What Is LiquidityLiquidity refers to the ability to take assets and turn them around into spendable or investable cash. Cash is, itself, the most liquid asset since it is easily spendable as it is. Other types of investments vary in liquidity - which means how easy are they to convert to cash. To have a firm idea of the financial state of someone attempting to make a major purchase or investment, they would be asked "how liquid are you?" Since some assets are not easily convertible they are still valid investments but don't aid in liquidity in the event a person needs a quick influx of spendable cash.
Ranking Liquidity of AssetsIf concerned about having substantial liquid assets, one should consider having a diverse portfolio of investments and assets. Here is a ranking of liquidity that can serve as a guide.
- Savings Bonds - After cash, these are the most liquid because they can easily be sold to a bank and offer immediate cash in hand.
- Stocks, bonds, options & commodities - These can be sold fairly easily and quickly, but may take a loss in doing so.
- Certificates of deposit - These are not too difficult to convert but there is a penalty.
- Collectibles - This includes art, coins and more. If taken to a dealer they may be convertible to cash fairly quickly but not likely at the fairest rate. For some collectibles it may be more difficult and time-consuming to find a dealer or pawn shop willing to take them. The best bet for the investment made is to send them to auction or other sale, but that can take a good deal of time to arrange.
- Preferred or restricted shares - These have restrictions on when and how they can be sold so are less liquid and may not be accessible at all under the circumstances in which the cash is needed.
- Retirement funds - These may allow the owner to take a loan or to close them under certain conditions but it can take several days to a few weeks and comes with hefty penalties or interest on the loan.
- Real estate - Obviously one of the least liquid assets though also one of the most significant assets to own, real estate can take a significant amount of time to sell and even longer if you want to obtain the most money possible for the investment made.
Obtaining Substantial Liquid AssetsHaving a diverse portfolio with a mix of several different types of assets makes it easier to liquidate assets when needed without destroying the portfolio. For proper financial asset management it is a good rule of thumb to maintain some assets in several different categories. Some assets should be easily available to convert to cash. Others that are less easy to convert often also have a higher return on the investment when they are sold or converted thoughtfully and taking the market into account. Retaining some assets that are difficult to liquidate may be a great way to ensure continued investment income. Balancing all of these needs is indispensable to financial health, but it is also valuable to ensure substantial liquid assets that can serve unexpected needs.
Every investor should ask themselves "how liquid are you?" and have a reasonable answer at any given time of how much cash they could convert their investments into including how long it would take to do so. Financial asset management includes the skill of being able to access those assets as needed.