How Do You Know Which Investments Are Liquid Assets?
Not all types of assets are the same. This is particularly true if you need to extract the value of the asset in order to pay for something else that might be a more urgent need. For example, if you needed to sell your house to pay for an emergency surgery, it would take more time than if you already had the money in your savings account. The cash in the bank is known as a liquid asset while real estate is not.
When investing you should be aware of whether or not the assets you are investing in are liquid. Liquid assets will provide you with more flexibility with your resources. Also, financial firms may provide special benefits to those with a large amount of liquid assets.
What exactly are liquid assets?
Assets are considered to be liquid if they can be easily converted to cash. Any asset that has this quality will retain its value upon being sold. If you think about it, cash is used in this way. When you purchase something with cash, you are essentially selling the cash in exchange for the item or service you are purchasing. This is why some liquid assets that are not cash are referred to as cash alternatives.
Examples of cash alternatives
Usually, an asset can be considered a cash alternative if it can easily be converted to cash and offer some degree of price stability not typically found in other investments. Securities can be categorized as cash alternatives if their maturity terms are less than 90 days. Also, U.S. Treasuries and bonds are considered cash alternatives.
Shares in mutual funds could be considered liquid, since investors are able to sell their shares relatively easily at any time, receiving their money within a few days. However, due to the different types of mutual funds objectives, not all funds would be considered a cash equivalent. Mutual funds are an investment vehicle where multiple investors pool their money in order to invest capital into the markets for profit. One specific type of mutual fund is a money market fund which invests in low-risk, interest-yielding assets such as municipal bonds.
Assets considered illiquid or non-liquid are more difficult to convert quickly into cash through selling. Real estate and land are categorized as non-liquid since it can take several months for an individual or a firm to market the property, find a seller, and then receive the cash from selling the asset. Also, these assets may experience significant fluctuations in value which could affect the amount the seller ultimately receives.
For example, if the owner of real estate needs to liquidate the asset quickly, it could take quite a while to find a buyer. Within that time the real estate market can change the price of the asset significantly for one reason or another.
How much liquidity should your portfolio have?
The balance of your portfolio should be designed to ensure that you achieve your financial goals and investment objectives. Also, your tolerance for risk will need to be considered as well. These factors should be used to guide how much liquidity you keep in your investment portfolio. Additionally, how often you will need cash to make investments and purchases will determine how much of your portfolio should be liquid assets.
Any opinions are those of the author and not necessarily Raymond James. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.