My Number 1 Priority When Picking Investments

There are many things that you can prioritise when investing, and these priorities are going to be different for a lot of people.

Some will prioritise their returns.

Others will prioritise risk.

But there’s one aspect of investing that doesn’t always get the respect it deserves:

Liquidity…

…and today I’m going to explain why it’s one of my biggest priorities.

What is Liquidity?

Liquidity is a term used in investing to describe how long it takes for an asset to be converted into cash.

It’s useful to picture liquidity as a spectrum, rather than a concrete “yes” or “no”.

Liquidity is a journey.

A journey from converting an asset, say a house, into cash in you bank account.

The longer the journey, the less liquid, or more “illiquid” an investment is.

Liquidity is important to me, especially during times of uncertainty.

Despite cash always losing value, it’s versatility still makes it a useful commodity.

In times of need, converting assets into cash is something that’s worth considering when buying assets.

And for me, it’s a huge priority. I like highly liquid assets, a lot.

I like knowing that wherever my wealth is, I can convert it quickly and easily into cash, in case anything happens.

The Importance of Liquidity

Liquidity is high on my list of priorities, and here are a few reasons why:

Versatility

If your wealth is in liquid assets, this means you can chop and change as much as you want.

This doesn’t sound like a very good investing approach, and it isn’t. But, in case of something going wrong with an investment, or the economy etc, you’re able to move your wealth around with relative ease.

It’s something that I hope I don’t have to do, but it’s nice to know that I can do it, if I need to.

Peace of Mind

On the same lines as versatility, I can go to sleep every night knowing that my investments can be sold with ease.

Of course, I don’t plan on selling my investments any time soon, but liquidity is something that helps improve my peace of mind.

And as you should know, something that helps you sleep better at night is probably something worth doing.

Little Opportunity Cost

There’s very little downside to liquidity, in the form of an opportunity cost.

It’s not like you’re giving up huge returns all for the ability to sell your investments in a panic.

You still have access to a huge range of great assets, and in truth, some of the best performing assets available to you today are highly liquid.

So, for me, there’s little reason to choose illiquid assets when the reward is going to be pretty similar anyway.

Liquid Vs Illiquid Markets

The Stock Market

The stock market is the perfect example of a market that is highly liquid.

If I wanted to, I could sell everything I own in the stock market, and have all of the money back into my bank account in a matter of days.

And in truth, the longest part of the process here isn’t the sale of the assets.

This will take minutes.

The longest part is transferring the cash from my investment account over to my bank account.

So, if you have investments and a form of spending on the same platform, it makes this even more liquid.

The only real liquidity problem with the stock market is that the market isn’t always open, but that’s it.

The most you’ll have to wait to sell investments would be a few days, say if there are bank holidays attached to a weekend.

But, this level of liquidity is why the stock market is king, in my opinion.

Real Estate Market

The real estate market is a great example of a market that lacks the liquidity to attract a large amount of investors who don’t have that much money.

For someone with millions, or even billions to invest, liquidity might not be a priority, so real estate would be a good bet.

But, if you’re someone who’s net worth is in the thousands, and not the millions, it’s not going to be a market you’re attracted to.

Sure, you have REITs, which solve the problem of liquidity in the real estate market, by letting you pool with other investors to fund real estate purchases.

But, if you’re talking about the real thing, it’s an illiquid market.

Think about how long it takes to buy and sell property.

It can take weeks, or even months to complete the purchase or sale of a property.

Compare this with the stock market, and it’s a huge deficit.

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