of value loss happens
When you make a distress sale does the asset loose a lot of value.
For example, a stock may be sold at any time with the availability of online share trading platforms and gets converted to cash in a day or two, but you may be forced to sell at a bad time (like now), when the sale may actually result in you loosing money. When people talk about liquidity they mostly only look at Point 1, but I would recommend that you consider both Point 1 and 2. You should spread your investments across different Assets Classes and Liquidity types.
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