Money Multiplication vs Money Preservation

What is Money Multiplication? Quite simply, let the money grow by investing it in investment vehicle that are high in risk but high in return too, while the return can be positive as well as negative. For instance, investment in Equities / Stocks is considered as high in risk and high in returns. A company can do extremely well so as to distribute its profit amongst its share-holders. Picking the right company's stock and timing remain key factors in this case. There are further riskier investments like derivatives, hedge funds etc with further increased potential of profit (and loss).

What is Money Preservation? Once the money has grown, let the money retain its value (inflation taken or else not taken into account). This can be done by retaining the money by investment in high grade bonds, or else sovereign bonds of a nation, or else simply holding on to cash. Some index linked mutual funds also act as low risk with low returns investment vehicles.

FOREX / Currency rate fluctuations have an impact on either of the above categories when the time comes to monetize returns especially if the investment is made in foreign assets. Stocks might be doing very well (+20% annual growth), as in current times. However, currencies might be trading on the lower side bringing the overall returns on moderate side (5% - 15% annual growth). (Numbers here are tentative and might vary, just to give some perspective of the portfolio size at the end of year in current times)

Very rightly said 'Time is Money'. Each of the above is critical but when to go for Money Multiplication strategy and when to apply Money Preservation? Again a simple rule is, a young investor has more energy to earn money and apply money multiplication strategy. He / She is less risk averse and prepared to take risks. While as an investor grows old, sources of revenue generation are limited while risk aversion increases. At such times the grown money can be transferred to less risky investment vehicles while enjoying the gains earned earlier through the investment.

A hybrid approach is also possible and an individual should conduct thorough research while picking the right investment ratios create mixed portfolios (this calls for a separate discussion will be explained separately). Not to forget tax considerations in various jurisdiction.

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