What Are Liquid Assets? Is It Better To Be Liquid or Illiquid?

Think for a moment of how much money you need. Now, imagine you could get it instantly in some form of asset. Would that solve the money problem?

If you choose the wrong asset, you may find it not worth that much. You heard right: two things can have the same market price and still have different values. 

Why do you want money? It brings freedom and power. But if you know anything about making money, you know that it doesn’t matter how much you can make, but how much you can actually keep and enjoy.

The more you can use your money, the more chances you have to make more. This practical point of view works, whether you want to generate rapid wealth or protect yourself from the economy. If you wonder how that’s possible and still wonder what we’re talking about, you should really learn more about liquid assets.

Liquid Assets: How much time is your money worth?

Getting money today is worth more than making money tomorrow. You want, of course, to create long-term financial success, but it’s so much easier with liquid assets.

By liquidity, we refer to any type of value that you can convert into money almost instantly. It also applies to those which you can trade with ease due to the demand (the so-called liquid markets). Let us get specific here:

  • You have money in your bank account. You just go to the nearest location and get cash. You can also use that money anywhere, anytime (with credit cards).
  • You bought a stock you no longer want. As soon as you place your order, someone buys instantly (in this case, the exchange).

In both cases, you get the value instantly, which is good both for you and the economy. People may consider illiquid assets safer, but they wouldn’t be as secure without liquidity. Can you imagine what would happen if everyone held their wealth and never moved money?

Yet, that doesn’t mean liquidity is the solution to all our problems. It’s certainly convenient to keep control over your finances, but you must use one or the other in different situations.

Think of the decisions that made you big money. Chances are you had to make some investments that required liquidity. If you need money to make money, the more you have available, the more money you will make. So obvious!

Here are some reasons you would consider liquid assets as your priority:

  • Flexibility

Often when people start making big money, they focus too much on conserving the amount, thus forgetting what made them earn it in the first place. You need to move funds and take risks, which reduces to being in the right place at the right time.

And because you can move liquid assets freely, you can secure more opportunities. It’s a conversion made in seconds compared to weeks or months (with illiquid assets). At such speed, one can anticipate the market and profit from inefficiencies.

Sounds familiar? Investors use these principles all the time.

  • Availability

Not to be confused with flexibility, liquid assets are available whenever you need them. There is some connection between how liquid your assets are and what control you have over them. 

Anytime you like, you can invest it in opportunities or exchange it. Or you can store the amount and still access it quickly. Illiquid assets, on the other hand, get more affected by the economy. Technically, you don’t lose anything until you sell, but it means you have to sell when conditions tell you to do so, not whenever you want.

Let’s say you’re in a tight financial situation and need funds right away. You can still convert that value into cash, but doing it at the wrong time will cost you money (AKA devaluation).

  • Fragmentation

While illiquid assets generally sell as a whole, their opposites can split into smaller units. Compare selling a house versus choosing how many shares to sell off stock.

When you choose stocks and dollar bills, you can choose how to spend every unit. It allows for more possibilities and financial strategies.

You no longer play an “all or nothing” game. Depending on how confident you feel and how much risk you tolerate, you choose how many units you want to trade. However, you can only win as much as you can lose. It’s called asset allocation, investing 101.

Some illiquid assets may be able to divide as well, but not without creating more complexity, which makes the asset harder to control.

  • Income

If you plan to protect your wealth by limiting the money you can move, you will be limiting your growth as well. You will not get a good return unless they are worth far more in the future, which may not be the case (given the many conditions you don’t control).

Imagine you have a system where you get two dollars from every bill you put in. What’s the strategy? To put as much money in the machine as fast as possible.

We call these machines businesses. Someone has a problem, you offer a solution, and repeat the cycle with every new client. You can boost your revenue with advertising and other scaling tactics. 

The tricky part is, a business efficiency declines once you reach the optimal point (you can’t invest unlimited money and expect the same profit margins). There’s an optimal amount you can put in the machine to keep the proportion. So the strategy isn’t about large numbers, but how many times you can double your money.

Because liquid assets have far more moves available, they have massive growth potential. 

  • Volatility

Talking of potential, did you know you’re more likely to make big money with liquid assets? When trading these, each dollar has a higher chance of being worth more (or less) in the future.

How?

There’s a curious connection. Assets that are harder to trade are physical (properties, land), while the most liquid ones are abstractions. You can buy a stock and “own” part of the company, even though you can’t see or work in it. And although old cash is practical, at the end of the day, they are worthless pieces of paper. They are worth whatever price we agree upon.

Curiously enough, it’s easier to appraise a property than to estimate the value of, say, some cryptocurrency. Thus, liquid assets tend to rely on perceived value, while physical assets fundamentally rely on real value.

Perceived value creates distortions and market inefficiencies, which is why liquid assets have profit potential with the right strategy.

The Problem With Liquid Assets

  • Risk-Reward

If you have a working system, you make more money the more you move it. The other side of the coin would be: financial risk increases the more moves you make.

Let’s face it: you can’t be right all the time. Even a working strategy may stop working because of market trend changes. We live in a probabilistic world.

It seems to be harder to manage illiquid assets:

  • Each move takes time, which reduces the chances of receiving the valuation you expected.
  • You have just one decision to make: buy or sell? The decision is likely permanent, so you’ll have to accept the consequences.

But even then, it’s still one decision. With enough time and thinking, you can make the right choice and grow your asset worth.

Let’s not forget there are always external factors affecting our results, which is why liquid assets could be dangerous. The more times you trade, the more you expose to this uncertainty. If you theoretically kept exchanging forever, you’d inevitably make a losing trade at some point. Can you afford to lose?

  • Ownership

Liquidity is great because you can transfer assets with ease. But because they are accessible, they also become easier to steal.

All the time, we hear cases of identity theft and scams. People use confidence tricks to take someone else’s cash or virtual funds. Once the crook has access, victims can’t do anything to recover losses.

How about illiquid assets? Thieves may break into houses to rob, but they certainly can’t take the whole property with them. To make it clearer, simply compare the ownership of your home with a dollar bill. All the people who used that paper before you are anonymous.

Conclusion: Liquid or illiquid?

Depending on your personality, you’ll have to adapt your asset allocation strategy

Because of the pros and cons, someone interested in explosive growth will prioritize liquidity. But remember that the market changes as fast you move that money. If you want to get the opportunity, you must constantly adapt your strategy and skills.

As for people trying to secure their finances, illiquid assets are the best bet. Just make sure you plan for devaluation. If your account isn’t growing, it’s reducing.

Let’s return to the main question. Why do you want money? 

So you have the freedom to do what you love? You may find profitable models you don’t necessarily enjoy, or perhaps you can’t make money with your passion until years later. Liquid assets can secure your finances today, so you can later live the life you want.

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