What is Liquidity?

Liquidity is an essential factor in the valuation of an asset. It is the measure with which a business or individual can convert their assets into cash. 

For businesses, this is important because they need to be able to turn their assets into cash as needed for operating expenses, maintenance, salaries, and other payments.

For individuals, liquidity is necessary because it allows them to make decisions about their money and investments. For example, if you need to buy a house or car, having a high degree of liquidity will allow you to do so with little delay and without having to pay hefty fees for borrowing money from a bank. It also ensures that you can maintain certain financial obligations, such as monthly bills.

In this article, you’ll learn about the importance of asset liquidity, the kinds of liquid and illiquid assets, and which asset classes are best for your investment portfolio.

Liquid Assets

Maintaining a balanced portfolio of assets is crucial in a volatile market. One way to do this is by holding liquid assets, which can be readily turned into cash in times of need.

Liquid assets are usually cash or easily converted financial assets, such as stocks, bonds, mutual funds, and bank accounts.

Kinds of Liquid Assets

Many kinds of liquid assets, and the following are examples of these:

1. Cash –   Cash is your most liquid asset. It’s easy to sell, and it’s easy to use. It can easily be turned into money. But it has no growth potential, and you cannot expect any higher returns on your investment if you keep all of your money in cash. It can be beneficial if you need money immediately and do not want to wait until the maturity date or pays off dividends. 

It’s very important to also consider having an emergency fund to avoid using up your cash. This fund should be kept separate from your regular account and not used for other purposes. The best way to keep your money is to put it into a savings or interest-bearing checking account. So, in times of financial crisis, you have enough to use without orrowing from other people or institutions.

2. Stocks – Stock can be considered a liquid asset because it can be converted into liquid cash or used to secure a loan. It is also easily transferable and can be sold to anyone anytime.

Stocks are shares in a company that has value and can be sold on the stock market with value based on those companies’ financial performance. So if the company does well financially, the stock price increases. The stock price decreases f it doesn’t do well financially.

3. Bonds –  Bonds are an investment that allows you to protect your money by putting it in a financial instrument backed by the government. The government will pay you back with interest, and you can hold the bond for a short amount of time or several years. One of the benefits of investing in bonds is that they are relatively liquid, which means you can sell them quickly if needed.

4. Bank Accounts –  A bank account is one of the most common types of liquid assets because it’s a safe place to store some of your money so that you can use it later on without having to sell something else to get it out of storage (like a savings bond). The interest rate you earn on the money in your bank account depends on what kind of account you have and how much money is currently in it.

Some people consider bank accounts a solid investment because your money can be used to buy other assets and is readily available if you need it. 

But there is no guarantee that your account will be liquid for the rest of your life. Banks have been known to freeze customer accounts if they suspect fraud or other illegal activity, so you might not be able to access your money on short notice.

5. Mutual Funds – Mutual funds offer liquidity because they have a daily price that allows investors to buy and sell at any time with no lock-in period or fees.

6. Certificates of deposit (CDs) – Certificates of deposit are liquid assets with low risk and offer a higher interest rate than most other investments. You can use CDs as a liquid asset to pay bills or buy something you want while earning interest on your savings.

Illiquid Assets

Illiquid investments or non-liquid assets don’t convert easily into cash. This includes real estate, art, collectibles, and other things with value but no ready market for resale.

Kinds of Illiquid Assets

1. Arts – Art can be considered a less liquid type of asset.

It’s challenging to store and display – This can make it difficult for potential buyers to view the work and determine its value.

There’s usually no secondary market for artwork – There is usually no formal market for artworks sold by individuals or small businesses as opposed to galleries. 

It takes time –  If you need quick access to money, then investing in art might not be suitable for you because it takes time before you can get any income from selling your artwork. 

2. Collectibles – Collectibles lack liquidity and are not easily converted into cash, and do not generate the same returns as other investments. However, they can provide many benefits that other investments cannot.

Collectibles are one of the best ways to diversify your portfolio. As such, they can help mitigate your risk by reducing your holdings in a single industry or sector of the economy. 

Because collectibles are not easily converted into cash, you are less likely to get caught up in the excitement of the market and make rash decisions based on emotion rather than reason. 

Collecting items is a fun way to express yourself and connect with those around you.

3. Real Estate –  Real estate is a long-term investment. You shouldn’t buy rental properties or commercial properties unless you plan to keep them for many years. Every month, a portion of your income will go towards paying off the loan. You might have to sell your property if you need money quickly. 

However, there are some benefits to investing in real estate. Firstly, it can provide a good return on investment (ROI) and eventually massive cash flow, and secondly, it can help you get better rates for other loans because your house or building acts as collateral.

Related: Commercial vs. Residential Real Estate: Which Property is Better to Invest in?

4. Private Equity –  Private equity funds are risky, but they can pay off big if you can hold on to your investment.

What assets are suitable investments?

Liquidity is an essential concept in investing. When considering how to invest your money, you must know the liquidity of the assets you’re considering. Some assets are more liquid than others, like cash or stocks. They all have different levels of liquidity.

For me, the best assets for investments are real estate, bonds, and stocks.

Real Estate

Having real estate assets is a great investment strategy. It’s one of the most popular assets people have owned for centuries. You can get a good return on your investment, whether it’s in residential real estate or commercial real estate.

While some drawbacks to the illiquid nature of real estate investments, they offer excellent returns and stability overall. 

Why is real estate a great investment?

There are several good reasons.

First, real estate investments are also very stable in pricing, meaning they’re unlikely to lose value over time as other investments could. This makes real estate a relatively safe way of growing your money over time by keeping it protected from volatile markets while still earning returns through appreciation of the property’s value.

Second, real estate can be used as collateral for loans, which means you could use your rental property as collateral for a loan if needed. For example, if you need cash for another investment opportunity.

Third, real estate is a tangible asset you can see and touch. This makes it easier to evaluate than equity investments.

Illiquid assets like real estate are traditional investments. They won’t make you rich immediately, but in the long run, they should provide a solid return on your investment as long as you don’t try to liquidate them too quickly. This can be especially helpful when rebalancing your portfolio, as you won’t be forced to sell off any low-price investments. 

Related: Multifamily Real Estate Investments: Easy Guide to New Investors 

Bonds

Bonds are a form of debt you can invest in, which means you loan money to the government or a corporation for a certain amount of time at a fixed interest rate. 

Where to purchase a bond?

You can buy them directly from the issuer, a broker or financial advisor, or a mutual fund or ETF (exchange-traded fund). 

Why are bonds a great investment?

First, bonds provide a fixed rate of return, and they’re safe. They are always backed by something concrete like the government or a company, so you know that your money is secure.

Second, bonds are issued by companies and organizations. You’re essentially lending money to the issuer when you buy a bond. They’ll pay you back the money you lent them plus some interest over time, usually six months or one year. 

So, the more risk involved with a bond, its interest rate will be higher. 

Consider buying bonds with higher interest rates if you want high investment returns.

Third, bonds can help diversify your portfolio and give it stability. Bonds are generally considered safer.

Stocks

Stocks are actively traded by thousands of people every single day on exchanges around the world. When one person buys a stock, another person sells it simultaneously, and that’s how trading works.

Why are stocks a great investment?

Stocks are one of the types of investments that can increase in value over time. The change in a stock’s price is called capital appreciation, and it can be used to build wealth because the market value of stocks fluctuates with changes in supply and demand. When there is more demand for a stock than supply, its price increases, and when there is more supply than demand, its price decreases.

Investors must ensure that the companies they buy stock in are financially sound and have a good track record. If you invest in a company that’s been around for a long time and has a reputation for being stable and successful, your risk of losing money will be very minimal.

Conclusion

There are differences between liquid and illiquid assets, and many investors have found that their portfolios tend to perform better when the balance contains a healthy mix of the two. passive income

As a new investor, you must consider your needs, objectives, and time horizons and adjust your portfolios accordingly. The most important thing is don’t ignore your asset allocation in favor of a particular investment. Instead, you should seek the right balance for your personal needs.

If you are still unclear about your financial goals or investment strategies, you may seek professional advice from financial advisors. They are equipped to guide you in your financial journey.

Do you want to learn more about real estate investing?

We’ve got you covered.

First, check out our podcast, The Path to Wellth. It’s a great way to get started with the basics of passive investing and wealth for wellbeing. You can tune in to our episodes on your favorite podcast players, Apple, Stitcher, and Spotify. Check out our latest video on our Youtube Channel.

Then, if you’d like to learn more about investment offerings or seek any other investment advice, visit our website at wealthycapital.com. 

We also give free e-book copies for individuals who aspire to start investing in multifamily real estate. Grab your copy here!

Recommended Video: How to Get Into Multifamily Investments: Tips for New Investors

Related: Financial Independence: What is the Valuable First Step?