Most financial institutions engrain us with the belief that ‘liquidity is power’. In this article, I want to uncover the ultimate myth about liquidity and how that intersects with your investment portfolio.
We are not talking about net worth. We are talking about an individual’s investment portfolio. This is different from a company that might have a large short term debt liability and needs cash on hand for Research and Development, etc.
I want to cover three topics here:
- What is liquidity and what that means for you as an investor
- Why we are taught that liquidity is good
- How this interests with your investment portfolio
What is liquidity and what that means for you as an investor:
Being ‘liquid’ is having the ability to easily convert assets into readily available cash without affecting the market price. This can also mean having cash or having cash in traditional savings accounts.
Why we are taught that liquidity is good:
Media and Financial Institutions engrain us with the belief that having liquidy is good. Yes, we should all have enough liquidity for emergencies, short term debt liabilities, and some diversification, what about the main portion of an investment portfolio? Does this all need to be liquid? Brokers are in the fees and commission based business. This is transactional. So these institutions make money when assets are sold. And the way that markets can move or what the advisors strategy is, this can be very often.
How this interests with your investment portfolio:
Each person’s investment strategy is different. But if the majority of it includes selling and buying quite often to reap short term gains or to ‘navigate’ markets, then it’s possible you might be trapped in the myth.
Being liquid and owning liquid assets are obviously two different things. But understanding that the majority of wealth is typically made from holding and not selling, is key.
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