Should one pay attention to how a liquid is a portfolio? This question arose when an elderly citizen insisted that a reverse mortgage turned his biggest property, his home, into a liquid asset. How does one challenge that claim?
Liquidity is the ability to convert to cash, faster and at a much lower cost. Keywords to pay attention to, time and cost. Technically all goods can be said to be liquid. It can eventually be sold at a certain price that converts it into cash. There was a question asked, if liquid assets meant that there were solid assets too.
If converting an item into cash takes less time, or involves a higher cost of completing the closure, we can call that asset illiquid. Consider gold jewelry for example. Would you call it a liquid? It can be sold to jewelry dealers, who often agree to take what is bought with quality seals in their own brand name from their stores. However, there are significant costs incurred like steep costs called the making charges, and damages are recovered. So gold coins, gold ETFs, and gold bars may be liquid, but gold jewelry is not liquid.
So is property. It is large and bulky and cannot be easily sold. There are heavy costs and taxes associated with sales. As a rule, tangible assets are less liquid than financial assets that can be segmented, computerized, and traded in the open market at open prices and low cost.
When we look at an investor’s portfolio, we look at the different levels of investment. Total financial failure refers to assets that can be converted into cash on demand without total cost. The savings bank deposit is exemplary. There are no costs associated with withdrawal and can be made at any time. That’s why it pays the lowest price.
At the next level, there is an investment in the liquid fund. A liquid fund simply moves investors from the side of the bank balance to the asset, at a much lower cost than bank interest rates. As there are an active night and short-term currency market, liquid currency derives from that market and transfers the return to the investor, after a small and efficient cost (usually 0.10 – 0.20%).