From an investor’s standpoint, liquidity is “cash and anything else you own that can easily be turned into cash without taking a significant loss to do so.” Stocks, bonds and gold are all very liquid. Artwork and real estate are generally not.
So, is it good to be liquid? Is there a certain percentage of your portfolio that should be liquid? Does it even matter?
Well, if you’re a day trader, liquidity is a good thing. If you’re an investor looking at some long term goal, being liquid might not be so important. In fact, it might even be detrimental to your overall investment strategy. Skeptical? Please keep reading….
What if the market for residential real estate were as liquid as the stock market? What if, on a daily basis, you could see what someone (the market) was willing to pay for your house at that moment? A stock or any tangible asset is worth whatever someone is willing to pay for it, right? Okay, so the local utility company wants to expand its nuclear dumping site into your backyard and is willing to pay twice the market value for your house – but you have to be out by Friday. Saturday’s “market pricing” might not be nearly as favorable. Do you say “Yes?” Maybe?
Conversely, what if the market showed that your house was rapidly losing value – it’s been worth less and less, according to the market, every day for a number of weeks. Do you sell your house for fear that today’s price might be the best one you’ll ever see again? Maybe?
Obviously there is an emotional element to owning a home that doesn’t apply to your investment portfolio, so there are other factors that may be dissuading you from just selling your home to realize a profit. Isn’t it possible, though, that these emotions could be keeping you from making the best possible decisions from an investment standpoint? Are emotions getting in the way of your other investment decisions?
Could the liquidity and accessibility of the stock market (via internet sites providing real-time quotes, online access to your accounts, discount trading platforms, etc.) actually be hurting you? Is it really necessary for you to know the real-time price of every stock that is owned by every index or mutual fund in your portfolio at every minute of the day? What is the point of that? Is it helping you?
My point is that this increased liquidity may only be providing retail investors with a reason to get excited, and opportunities to react to their emotions, rather than the true benefits of liquidity – “….can easily be turned into cash.”
One of our goals is to keep our clients on the path to future prosperity and, in some cases, that involves protecting them from themselves. It’s easy to panic, especially with 2008-09 so close in the rearview mirror and with the media frenzy that has followed. What’s more difficult, and potentially more lucrative, is to stay calm and make measured decisions with a long-term goal in mind. Perhaps a certain amount of an investment portfolio ought to be intentionally kept in less liquid assets for this exact reason….
Have a great weekend!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
310.772.2201 – Main
310.496.2822 – Fax