Why You Might Need More Liquidity In Your Portfolio

One of the challenges of investing is that you will not always be able too access the funds that you have invested. Therefore, if there is an emergency and you suddenly need to liquidate your assets, this will depend on the form that your assets are in and whether you took other steps to prepare yourself for such an emergency.

Understanding Liquidity

Liquidity is your ability to turn an asset into cash quickly. This is essential because there are many high-yield investments that cannot be converted into cash. You may want to include an emergency fund, but the more money that you place in savings, the less that your money will be earning you. A rule of thumb is to have at least six months of savings. Not only will there be fewer emergencies that will last longer than six months, but this period also will give you more time to sell less liquid assets. The liquidity of your assets falls on a spectrum. Some assets cannot be liquidated at all. Other assets can only be liquidated within a short period. For example, you might be able to sell an asset, but it may take a few days before that asset will then appear in your bank account.

Will Someone Need To Purchase Your Asset?

One thing you should consider is whether someone will need to purchase your asset before you liquidate it. With some investments, you simply need to withdraw them from an account. However, with other assets, you will have to concern yourself with whether there is anyone who would want to purchase your asset. It would be easier to liquidate gold than it would be to sell real estate without taking a loss, for example.

Investing In Illiquid Vs. Liquid Assets

You should still invest in illiquid assets because they can provide you a large return on your investment. However, you should only invest 10% or less of your wealth into illiquid assets. Look for investments that are highly liquid, but still provide a return on your investment. Money market accounts have a high APR, but still allow you to instantly access your account for withdrawals. There are also investments that mature after only two years, such as short term bond funds and ETFs. While less stable, they have a potential for a higher yield. Also, some CDs offered by banks mature in as little as two years. But ultimately, to make sure that you protect yourself from all forms of risk, you will need to diversify. Visit http://www.landsbergbennett.com/ for more information.