Two out of three

In life, there is a general principle that applies in many situations. It’s called the “two out of three” principle. Basically, it says that if there are three things that you can vary in a situation, you can usually control any two of the three, but not all three.

For example, students in college are often told that they can choose two out of three between good grades, a fun social life, and sleep. That is, they can study and get good grades while maintaining an active social life full of partying and fun. Of course, they will have no time left to sleep. If they choose to have a good social life and also to sleep well, then when will they have time to study and get good grades? The third choice is to study well and sleep well but have minimal, if any, social life outside of libraries and labs. Life’s like that. One can’t have everything.

In business too, this applies. A design consultant once told me that they have such a rule of two out of three as well. A customer can choose between quality, speed, and price. If they want a service fast and at a high quality, they cannot get it at a low price. If they want a premium product cheap, they’ll have to wait a while. If they want it cheap and fast, they can’t expect a top-notch product.

When it comes to investing, a similar law applies. Here, the three variables are risk, time frame, and returns. If one wants to invest in a low-risk, low-maintenance product for a short period of time, they can’t expect high returns (think short term FDs and liquid funds). If they want to invest for a short time and expect a high return, they will have to go for complicated, high-risk products. The only way to make high returns and build a lot of wealth while taking low to moderate risk is to invest for the long term.

This last way is the way of equity mutual funds. It’s a relatively simple product whose risk keeps going down as the investment time frame increases, while holding the promise of delivering a lot of accumulated wealth to patient investors.

The last said ‘two out of three principle’ with equity funds provides you with two certain benefits – minimum risk and optimal returns. The third benefit, is of course the outcome – which is maximum wealth.