When most people think about assets and investments, they think of things like stocks and bonds. At the same time, some of the most valuable assets in existence are non liquid assets like pieces of art. So far, the most expensive piece of art ever is worth over $450 million!
At the same time, some people have the idea that liquid investments are better than non liquid alternatives. Other people are not clear on the precise difference between these two types of assets.
So what is it that makes an asset liquid or not? Is it better to have only one of these kinds of assets, or is the best investment strategy a combination of the two? The more you know about liquid and non liquid assets, the better prepared you will be to create the best investment strategy for your unique situation.
Read on to learn all about liquid assets and the pros and cons they can provide!
What Are Liquid Assets?
Liquid assets are assets that can be easily turned into cash. If you do turn a liquid asset into cash, that is called liquefying it. Liquid asset examples include things like stocks, bonds, and precious metals.
Liquid assets provide certain advantages, but there are also benefits that come with investing in non liquid assets.
Liquid Funds Can Be Safer
One of the most attractive things about liquid assets is that they can be safer to invest in. If anything seems to be going wrong with your investment, you can always cut your losses and liquidate it. Although you might still have lost some of the value of your investment, this strategy can limit those losses.
In many cases, people will set up automatic sales of liquid assets if they start to lose too much of their value. For example, if you buy 100 pieces of stock at $100 each, you might decide to set things up so that your portfolio will automatically liquidate your 100 pieces of stock if they dip below a value of $80.
If the company you own stock in is on its way to crashing completely, that can shrink your lost value to only $20 per piece of stock. Of course, there is always the chance that a stock will dip to a value of $80 before returning to its original value. In such cases, you will be stuck with your $20 loss.
Liquid Assets Are More Accessible
In other cases, people like liquid assets because they can use them to cover expenses if necessary. If you incur a major expense, it will not take you too long to liquidate some of your liquid assets and use the cash to cover that expense.
On the other hand, if you find an amazing investment opportunity that you do not have enough liquid funds for, that is another perfect time to liquidate some liquid assets.
Liquid Assets Are Easier to Manage
In general, it is easier to manage liquid assets. Because you can buy and sell them with little notice, you can make provisionary plans for your liquid assets. If necessary, you can always update those plans later on.
What Are Non Liquid Investments?
Non liquid investments are assets that are more difficult to turn into cash. For example, pieces of art or real estate can be much more difficult to liquidate if you decide to do so. Of course, you can still liquidate these assets, but it may take months or even years in some cases.
At the same time, what non liquid assets lack in liquidity, they make up for with other advantages.
Non Liquid Investments Can Provide Bigger Returns
As attractive as safe investments are, they often provide lower returns. Taking the chance of investing in non liquid assets can give you the opportunity to enjoy much larger returns on your investments in the long run.
Most Liquid Investments Outpace Inflation
On top of that, most non liquid investments have a natural tendency to accrue value over time. One of the major problems with liquid assets is that you can lose the value of your investment if inflation progresses faster than your investments do.
However, when inflation is hitting liquid assets the hardest, it can sometimes act as a boon to non liquid assets. For example, if the value of a currency is going down as inflation goes up, the number of units of currency a piece of property is worth will tend to go up at the same time. That makes non liquid investments a major protection against inflation.
Diversify With Non Liquid Assets
At the end of the day, it is not that one of these kinds of assets is better than the other. Rather, each provides certain pros and cons that can balance each other out.
If all you have in your portfolio are liquid assets, then you might want to balance that out with some non liquid assets as well. One of the most proven pieces of investment wisdom is the value of diversifying your investment portfolio.
Enjoy Tangible Value With Non Liquid Assets
Luxury art and other kinds of non liquid assets often provide value apart from their financial value. You can enjoy the beauty of art and the use of property that you own.
This is one of the main reasons that non liquid assets can preserve their value even when inflation is going up. The value of these assets does not depend on their relationship to currency.
Understand the Pros and Cons of Liquid Investments
It can take some time to develop a nuanced understanding of the pros and cons of liquid investments versus non-liquid investment alternatives. However, in the long run, doing so is essential if you want to take the best care possible of your financial health. Although liquid investments have their place, it is also important to use non liquid investments when appropriate.
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