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L is for Liquidity – The Elite Investor Club’s A – Z Guide of Investing


To join the Elite Investor Club, see – I hope you’re keeping up with me and going back over the previous episodes to make sure everything sticks. We’ve reached the letter L and I’m using it to cover an important investment concept. L is for Liquidity. Liquidity is one of those terms that people hear without necessarily understanding. In the world of business accounting it means the ability of a corporation to meet its short term liabilities, pay its bills and so on. In other words, having enough current assets to meet its current liabilities. But in the world of investing liquidity has a slightly different meaning. It’s used to refer to the speed with which any assets that you hold can be converted into cash. And there’s a critical rider to that. Liquidity is the speed at which assets can be converted into cash with little or no loss in value. In the aftermath of the Wall Street Crash people learned the true value of assets. Paper share certificates became worthless overnight. What mattered was having cash to buy the next meal. I’ve seen photos of Cadillacs and Rolls Royces for sale for fifty or a hundred dollars by people who suddenly went from wealth to poverty in a matter of days. Trying to maximise their gains in a booming market, they’d invested everything in the stock market then borrowed some more on margin. No gains had been taken out of the market and put into safer assets. They put all the chips on red and lost. Just in case you think this is a quaint tale from a history book, tens of thousands of people are doing exactly the same in today’s market. Except its much easier to do now than it was in the nineteen twenties. A few clicks of the mouse and your leveraged spread bet can buy you exposure to the Twitters and Ubers as they are chased to new highs despite the conspicuous absence of outdated concepts like profit. At least today’s technology allows you to buy and sell in a heart beat. Mind you, that’s still slower than the professionals so it will always be the little guy that’s the loser in any big moves in the market. At the other end of the liquidity spectrum would be property and some funds and bonds where your money is either locked in for a set period or depends on a lengthy sale process if you want to turn it back to cash. There’s usually a trade off between how long you want to tie your money up for and what sort of return you’ll achieve. Conventional wisdom has it that the longer your funds are committed the riskier the investment. In my view the reality is that a sophisticated investor should have a portfolio that includes a range of timescales from instant to ten or more years. You should always have an emergency fund of anything from one to twelve month’s living costs so that you are neve forced to sell assets at firesale prices just because of a short term change in your circumstances. Some long term assets like government bonds give a lousy return while being regarded as safe. If you’ve been paying attention you’ll know that I regard such bonds as anything but safe. The potential loss of capital when the inevitable correction comes will mean a massive loss for most holders of these overpriced ‘assets’. Some of the best long term investments I’m seeing at present are in the commercial property sector, especially those playing into mega trends like the ageing population. I also have medium term investments in property backed bonds and loan notes from two to five years. And I have cash in instant access accounts earning a mouth watering nought point one per cent a year. Like every aspect of your wealth, liquidity has to be managed. But it can’t become the biggest factor in your decision making or you’ll be condemned to lousy returns forever. Make sure you have your emergency fund in place then build up a portfolio of short, medium and long term assets so that you balance your liquidity risk. When you’ve done all that, it’s time for a different kind of liquidity. A glass of wine perhaps? Cheers!